Social Distancing Makes Sense Only With Extraordinary Fiscal Stimulus

Governments' economic measures to address Covid-19 need to be much bigger.

March 22, 2020, 6:00 PM EDT

Across the world, as governments take their first economic stimulus measures to address the Covid-19 crisis, debate is intensifying over the right form and size of that assistance. But this discussion hasn't yet come to grips with five fundamental realities:

First, mandating social distancing in response to the Covid-19 crisis requires socializing the economic costs of doing so. We as a society can't reasonably require social distancing, with the massive economic consequences it entails, and believe that most of those costs should be privately borne. We therefore need to either abandon social distancing (thereby overwhelming health systems and sparking untold deaths) or enact much larger stimulus measures. And by much larger I mean far larger even than the eye-popping figures the Trump administration is now pursuing in the U.S.
Second, the disruption is so vast — the economy in many sectors and areas has effectively come to a standstill — that government failure to act will result in an avalanche of bankruptcies and extended unemployment that will, in turn, inflict lasting damage on businesses and families, even after the health crisis passes. Economists call this phenomenon hysteresis; others call it not being able to put Humpty Dumpty back together again. It is why government intervention cannot be limited to the sectors most directly affected (airlines and hotels, for example) and must take new forms beyond the conventional tools (such as rebates to individuals). While many existing stimulus measures are necessary and helpful — especially support for unemployed workers and state governments — they are terribly inadequate given the scale of the economic damage already occurring.
Third, given governments' adoption of social distancing, the dilemmas we face will continue until an effective anti-viral or therapeutic can be found that allows us to contract the disease without suffering significant harm. In the meantime, even if current efforts are successful at attenuating the spread of the disease over the next several weeks, social distancing will need to be re-imposed in cycles. Given the plausible timetable for developing a vaccine, and unless we get very lucky and the virus itself mutates in a less harmful direction, these cycles could continue for well more than a year.
Fourth, a proper response to the Covid-19 crisis will stress test the increasingly popular proposition that government deficits don't matter. This is a fiscal risk worth taking. Indeed, those who argue that the cost is too high or that a stunning increase in the deficit is too risky need to return to the first point above, because the budget impact reflects the economic consequences of social distancing. If you don't like the fiscal cost but you favor social distancing, what you're really saying is that you are willing to accept millions of bankruptcies and the ripping apart of corporate and social fabrics across the world.
Fifth, the economic harm comes mostly from the sudden stop in business activity due to social distancing, not the lost productivity of those suffering or dying from Covid-19. The demographics of those suffering from coronavirus and those suffering from the economic virus are quite different.

Governments around the world are awakening to these truths, and beginning to debate how to assist businesses suffering from the downturn. The U.K. is considering making grants to companies for up to 80% percent of salary, capped at 2,500 pounds ($2,900) a month; offering loans to small and medium-sized businesses; and taking equity stakes in airlines and other companies. Denmark has put forward a program to subsidize 75% of payroll for companies facing a need to cut jobs by 30% or more. France is considering equity injections and loan guarantees.

The economists Emmanuel Saez and Gabriel Zucman have proposed that governments simply pay companies to cushion the shock: "In the context of this pandemic, we need a new form of social insurance, one that directly targets and works through businesses," they wrote earlier this month. "The most direct way to provide this insurance is to have the government act as a buyer of last resort. If the government fully replaces the demand that evaporates, each business can keep paying its workers and maintain its capital stock, as if it was operating under business as usual."

And Andrew Ross Sorkin of the New York Times has suggested a universal loan program, with a zero interest rate and extended repayment terms.

One thing is clear about stimulus measures in this crisis: Bigger is better. To my mind, the least-worst option is a large and comprehensive program of loans to businesses, as Sorkin has proposed, which could be extended quarterly and limited in the first instance to a share of 2019 revenue. 1 It should work according to these four principles:

All companies and sole proprietors should be eligible, given how hard it is to quickly assess which industries are affected and the feedback loops across sectors and businesses. The only condition should be that the companies maintain payroll and payments at some threshold relative to 2019.
The program can most effectively be administered through banks, with the government then buying the loans and borrowers repaying through the tax code. Repayment could take the form of allowing a company or individual to deduct only a certain share of non-labor expenses until the debt is repaid. This approach in effect provides an auto-stabilizer for the repayments: They will be accelerated if the economy starts booming and delayed if doesn't. Repayments will also be faster for firms that get back on their feet faster and that spend a smaller share of their budgets on labor. By having the government take loans off banks' balance sheets up-front, this strategy also avoids further capital stresses on banks.
In the event an effective therapeutic against Covid-19 is delayed, causing the economic shock to last longer, the loans could be transformed into grants (thus moving from Sorkin's idea to Zucman and Saez's). It is nonetheless better to start with loans, and then forgive those loans (thus shifting to grants) if necessary, because we don't know how long or severe the downturn will be, and it may turn out that the loans are sufficient to attenuate the economic damage. Even broad-scale loans would be an unprecedented fiscal experiment — but pose much less long-term fiscal risk than grants.
Any future debt forgiveness for companies should give the government equity in those companies, and impose stricter conditions than those attached to the loans.

The specific design features of this program are matters for debate (including whether the banks should bear some share of the risks), and the right approach undoubtedly will vary from country to country. But the basic realities are the same everywhere: It makes no sense to impose social distancing without socializing the costs. And if we want to avoid irreversible economic damage, we can't afford to wait.

Some have suggested simply delaying payments rather than injecting liquidity into companies. Delaying payment for taxes and perhaps certain mortgages and rental payments is wise, but a broader payment halt across companies offers only the mirage of a solution. It would push the problem into the future, but comes with the significant cost of building up arrears that will ultimately come due. In addition, delaying payments to any entity other than the government merely shifts the cash-flow problem somewhere else — it doesn't eliminate even the short-run problems from the collapse in demand.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Peter R. Orszag at porszag5@bloomberg.net

John Case
Harpers Ferry, WV

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