Insights Blog

The New School Economics Department's COVID-19 Policy Forum

March 19, 2020

A compendium of economic thoughts and policy recommendations in response to the coronavirus. 

The following is a forum for faculty and students in The New School for Social Research's Economics Department to share their ideas on progressive policies and considerations in response to the economic impacts of the coronavirus. Last edited March 31, 2020.

 

Joseph Edwards

(MA Student, Economics)

The unprecedented nature of our current crisis complicates the usual policy prescription of demand targeted stimulus. Boosting the disposable income of households so as to increase consumer spending will not address the issue as to why factories have shuttered and supply chains have broken down with the result being that such stimulus may in fact be detrimental. We may very well face a 1970s style recession of high inflation and high unemployment. Deficit spending must be targeted towards attacking the underlying cause of the crisis: COVID-19. Additional capacity for testing, containing, and ultimately curing COVID-19 must be the focal point of fiscal policy initiative. Finally, a kind of holding action in the form of bailouts to flagging businesses must come with “strings attached.” This includes, inter alia, a temporary suspension of stock buybacks and dividend payouts from companies in need of federal assistance.  

 

Mark Setterfield

(Professor and Chair of Economics)

1. This time differs from last time (at least right now) in the sense that last time, the financial crisis heralded the loss of a structural source of demand (household borrowing) that had no obvious replacement -- suggesting an L-shaped recession. As far as I can see that was borne out by experience, the gap between log output and 'potential' output (as reflected in the unemployment rate etc) having closed largely because of continual downward revisions in the path of potential output. This time, the recession should be U-shaped, in the sense that there is no initial loss of a structural source of demand: if the virus went away tomorrow, people would go back to theatres, restaurants etc. That's not to say it won't be severe, however, or that it won't be persistent -- the degree of persistence depending on natural forces (the virus itself) and social forces (efforts to contain the virus on one hand, and possibly also habit persistence even after the medics give us the 'all clear' -- will people immediately go back to restaurants because of cabin fever, or will they continue to stay away, despite medical assurances, out of fear for their health?) These themes (depth and persistence) bring us to ....

2. ... how to make a potentially U-shaped recession L-shaped. Answer: inadequate initial policy response that piles on problems related to the debt structure, and turns one crisis (interruption of economic activity and hence income flows due to COVID-19) into another (a financial crisis of some sort, based on inability to service outstanding stocks of debt -- as discussed by Michalis Nikiforos in his recent Levy brief) I think the "one crisis into another' could become real if either (a) the initial policy response isn't big enough (so the depth of the recession is great) or isn't timely enough (so that the persistence of conditions has cumulative effects on households and small businesses slowly that eventually result in defaults).

3. I think the policy response should be more targeted than the 'give everyone $1000' approach, and needs to address both supply- and demand-side concerns arising from what is (iniitially) a very large but asymmetric shock. First things first: medical facilities are inadequate. So use state university dorms, army corps of engineers etc, and test/treat anyone regardless of ability to pay. Also, it's obvious that the service sector is taking the immediate hit -- this accounts for the bulk of employment and a lot of low wage, low/no benefit employment, and small businesses. So replace/prop up their income streams immediately (never mind giving me $1000) -- same for 'gig' workers who will experience a big loss of hours. I haven't thought through the details -- massive extension of unemployment benefits to include 'layoff benefits', for example? -- but I think targeting the policy response may be necessary to avoid the sort of problems in noted 2. After all, this isn't just replacing private demand with public demand writ large: give me $1000 and I still can't spend it in a restaurant or on a hotel room, so how do the millions of workers in hotel/catering/retail ever make rent/mortgage/credit card payments, and when they don't ... (Notice also that in terms of eventual default, I'm more concerned about the household sector than the corporate sector. The latter have been the focus of Levy et al in recent years -- as witnessed by Michalis's Levy brief, but don't forget that many households are still deeply indebted and depend on borrowing (not savings) to address unforeseen emergency expenditures. In all likelihood both household and corporate debt are important.)

 

Willi Semmler

(Arnhold Professor of International Cooperation and Development)

Germany is undertaking a policy that, if enacted in the U.S., would preserve jobs rather than leave workers on their own to find new jobs post-crisis. Rather than giving cash payments to workers after they’ve lost their jobs, "Kurzarbeit” is a policy that shortens the work week while using federal funds to assure employees full pay.

In short, Kurzarbeit functions as payroll insurance. When a recession hits and the economy and firms start to contract, the Federal Institute of Labor decides when to shorten the work week and pays the difference in a company’s payroll. For example: firms have work for 2-3 days a week, for which they pay wages. The rest of the usual work week’s wages are paid by the Federal Institute of Labor. If and when funds for Kurzarbeit are exhausted due to a severe and long-lasting recession, the federal government steps in to subsidize payroll.

The program is advance funded. Each employee pays 1.5% of their wages to the Bundesanstalt fuer Arbeit, the Federal Institute of Labor, which is matched by the employer for a total of 3% of wages. This builds up a fund for unemployment insurance, re-skilling, and shorter workweeks.

