Lockdowns of entire cities. Panic in financial markets. Bare store shelves. Shortages of hospital beds. The world has entered a reality unknown outside wartime.
Alarmingly, a growing chorus in the US – including President Donald Trump – is assuming that newly passed "stimulus" legislation will allow the COVID-19 lockdown to be eased as soon as Easter. In fact, the pandemic demands not only vast government spending but also intervention, including a temporary state-led reorganization of the entire economy.
By mandating that people isolate themselves at home, policymakers hope to slow, and then reverse, the rate at which COVID-19 is spreading. But a lockdown alone, or a burst of money creation, will not stop the pandemic or save our economies. The $2 trillion economic-rescue package just adopted by the United States is a case in point. The US needs government spending on the scale that it envisions, but it also needs government intervention to address a deepening public-health crisis. As such, many of the “stimulus” bill’s provisions appear misguided, some woefully so. Others move in the right direction, but are too piecemeal. (...)
The systemic insurance that is needed demands a government-led effort in four main areas:
Alarmingly, a growing chorus in the US – including President Donald Trump – is assuming that newly passed "stimulus" legislation will allow the COVID-19 lockdown to be eased as soon as Easter. In fact, the pandemic demands not only vast government spending but also intervention, including a temporary state-led reorganization of the entire economy.
By mandating that people isolate themselves at home, policymakers hope to slow, and then reverse, the rate at which COVID-19 is spreading. But a lockdown alone, or a burst of money creation, will not stop the pandemic or save our economies. The $2 trillion economic-rescue package just adopted by the United States is a case in point. The US needs government spending on the scale that it envisions, but it also needs government intervention to address a deepening public-health crisis. As such, many of the “stimulus” bill’s provisions appear misguided, some woefully so. Others move in the right direction, but are too piecemeal. (...)The systemic insurance that is needed demands a government-led effort in four main areas:
- Redirecting the economy’s existing productive capacity to overcome the rapidly growing shortages of equipment and services required to respond effectively to the pandemic.
- Supporting firms that are not directly involved in efforts to combat the crisis, so that they can continue to supply essential goods and services.
- Ensuring that the population has sufficient means to purchase these goods and services.
- Creating a financial facility to help those unable to pay their mortgage and meet other obligations, thereby mitigating cataclysmic risks to the financial sector.
Such systemic insurance goes well beyond current proposals to spend trillions of dollars, much of which is earmarked for policy initiatives that misdiagnose the crisis as one of deficient aggregate demand or as the result of an ordinary supply shock. Moreover, substantial sums are being dedicated to bailouts without explicitly conditioning the money on a firm’s participation in the effort to combat the health crisis and its economic consequences.
So, as officials around the world consider large outlays to combat the COVID-19 crisis, the most immediate questions that we face are whether the policies currently under consideration provide sufficient insurance against the systemic risks that are now mushrooming. The criteria are straightforward:
Policies aiming to stimulate employment, such as the cuts in corporate or payroll taxes advocated by US Senate Republicans, certainly won’t help combat the pandemic and its consequences for the supply of goods and services. Employees who are sick or apt to be sick, and thus a hazard to others, cannot be relied upon to maintain the production of goods and services.
What is now painfully clear is that there is a supply shortage of an unprecedented type: medical equipment and facilities. And it is equally clear that the policies under consideration in the US, which mostly rely on voluntary repurposing of existing manufacturing capacity, are woefully inadequate to close the growing gap.
Re-equipping factories to produce ventilators for patients and personal protective equipment (PPE) for medical personnel, for example, takes time. So these measures must be scaled up without delay. Moreover, such retooling requires substantial financial outlays, which are hard to make in a collapsing economy.
In order to repurpose existing capacity, the government should condition support for any private firm on the firm’s commitment to producing vital equipment (specified by a body of medical experts) and meet its payroll at reasonable wages. To avoid price-gouging, medical supplies must be priced at pre-crisis levels.
