A Traditional Economic Stimulus Won’t Work. Here’s What Might.
More countries should follow Denmark’s example
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 be counterproductive by encouraging activities that are incompatible with social distancing, thereby accelerating the spread of infection.
What might work better is a temporary program of public furlough assistance that allows firms to place workers on paid leaves of absence. This proposed program would permit businesses to temporarily furlough workers, up to a limit of say, 90 days, with the government replacing part or most of their salaries. The businesses would be required to maintain each worker’s health coverage during the furlough, and return them to employment afterwards. This program would be similar in some ways to traditional unemployment insurance, but would allow the worker to collect benefits without being laid off, avoiding painful unemployment spells for workers and, just as important, any disruption in employer-based health insurance.
Businesses would be able to temporarily cut labor costs…