A Traditional Economic Stimulus Won’t Work. Here’s What Might.

More countries should follow Denmark’s example

A man walks through the U.S. Capitol Rotunda, empty of tourists as only essential staff and journalists are allowed to work during the coronavirus pandemic on March 24, 2020 in Washington, DC. Photo: Chip Somodevilla/Getty Images

As the Covid-19 pandemic brings the U.S. economy to a standstill, a severe drop in consumer demand is putting vast numbers of businesses at risk of bankruptcy, and millions of employees at risk of losing their jobs. With the U.S. government preparing to spend up to $2 trillion to help workers and shore up businesses, a key question remains: Which interventions will be most effective?

Unfortunately, traditional stimulus measures are unlikely to solve this problem alone. Such measures, including interest rate cuts by the Federal Reserve, or stimulus checks mailed to U.S. households by the Treasury, seek to fight a drop in demand by encouraging households to spend more. But while a traditional stimulus package might work in a normal recession, it is poorly suited to the current environment for two reasons.

First, given the risk of infection, consumers may rationally be extremely averse to certain types of activities, such as dining in at restaurants, even if they feel they are affordable. Moreover, public health measures closing businesses or mandating shelter in place may make these activities impossible even if consumers are willing to take part. Second, to the extent that these policies are successful, they may…