The U.S. Needs Social Insurance More Than Stimulus

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(Bloomberg Opinion) -- A stunning and unprecedented economic pause is under way in the U.S. and across the world. The downturn is already sudden and severe, with more than 3 million Americans filing for jobless benefits in the last week alone, a new record.

Yet the shape of the downturn isn’t the strangest thing about it. What’s extraordinary is the concentration of economic pain on particular sectors of the economy — not by accident but by design. The government is fighting a pandemic by bringing economic activity to a virtual halt across a range of industries: travel, restaurants, “inessential retailing,” live entertainment and so on. In effect, the people losing their jobs and livelihoods have been drafted into national service.

This has ethical as well as economic implications. It’s not enough simply to ask whether the stimulus is the right size for macroeconomic purposes. Any policy should take special care to protect this growing army of public servants.

Commentators are calling the enormous coronavirus-relief bill that finally passed the Senate this week a stimulus package. Headlines focus on the price tag, a little over $2 trillion, and there is already talk that it isn’t big enough to fill the hole in demand caused by the pandemic. But this isn’t the most appropriate way to judge the plan.

Ordinary recessions are demand-driven. In 2008, financial distress pushed spending below the economy’s capacity to produce, resulting in lower output and higher unemployment. The answer was to stimulate demand. It still wasn’t straightforward, because the usual way of expanding demand (lower interest rates) ran out of road. But the goal wasn’t disputed. You needed stimulus.

This time is different. The goal shouldn’t be to hold demand to the trajectory it was on before the pandemic began. That would be self-contradictory — and, remote as this possibility might seem at the moment, there’s a danger in trying too hard. If too much demand meets a persistent, deliberately engineered collapse in supply, it would result in higher inflation, not full employment.  

To be sure, stimulus still matters. Over the coming weeks and months, demand is likely to fall by more than the output sacrificed to fight the pandemic, so there’ll be a gap to fill. And once the threat to public health has lifted, the economy might require a further shot of demand.

Right now, though, delivering broad-based support for demand isn’t the first order of business. The main thing is to throttle the economy judiciously while supporting as fully and quickly as possible those who are being sacrificed to this policy.

Whatever this platinum-level social insurance costs is what America should commit to spend. Depending on how events unfold, the outlays might amount to a smaller macroeconomic stimulus than the economy turns out to need; if so, add other kinds of stimulus. If they’re more than the economy needs in macroeconomic terms, raise taxes to spread the burden fairly. In these extraordinary circumstances, the commitment to protect takes precedence over any calculation of the correctly sized fiscal stimulus.

Judged this way — not just by magnitude — the Senate’s plan gets only a passing grade. It provides some of what’s required. Among the plan’s many components is a $350 billion loan program for small businesses, with the provision that the loans can become grants if the businesses maintain the same number of employees and pay them at least 75 percent of their pre-pandemic wages. It includes a temporary $600 weekly increase in unemployment benefits, with help extended to the self-employed and contract workers. And the bill provides one-off payments of $1,200 per person (plus $500 per child) that phase out for incomes between $75,000 and $99,000.

In principle, the forgivable-loan plan could keep a lot of people on the payroll. But it will be difficult to run and is much bigger than anything the Small Business Administration has ever managed. The boost to unemployment benefits will dramatically narrow the gap between income from working and unemployment.  In some cases, workers will briefly be better off unemployed than they were while working; that’s the price of rolling out help as quickly as possible. But the plan is blunt and too short-term. The one-off payments should be relatively quick and easy to deliver, but they’re more about supporting overall demand than helping the people who need it most.

A more comprehensive strategy — committing the federal government to pay the wages and health-care costs of most laid-off, furloughed and short-time workers for the duration of the crisis — would better serve the principle of social insurance. Developing such a plan won’t be easy, but it should be a top priority.

The main obstacle is the one that caused the Senate plan to fall short: Existing programs for the workers hit hardest by this emergency are divided in complicated ways between the federal government and the states, each of which has its own policies in place. The entity with effectively unlimited fiscal resources stands at arm’s length from the level of government that identifies and administers the needed relief.

This divide also exists in other policy areas, of course, such as infrastructure or health care. But the pandemic — and the state-against-state competition to acquire testing materials and personal protective equipment — has thrown it into stark relief. The fundamental mismatch between what states are tasked to do and the resources available to them has never been so obvious.

The coronavirus is, among other things, a stress test of the federalist principles that govern America. How they will fare remains to be seen. In the meantime, help for America’s public servants should come first.

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

Clive Crook is a Bloomberg Opinion columnist and writes editorials on economics, finance and politics. He was chief Washington commentator for the Financial Times, a correspondent and editor for the Economist and a senior editor at the Atlantic.

©2020 Bloomberg L.P.

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