Respond to the Coronavirus With Everything, All at Once

(Bloomberg Opinion) -- As the White House and Congress negotiate an economic package to address the coronavirus outbreak, it may be useful to think of this crisis in three distinct phases. What Washington needs to do is address each stage of the crisis at once, in a way that makes the next one easier to deal with.

The first phase is the intentional economic shutdown, produced by social distancing and other practices, that is designed to stem the spread of the virus. This policy causes immediate and direct economic harm in the hope of preventing greater loss of life. It is a necessary and justifiable tradeoff. The economy will have to absorb this loss and the government should provide direct assistance to families and businesses in need.

The second phase is the liquidity crunch, the early effects of which are already being seen in the financial markets. They will be exacerbated as time goes on. The essential problem is that, as Larry Summers puts it, time has essentially been stopped economically but has not been stopped financially. Households and businesses are still responsible for paying rent and making payroll.

The third phase is the recovery. Once the pandemic has passed, the economy will need to surge back to prevent a prolonged recession. In his press conference on Monday, President Donald Trump said that he expected pent-up demand to produce such a boom, and Treasury Secretary Steven Mnuchin has echoed those expectations.

The success of Phase Three depends almost entirely on what the government does about Phase Two. The Federal Reserve has already lowered rates to zero and begun quantitative easing. That will help by making it easier for banks to negotiate favorable terms with distressed borrowers, and there is already some anecdotal evidence that banks are offering unsolicited credit lines to small business. The White House is also planning to expand Small Business Administration loans. This makes sense, but these types of federally administered programs can be kludgy and difficult to scale.

The administration now also supports direct payments of $1,000 to all American adults. That will help, but it’s not nearly enough — for either consumers or the economy. For households that are truly distressed, $1,000 is not sufficient. Meanwhile the total amount of stimulus, roughly $200 billion, is too small to change the overall dynamics of the economy.

What’s needed, then, is an all-of-the-above approach. In addition to the low interest rates, loans and direct payments, there is more the government can do.

First, it should temporarily increase unemployment benefits and remove any caps for the duration of the pandemic. (In fact, the White House is already considering this.) In normal recessions, such generous benefits would discourage workers from aggressively seeking new work. In the current climate, however, policy makers should be cautious about pushing those out of work to seek new work.

Second, Congress should not only adopt Trump’s proposal to eliminate the payroll tax for the rest of the year, but it should also refund any payroll tax already paid in 2020. This will be an enormous stimulus to the economy, roughly $1.2 trillion, and it will provide an infusion of liquidity for businesses. That could allow them to expand employment under pandemic conditions if they are able to do so. Amazon, for example, is preparing to hire 100,000 new delivery workers, and some bars and restaurants may need to hire more people as they convert to delivery-only.

It may seem that these two goals — expanding pandemic-appropriate employment and raising unemployment benefits — are odds. They aren’t. The idea should be to encourage expansions in safe employment while giving job seekers bargaining power to turn down dangerous work.

Finally, and crucially, Congress should not be concerned about the price tag. The president has said that this is the equivalent of a war, and Congress should treat it as such when considering appropriations. It’s far better to do too much than too little.

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

Karl W. Smith, a former assistant professor of economics at the University of North Carolina and founder of the blog Modeled Behavior, is vice president for federal policy at the Tax Foundation.

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