How should macroeconomic policy respond to COVID-19? Twitter has hosted a lively debate in recent days. In this chart, I’ve tried to distill that discussion into three basic strategies: (1/5) pic.twitter.com/rD6N73CuWu— Donald Marron (@dmarron) March 13, 2020 I had a chance to talk through economic policy responses to Covid-19 in my graduate business cycle class yesterday. I very much like Donald Marron’s take on it, which you can see in this Twitter thread, whose first tweet is shown above. I think what I have to say is very much consistent with what he says. He writes that while the epidemic is raging, we want to reduce economic activity in sectors such as restaurants, travel and in-person entertainment in order to reduce transmission of the coronavirus. I am on the side favoring very
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I had a chance to talk through economic policy responses to Covid-19 in my graduate business cycle class yesterday. I very much like Donald Marron’s take on it, which you can see in this Twitter thread, whose first tweet is shown above. I think what I have to say is very much consistent with what he says. He writes that while the epidemic is raging, we want to reduce economic activity in sectors such as restaurants, travel and in-person entertainment in order to reduce transmission of the coronavirus. I am on the side favoring very strong social-distancing measures. I am glad our republic is taking things more seriously than it did 10 days ago. Strong social-distancing measures should result in an intentional sharp recession of an unusual type: things that can be done remotely or at low enough human densities to be reasonably safe, or are essential, such as groceries, will continue, and health-care-related activities will increase, but other virus-unsafe and not-absolutely-essential sectors will basically shut down or contract markedly.
After we have brought the epidemic under enough control to allow economic activity to resume in almost all sectors, a big issue we face is that many people will have lost their jobs or self-employment income but still face bills such as the rent, mortgage payments, groceries, etc. There are many people of low and moderate incomes who would face serious economic hardship without aid. We should help them. Legally requiring forbearance by landlords and creditors is probably appropriate, but then puts a financial strain on those landlords and creditors which might need to be addressed in some cases.
More generally, small businesses and nonprofits that were totally sound in the absence of the epidemic may be facing bankruptcy. Personally, I don’t want my favorite restaurants to go under financially simply because they have to keep paying rent during the epidemic but have almost no revenue. Since the financial hit from the epidemic is not their fault I am very sympathetic to the idea of bailing out small businesses that would fail without help only because of the coronavirus.
Note that I am not so worried about big businesses. For them, bankruptcy simply means that they end up owned by the bondholders instead of the stockholders, who are wiped out, but they can continue in operation. The government should only bail them out if their operations would be affected by the financial hit. Note that banks should be OK if appropriate aid is given to the people who owe money to banks and would be drive to bankruptcy in the absence of aid.
But how can we get aid to people quickly and still have time to carefully think through how to target it? Here is my proposal:
Instead of mailing $1000 check to each person as is being discussed, mail each adult a government credit card with a $5000 line of credit. Mail similar government credit cards with lines of credit that are a certain percentage of previous revenue to small businesses that would be most strongly affected by the coronavirus. (Businesses that have filed a tax return at least once would be eligible according to a formula. Businesses newer than that would have to apply.) This allows households and business to meet their immediate bills to a much greater extent than a mere $1000.
Couple the issuance of these government credit cards with their associated lines of credit with an announcement that the government would do means-tested loan forgiveness according to criteria that the government will take the needed time to work out.
This proposal is a version of my “Federal Lines of Credit” proposal. I have links to my posts on this proposal collected at the bottom of my post “Helicopter Drops of Money Are Not the Answer.” There is, however carefully targeted transfers in the form of loan forgiveness added to the Federal Lines of Credit.
The Federal Lines of Credit combined with the promise of means-tested loan forgiveness should go a long way toward supporting aggregate demand after the worst of the epidemic is over. But it may be necessary for the Fed to support aggregate demand by cutting interest rates further—into negative territory. My judgment of Fed performance so far in this epidemic is that they are doing a good job except for too much reluctance to consider negative interesting rates. (For example, they are doing a good job of keeping the functioning of the financial markets reasonably normal, and cut interest rates quickly to near zero.) I have links to my posts on negative interest rate policy here:
Also, I wrote a major post about negative interest rate policy just last Thursday:
Right now, the focus for fighting the coronavirus is appropriately on public health and medical interventions. But economists are tasked with thinking ahead to how we can avoid long-lasting economic carnage from the Covid-19 epidemic.