Economic Ramifications of the Coronavirus

People all over the world are dealing with sudden and unprecedented (in modern times) hardship. A virus that was first discovered in December has caused thousands of deaths and will likely cause millions before all is said and done with many more caused by knock-on effects and poor responses by global governments. The hardest hit will be the poor who cannot afford to miss work and service-industry folks who suddenly find themselves without a paycheck. Social safety nets can help stem the bleeding, but some countries (such as the US) lack a sufficiently robust system to cope with a situation such as this without taking new and drastic action. As a result, we are seeing competing stimulus packages getting rammed through both houses of Congress. Some measures are good ideas while others are wasteful or miss the mark. Ideally, we would look at who needs help to get by (and when I say who, I mean human people, not corporations), and then we would find ways to most efficiently help them.

The essential first step is making sure that everyone is able to weather the storm. Most importantly, that means giving everyone the security to take off if they are sick. This is why the bulk of the plans making their way through Congress include some form of extended paid sick leave guaranteed for everyone. It also means giving people a helping hand that suddenly lost work because we are closing or reducing capacity for public spaces including bars and restaurants. Waitstaff, chefs, bartenders, and all other service-oriented professions are feeling the squeeze more than any other. They are not the only ones, though. A poll completed a week ago (a lifetime ago in terms of this virus) found that one in five American households had lost work due to the coronavirus; they either lost hours or lost their jobs. This is why Congress is talking about simply cutting checks to every American. We can deal with the ramifications later by clawing some back via income taxes for those who did not need it, but we do not have the time to waffle around on who doesn’t deserve it and why. The speed of this crisis does not allow it.

After we have secured help for people who are immediately impacted, the next step is securing the future. We will get past this whether it is 6 months from now or 18 months from now. When we do, the economy will need to be rebooted. If businesses are all left in ruins, we might not like what sprouts up from the ashes. Small business is the backbone of our economy and we need to treat it as such; our diverse restaurants, bars, and cultural sites may become extinct if we do not help them. Nascent businesses building our future may die off before they ever get a chance to show us what they have to offer. Large corporations forming the backbone of our economy may struggle to bring people back to work. If we want to avoid these scenarios, we need to determine where the government needs to step in to prevent the utter devastation that would otherwise come about. Nevertheless, corporate policy should be more subtle than that impacting individuals.

Restaurants, bars, cultural venues, museums, and other businesses relying on customers to come into their establishments will be the hardest hit. They would not be experiencing this difficulty in the absence of this particular form of crisis or government responses to it and, as such, could reasonably be expected to be prepared for it. Offering long-term 0 percent interest loans to such businesses or grants that help them stay in their leases or mortgages could prevent closures negatively impacting communities. This cannot be open-ended, but keeping them afloat will give people a place in which they can return to work when this is all over and it maintains cultural sites for happier days.

Meanwhile, new businesses just getting off the ground will not be able to find new customers and will struggle to find funding with the inevitable cash crunch that will come as financial institutions batten down the hatches. There is no productivity growth without innovation and innovation cannot take place without the help of entrepreneurs. This does not mean that every business that has recently been founded deserves funding, but proposals such as that of Amy Klobuchar would allow the government to invest side-by-side venture capital in places such as the Midwest, which have historically struggled to find funding. If private money feels comfortable investing, public money can come in alongside it.

Finally, we can turn our attention to large corporations. They have the funds to wait it out a bit longer, so approaching that last allows us to better assess what is happening. If they are not able to withstand the hit after just a few weeks, they were probably overleveraged and the virus likely only accelerated the inevitable. Industries likely to be hardest hit by this crisis include travel and durable goods. Some, such as the automotive industry, can retool their production lines to temporarily create things we need more of right now including ventilators and other life-preserving medical technology. Others, such as airlines, will not be able to do much beyond waiting it out, so some form of assistance will be necessary (although it should probably come with some strings attached as they have spent the vast majority of their free cash flow on share buybacks during the good times).

A broad-strokes policy is inappropriate and we do not have space for me to discuss all of them here, but I will say that, in the case of large corporations, staying within our means is better than overdoing it. We are still dealing with ramifications of extensive low-cost financing today in the form of shambolic firms that continuously roll over their finances without creating any positive cash flow. In an ideal world, such firms would cease to exist and we could restart productivity growth. Open-handed financing of these ‘zombie’ firms can only contribute to an extension of the era of low productivity growth.

Further, there are many policies being put forward with which I believe we should immediately dispense. Proposals of funding payrolls to keep people working that would not otherwise be is a gross mismanagement of government funds. It is regressive in that it gives more money to people who are already better off. Payroll tax breaks do nothing to help the millions of Americans who are about to be out of work; those breaks are essentially turning a sprinkler onto a field that is filled with water. Cancellation of student debt is not in any way related to this current situation and even talking about it wastes valuable time that should be spent on more productive ideas. Corporate tax breaks are ineffectual when most economic activity is suspended by design.

Relief required also depends on the scale of restrictions placed upon normal economic activity. Extreme positions such as full lock-downs are especially onerous on wage workers and, as such, more focus for relief needs to go towards them. Here I should mention that I believe lockdowns to be unsustainable given the timeline we are looking at for this crisis, but, after our local leaders hit the panic switch, the federal government needs to step in to alleviate some of the damage such policies have wrought. That aside, this will all change as the situation develops. There is simply too much we do not know. The speed of this economic onslaught has been faster than anything else in history (including the Great Depression). To wit, the stock market has gone from peak to bear market faster than at any time in history. Responsible leadership has never been more important.