Coronavirus threatens the world’s economic life, and current proposals from governments around the globe are failing to match the scale of the crisis. Today, the chancellor, Rishi Sunak, [UK Chancellor of the Exchequer] announced £330 billion of loans and that some companies would not have to pay business rates for the next 12 months.
While loans help businesses in the short term, they do not compensate for losses and only allow companies to smooth costs over a longer period.
In the United States, the Trump administration has suggested direct cash payments to individuals. Such measures (such as $1,000 given to each U.S. household) help to alleviate temporary economic hardship but are poorly targeted: It’s too little for those who lose their jobs, and it is not needed by those who don’t. During social distancing, the goal should not be to increase demand, since people can no longer spend on many goods and services.
Unemployment insurance, or benefits, and paid sick leave policies come closest to helping laid off workers and those unable to work, but they do not prevent redundancies and do not help businesses. Tax relief, such as the business rate holiday offered by the UK to sectors most affected by the recession, such as hospitality and retail, will help. But there’s no guarantee this relief will be enough to prevent bankruptcies and job losses.
Prof. Gabriel Zucman, right
There is, however, a radical and targeted solution to the specific causes of the coronavirus global recession: governments should step in as payers of last resort, which means they would cover wage and maintenance costs for businesses facing shutdown. In the context of this pandemic, we need a new form of social insurance, one that directly helps both workers and businesses.
So, how does this work in practice? The drop in demand caused by social distancing measures, and a following decrease in output and therefore GDP, is expected to be short, probably for a few months. Governments cannot undo this direct output loss, but they can prevent a very sharp but short recession becoming a long-lasting depression.
Absent government actions, and many businesses and workers do not have enough liquidity to weather dramatic shortfalls in demand causing mass redundancies. Keeping businesses alive through this crisis and making sure workers continue to receive their wages is essential.
The most direct way to provide this insurance is to have governments act as payers of last resort, so that hibernating businesses can keep paying their workers (known in economic terms as idle workers) instead of laying them off, and can keep paying their necessary bills such as rent, utilities and interest instead of going bankrupt.
In practice, in the US, the unemployment insurance system is already up and running, making it possible to compute and deliver compensation to idle workers. Workers should immediately start receiving special unemployment insurance benefits so they are no longer a cost to their employers — even though they stay formally employed — and no re-hiring process is needed once they can come back to work.