Self-employed individuals (such as gig workers) could report themselves as idle and be eligible for this special unemployment insurance. In case of partial idling — if someone’s working hours have been cut — unemployment insurance benefits would be prorated.
These benefits would be progressive if they replaced a higher fraction of earnings for low-paid workers. This is a desirable feature, as low-paid workers are more likely to be affected by the lockdown (i.e., less likely to be able to work from home) and less likely to have savings to replace a temporary loss in earnings.
In the payer-of-last-resort program we envision, businesses on lockdown would report their monthly necessary costs of maintenance and receive payment from the government.
Necessary costs are rent, utility payments, interest on debt, health insurance (in the U.S.) and national insurance contributions (in the UK) of idle workers, and other costs that are vital for the maintenance of businesses. For partially shut down sectors, governments would pay a fraction of the maintenance costs. The amounts don’t need to be exact; verification and correction can take place once the lockdown is over. Any excess government payment could be transformed into an interest-free loan that could be recouped over several years.
Right, Emmanuel Saez
There are two reasons why such a policy would work in the case of the coronavirus pandemic. First, it is clear what is driving the shock: a health crisis that has nothing to do with any business’s decision and will be temporary. Second, different industries are affected differently. That’s in contrast to normal recessions, where the drop in demand is widely spread and has no clear timeline.
How much would such a payer-of-last-resort program cost? Based on national account statistics by industry, we estimate that with a nationwide lockdown up to 30% of aggregate demand could evaporate in the US over the next three months, leading to a 7.5% drop in annual GDP.
Compensating idle workers and necessary business maintenance costs would involve government payments of around half of this total. Unemployment insurance replaces about 50-60% of wages, and essential maintenance costs of businesses are probably less than half of their normal operating costs (for example, non-flying planes do not burn fuel). The total cost for the government would be around 3.75% points of GDP, financed via an increase in public debt. The direct output loss from social distancing measures would in effect be put on the government’s tab, i.e., socialized. A payer-of-last-resort program will work if it is limited in time (e.g., three months), so the cost remains manageable and business decisions are not affected.
It would not fully offset the economic cost of coronavirus. No matter what governments do, there will be real output losses. Even if airline workers are paid, the plane rides won’t happen. For other sectors, supply-chain distortions will happen no matter what, due, for example, to quarantine measures.
But a payer-of-last-resort program would alleviate the hardship on workers and businesses. It would maintain the cash flow for families and businesses so the coronavirus shock has no secondary impacts on demand — such as laid-off workers cutting down on consumption — and a quick rebound can take place once demand comes back. Business activity is on hold today, but with an intravenous cash flow it can be kept alive until the health crisis is over.
Cross-posted from The Guardian
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