This conditionality should not only apply to firms producing equipment. The systemic insurance approach to allocating taxpayer funds would require that large service-sector companies such as airlines or hotel chains receive bailouts only if they repurpose their capacity to support the fight against the pandemic. Rather than standing idle waiting for passenger travel to resume, airlines should be provided funds to re-equip their airplanes to transport medical supplies and equipment, or to move sick patients to locations with the capacity to care for them. Similarly, hotel chains should be supported by the government only if they agree to repurpose their hotels to serve as temporary hospitals. (...)
But such a reorganization of our economies poses more than operational difficulties, especially in the US, where government has historically strictly limited its direct intervention in productive activities. Although governments’ intervention in modern economies takes many forms, ingrained ideas about the balance between the state and the market are even now impeding an adequate response to this crisis.
by Roman Frydman and Edmund S. Phelps, Project Syndicate | Read more:
Image: Getty
[ed. Indeed. So far it appears government policy and intervention efforts have mostly been about incentivizing business and consumer behavior rather than requiring that all possible resources be mobilized to target specific problem areas (lack of medical tests and equipment, quarantine facilities, medical personnel, supply chains, research, etc.), ie. trying to maintain a business as usual economy when the economy is anything but usual, and with health directives working in the opposite direction. See also: How the World’s Richest Country Ran Out of a 75-Cent Face Mask (NY Times); and Trump Resists Using Wartime Law To Get, Distribute Coronavirus Supplies (NPR).]
So, as officials around the world consider large outlays to combat the COVID-19 crisis, the most immediate questions that we face are whether the policies currently under consideration provide sufficient insurance against the systemic risks that are now mushrooming. The criteria are straightforward:
- Is government spending sufficiently laser-focused on overcoming the public-health crisis?
- Is the economic rescue package adequate to sustain the population’s wellbeing?
Policies aiming to stimulate employment, such as the cuts in corporate or payroll taxes advocated by US Senate Republicans, certainly won’t help combat the pandemic and its consequences for the supply of goods and services. Employees who are sick or apt to be sick, and thus a hazard to others, cannot be relied upon to maintain the production of goods and services.
What is now painfully clear is that there is a supply shortage of an unprecedented type: medical equipment and facilities. And it is equally clear that the policies under consideration in the US, which mostly rely on voluntary repurposing of existing manufacturing capacity, are woefully inadequate to close the growing gap.
Re-equipping factories to produce ventilators for patients and personal protective equipment (PPE) for medical personnel, for example, takes time. So these measures must be scaled up without delay. Moreover, such retooling requires substantial financial outlays, which are hard to make in a collapsing economy.
In order to repurpose existing capacity, the government should condition support for any private firm on the firm’s commitment to producing vital equipment (specified by a body of medical experts) and meet its payroll at reasonable wages. To avoid price-gouging, medical supplies must be priced at pre-crisis levels.
This conditionality should not only apply to firms producing equipment. The systemic insurance approach to allocating taxpayer funds would require that large service-sector companies such as airlines or hotel chains receive bailouts only if they repurpose their capacity to support the fight against the pandemic. Rather than standing idle waiting for passenger travel to resume, airlines should be provided funds to re-equip their airplanes to transport medical supplies and equipment, or to move sick patients to locations with the capacity to care for them. Similarly, hotel chains should be supported by the government only if they agree to repurpose their hotels to serve as temporary hospitals. (...)
But such a reorganization of our economies poses more than operational difficulties, especially in the US, where government has historically strictly limited its direct intervention in productive activities. Although governments’ intervention in modern economies takes many forms, ingrained ideas about the balance between the state and the market are even now impeding an adequate response to this crisis.
by Roman Frydman and Edmund S. Phelps, Project Syndicate | Read more:
Image: Getty
[ed. Indeed. So far it appears government policy and intervention efforts have mostly been about incentivizing business and consumer behavior rather than requiring that all possible resources be mobilized to target specific problem areas (lack of medical tests and equipment, quarantine facilities, medical personnel, supply chains, research, etc.), ie. trying to maintain a business as usual economy when the economy is anything but usual, and with health directives working in the opposite direction. See also: How the World’s Richest Country Ran Out of a 75-Cent Face Mask (NY Times); and Trump Resists Using Wartime Law To Get, Distribute Coronavirus Supplies (NPR).]
