Economic Stimulus: The U.S. Can Follow Europe’s Playbook
The deep effect of the coronavirus crisis on the U.S. economy has been met with massive government programs to contain the damage of social distancing and of the shutdown of businesses in all 50 states plus its territories.
The response was certainly swift, and much faster than in 2008. In a matter of days, President Trump signed a $2.2 trillion economic stimulus package, the CARES Act. Then on April 9th, the Fed announced that it would inject another $2.3 trillion to support the U.S. economy. The Fed also announced that it would support financial markets with the large-scale purchase of both investment grade and even junk bonds.
The aforementioned numbers total over 21% of U.S. GDP. This is ‘bazooka’ money, by any measure, and over twice the response of 2008.
The CARES Act involves in large part providing low-cost cash to small and midsize businesses in the form of loans for them to keep their workers on payroll or rehire them rapidly when the U.S. economy opens up. The Small Business Association channels debt capital through local and national banks that underwrites and approves them. Unemployment checks have also been raised by $600 weekly for up to four months.
Washington certainly means well. But this is taking too long and the bottlenecks are too costly.
We can’t blame the government given the sums in play and the timeline of the emergency. Nevertheless, businesses are not getting the loans they need to survive, and there are numerous reports of the newly laid-off waiting for hours or days on the phone to be able to register for unemployment. In some cases, the unemployed are physically waiting in long lines to register at unemployment offices which puts their health at risk.
This time around the damage is so severe that another solution is needed for the economic fallout to be contained. Unemployment is foreseen to rise quickly to 13%, but that is without the individuals who are not able to register for it. And unemployment checks are critical in our country: 24% of the workforce are gig-workers.
The Federal Reserve foresees unemployment up to 32%. At its peak during the Great Depression, it was 25%. Of course, any unemployment rate hinges on whether some states ease up their stay-at-home orders. But according to some health experts, social distancing might need to be extended into 2022.
Businesses are failing for no market reason but for an unpredictable X-factor, and the U.S. could use a page from Old Europe’s playbook this time around. The shock is too steep otherwise, and we risk not bouncing back swiftly, or at all for a long time. Businesses are failing currently not because they are insolvent or do not have viable value propositions, but because lockdowns have disallowed them from operating normally which has created a liquidity crisis.
Rightly so, Rep. Pramila Jayapal (D-WA) and Sen. Josh Hawley (R-MO) have recently begun working on proposals for the federal government to backstop and guarantee companies’ payrolls directly in order to keep people employed and avoid mass layoffs. Congress itself has been frustrated with the rollout of the stimulus programs.
In France, most companies have furloughed workers and the government is spending $50 billion to back businesses not to fail and for them not to dismiss employees. The mechanism works with the government refunding 80% of firms’ payrolls within 10 days. Entrepreneurs and CEOs still have to pay for the remaining 20%. Hence, they have to invest in themselves and believe their companies will overcome the crisis. A self-sorting system for the government not to back anyone who wouldn’t deem themselves a viable concern.
The idea being that given the magnitude of the blow, the public and private sectors will be able to rebound faster once the pandemic is over. Morale stays high, companies limit their downsides and in theory, the damage is capped. The strategy is itself inspired by Germany’s successful reaction to the 2008 financial crisis, as it subsidized furloughs and kept companies from going under.
U.S. history has certainly favored a flexible labor market. But good companies don’t have to fail and create unnecessary layoffs when nothing is their fault. We will surely have big government, at least temporarily. We have passed the point of no return. But the above is a response to the size of today’s situation. We don’t need massive layoffs to try and then massively rehire workers. Confidence and consumption will be thoroughly eroded, especially as we do not have the social nets European systems feature. Free-markets have proven their value time and again. But today firms are failing for a public health reason. We are fighting off the Great Depression. The V- or U-shape recovery is in play and time is ticking.