The future shape of the economic crisis driven by the federal government’s inadequate response to the coronavirus pandemic is coming into focus. The widespread social isolation that has sent both the demand for and production of goods and services into a free-fall reflects our spotty knowledge about the contagiousness and lethality of the virus. At the same time, we don’t know where hospital admissions will spike next. These new facts of life point to two potential economic scenarios, based on aspects of the virus that are beyond our control.
If we’re lucky, the virus will dissipate by June. Let’s call that an Act-of-God scenario. In this case, a deep recession, spurred by broad social isolation and public anxiety through April and May, will persist through most of this year. It should end by 2021, because the $2 trillion in emergency relief expected to be passed in the coming days should be enough to support a decent recovery.
To solidify a new normal for the economy, Congress can’t stop with that stimulus. It should follow up early next year by providing $1 trillion in interest-free loans to capitalize new businesses, and another $1 trillion in an emergency federal work and infrastructure program to repair and build roads, bridges, airports, wastewater treatment plants, and mass transit systems. That money can also go toward redoing the electric grid and providing rural broadband.
If God doesn’t cooperate, however, and the virus spreads throughout 2020, we won’t be able to avoid a protracted economic breakdown as serious as the 1930s. In this case, we have to respond in ways that can help preserve the economy’s underlying strengths. One plan with merit, described recently by Andrew Sorkin in the New York Times, would create five-year, interest-free government bridge loans for businesses that maintain all or most of their employees.
This approach, while attractive in concept, would be daunting to carry out. Since the purpose is to help businesses and workers get through this crisis, the bridge loans have to cover a company’s fixed costs as well as its payrolls, including commercial and industrial rent, utilities, and interest on business loans. Moreover, two-thirds of Americans get their health insurance through their jobs, with employers covering 71 percent of the premiums for families and 82 percent of the premiums for individuals. The bridge loans clearly have to cover those benefits.
In 2019, payrolls and healthcare benefits cost private businesses $11,547 billion. Fixed costs added at least $1,203 billion to those labor costs—based on a rule of thumb that a business’s fixed costs should not exceed one-third of its revenues. So, payroll and fixed costs in 2019 came to some $12.75 trillion. If two-thirds of the private sector line up for the bridge loans, they will cost the government $4.25 trillion for six months.
That may sound difficult to implement, but the alternative is a protracted Depression-class crisis is that millions of businesses will disappear. By the time the virus does recede, tens of millions of Americans will have no jobs to which they can return.
You may sensibly ask: How can the Treasury raise all these funds on top of the underlying $1 trillion deficit we face, plus the $2 trillion in crisis assistance that is likely soon to be enacted, as it also continuously refinances existing federal debt?
Foreign governments and foreign investors currently own 39 percent of our public debt, but our Treasury may not be able to depend on them this time. Our largest foreign lenders will try to hold on to their nation’s savings for their own support and stimulus programs. Other countries, such as South Korea and Singapore, which are dealing with Covid-19 more successfully, also depend on trade flows, which have fallen sharply. In this environment, trying to borrow an additional $4 trillion through normal bond issues could spike interest rates and undermine the credit of the United States.
Therefore, the Federal Reserve will have to lead the way. Bridge loans for businesses are a lifeline for banks holding those businesses’ existing loans. In return, the Fed can direct the banks to purchase the bonds, perhaps with congressional approval. That’s not totally unprecedented: Congress took a version of that action to fund the Civil War. If necessary, the Fed can loan the banks the reserves to purchase the bonds. The Fed’s alternative here is to directly create the funds for the bridge loans. The benefit of that approach is that there would be little inflationary risk, at least in this environment, beyond food prices, which also could be controlled.
Finally, the IRS would give the Treasury the information it needs to determine the bridge loan each company needs to cover its labor and fixed costs. And to ensure that those loans go only to those ends, Congress can temporarily bar stock buybacks, freeze executive compensation, and enact a high surtax on profits that exceed those in 2019.
Nobody knows where the coronavirus crisis will end up. The realities on the ground change every day. But we are clearly heading toward an economic meltdown. Dramatic measures will be necessary. If we face the prospect of a Great Depression two months from now, the approach I’ve laid out would be a possible, if daunting, way to address it.