More Less
More Less
March 23, 2020

Fighting a coronavirus recession

Opinion image

The first thing to note is the old saying, “The stock market has predicted 9 of the past 5 recessions.” The second is that “pundits” who are already crying recession are adding to the panic. We may very well be falling into recession, but that is all we can conclude thus far. What we currently have is tremendous uncertainty and the beginning of mass layoffs, particularly in services (entertainment, retail trade) and transportation (airlines). The hardship is on workers in those industries, particularly less-skilled workers whose incomes are low even in good times.

The first economic responses should be aimed toward those workers—mandatory sick pay for those who contract the virus, expanded unemployment benefits for job-losers (extensions of the usual potential duration—typically 26 weeks in the US). The first US response meets these criteria. In other wealthy countries these protections have been in place permanently for many years.

Any impending recession will be different from past recessions. With the shutdown of so many industries because of fears of contagion, we have a negative domestic supply shock. There is an effective ban on spending on certain things—for examples, cinema-going, eat-in restaurants. And that ban is generating a cut in income for many people, particularly in lower-income households. Taken together, these job losses produce a cut in aggregate demand.

Recognizing these facts, we should NOT:

  1. Cut payroll taxes (proposed by Pres. Trump). Doing that would not put income into the pockets of those who have lost their jobs—it offers most of its help to those who are currently employed. Those workers are maintaining their incomes and probably increasing saving because the effective ban on some consumption items gives them fewer things to spend on.
  2. Write checks to most adults (proposed by US Senate Republicans and suggested in many countries). Same problem as a payroll tax cut. Macroeconomic theory shows that for most people this windfall will be saved; and immense amounts of empirical research (on German reparations to Holocaust victims, on temporary tax cuts, etc.) validates the theory.
  3. Offer bail-outs to industries that are only temporarily shut down. With interest rates in Western economies at record lows, let them borrow to maintain their cash flows. Why should the average taxpayer subsidize shareholders of airline companies?

We should:

  1. Write additional checks to those lower-income people who cannot pay their rent or meet their mortgage payments because they have been laid off or have had their workweek shortened. A low income threshold should be used—no more than twice the poverty level (in the US this would be about $50,000 for a family of four).
  2. Offer an expanded borrowing facility to small businesses, at current low interest rates and with delayed repayment.

The central point is that any aid must be targeted. It cannot be a grab-bag into which politically powerful interests can dig to enrich themselves. Corporations and individuals who are not hit either directly or indirectly by this crisis and those who have the wherewithal to weather the crisis should not be the beneficiaries of expanded government largesse resulting from fears of a deep recession.

© Daniel S. Hamermesh

Read Daniel S. Hamermesh's previous opinion piece on the crisis "Coronavirus and the labor market."

Find more coronavirus content on our dedicated key topic page: Covid 19—Pandemics and the labor market

Please note:
We recognize that IZA World of Labor articles may prompt discussion and possibly controversy. Opinion pieces, such as the one above, capture ideas and debates concisely, and anchor them with real-world examples. Opinions stated here do not necessarily reflect those of the IZA.