Glenn Hubbard on How to Avoid the Demand Doom Loop

(Bloomberg Businessweek) -- If you shut down an economy in a pandemic, you need to replace private business demand. Think about all the small and midsize firms who have to turn off a switch and just not operate for eight weeks, 12 weeks, whatever it is, and lay off all their employees. That’s a cataclysmic event. The health part is unavoidable. What’s avoidable is the demand doom loop, and to do that you’d have to fill in private demand.

It doesn’t mean mailing $1,000 checks to everybody, though I have nothing against that. It means doing something for businesses. If I were doing it, it’s replacing a significant fraction of revenue for small and midsize firms, the small-business owner. [His plan is to replace 80% of a business’s revenue loss for as long as the pandemic lasts.] I go to the bank—not a new government entity—and get a loan. It would be guaranteed by the government, and that loan would be forgiven at the end of the pandemic period provided I’ve kept my employees in place. So you’re keeping your employees, the relationships, and the business network in place. And when the lights come back on and the pandemic is over, you’re ready.

If we don’t do this, we will have mass layoffs with unemployment insurance consequences and Medicaid consequences, and thousands, if not more, failed businesses around the country. So, is it a lot of money? [While he gives no estimate, it’s likely hundreds of billions of dollars]. Yes. Is it an important component of an economic recovery package? Absolutely. These businesses are failing through no fault of their own. We’re shutting down the economy for good health reasons, but we need this in the package.

We know we’re going to have a sharp recession because of the pandemic. The question is, can we stop it from being a doom loop? And with bold action on small and midsize businesses, I think we can.

If you think about what happens in a pandemic, think about turning a light switch off. We’re telling a number of firms just to shut their doors for a period of time, for health policy reasons. In a frictionless world, when we turn the light switch back on, all those employees are fine, the firms are fine. But suppose during that period the aggregate demand effects of shutting everybody down have overwhelmed that. So all these people are laid off without any income. These businesses ultimately fail, go bankrupt. That’s the doom loop, and it can have very large effects throughout the economy because we’re talking about very large numbers of employees in firms, really, all over the country.

I would urge policymakers not at all to be cautious, to try to get out in front of this and stop the demand doom loop. Let’s suppose you only gave employers their share of the payrolls tax, or 25% or 50% of your payroll. That’s not enough, because if I’m a small-business person, let’s say I own a restaurant, it’s me. It’s my personal credit on the line. Why would I lose my house just to keep my employees working? It’s just not going to happen, the government really has to fill in that private demand.

But you would do it over and above the checks that people [in Congress] want to send. If you keep people employed, you don’t really need the checks, and if you don’t keep people employed, what you’re doing is increasing unemployment insurance expenses, maybe you’re jumping them into Medicaid programs. I don’t think policymakers should think that doing nothing for business is a zero cost. It’s just going to show up elsewhere. —As told to Christopher Condon
 
Hubbard is former chair of the Council of Economic Advisers under President George W. Bush and dean emeritus of Columbia University Graduate School of Business.

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