Germany is now putting this policy into effect again, after successfully implementing it in reaction to the "Great Recession.” Specifically, in the years following 2008/9, the policy allowed workers to keep their jobs, employers to provide a (subsidized) payroll, and firms were saved from bankruptcy, insolvency, or default, and remained creditworthy (in fact there are additional credit flows initiated now by the federal government).

The program was mutually beneficial to both firms and employees. Firms kept their skilled workers and human capital, while workers stay employed, remained part of their unions, and kept their bargaining power. The program also stopped aggregate demand from falling as quickly as it would have otherwise by ensuring household income, allowing many to avoid defaulting on household debt.

Overall, Kurzarbeit prevents the economy from spiraling down too quickly and for too long. Moreover, once the recession flattens out, firms do not need to restart businesses -- with new business plans, new workers, possibly new locations, or the need to secure new financing.

Without such a policy, firms in the United States lay off or fire workers immediately, producing a prolonged period of a recession characterized by great losses in human capital, skilled workers, and workers’ bargaining power.

 

Ramona Moorhead

(MA Student, Economics)

Companies that receive public funding should be required to re-orient worker training to limit the future offshoring and outsourcing of jobs. To do so will necessitate that companies provide skills and technical training for U.S. workers to adapt to technological upgrades in production and an investment in technological upgrading in manufacturing plants in the United States. 

To ensure that companies adhere to national labor laws, federal monitoring of domestic labor standards and corporate oversight—akin to practices put in place by President Harry S. Truman during the Korean War - should be implemented. Such a program could decrease the threat of corporate profiteering and ensure greater protection of workers’ rights, while also creating employment opportunities for labor rights monitoring and evaluation.

 

João Paulo Braga and Gustavo Pereira Serra

(PhD Students, Economics)

Global leaders declared war against Covid-19 in mid-March 2020. Developing countries face much more challenging technological and financial resources than rich countries. Brazil confirmed 3,417 COVID19 cases including 92 deaths on March 27.The Federal Department of Health and State Governors have been actively responding but President Bolsonaro and his Ministry of Finance are actively contradicting Brazilian public health experts insisting on an economic agenda of austerity and liberal reforms. But as economists, we encourage developing countries to implement a mission-oriented development policy to re-shape its growth strategy as economist Marianna Mazzucato (2011) describes.

Considering the roots of the current situation, we doubt conventional fiscal and monetary policies will work under this health crisis. Brazil and other developing nations face the inescapable increasing role of the government to keep business and people alive in the short-run while building new growth drivers in the medium-run. 

To maintain the economy, based on other countries’ policy response to this crisis, developing countries' governments could (i)  increase cash transfer programs to formal and informal sector workers; (ii) provide subsidized loans to firms to ensure cash flows during the lockdown, conditioned to the maintenance of their payroll; (iii) offer public collateral to private firms to ensure credit access; (iv) implement a mission-oriented program to ensure a public purchase program and a science and technology policy to equipment, medicines and the health sector. 

Additionally, despite the closed borders, different countries should re-open dialogue and increase international cooperation to share resources to fight the crisis. Multilateral actions are key to finding and implementing solutions in the developing world. 

References:

Hausmann, R. (2020, March 24). Flattening the COVID-19 Curve in Developing Countries. World Economic Forum. Retrieved from https://www.weforum.org/agenda/2020/03/flattening-the-covid-19-curve-in-developing-countries/

International Monetary Fund (2020). Policy Responses to COVID-19. Retrieved from  https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19

Mazzucato, M. (2011). The entrepreneurial state. Soundings, 49(49), 131-142.

McGeever, J. (2020, March 30). Brazil austerity fervor threatens fight against coronavirus. Reuters. Retrieved from  https://www.reuters.com/article/us-brazil-economy-fiscal-analysis/brazil-austerity-fervor-threatens-fight-against-coronavirus-idUSKBN21H2FL

Nikiforos, M. (2020). When Two Minskyan Processes Meet a Large Shock: The Economic Implications of the Pandemic (No. 20-1). Levy Economics Institute.

Savarese, M., Biller, D. (2020, March 26). After Bolsonaro Labels Coronavirus a 'Little Flu,' Brazil's State Governors Defy President's Call to Reopen Businesses, Schools. Time. Retrieved from https://time.com/5810902/jair-bolsonaro-brazil-governors-coronavirus/

Worldometers (2020, March 27). Total Coronavirus Cases in Brazil. Retrieved from https://www.worldometers.info/coronavirus/country/brazil/

 


The Schwartz Center for Economic Policy Analysis (SCEPA) works to focus the public economics debate on the role government can and should play in the real productive economy – that of business, management, and labor – to raise living standards, create economic security, and attain full employment. Our team of faculty and research associates works from the broad and critical perspectives representative of The New School’s department of economics, including post-Keynesian, neo-classical, classical and institutionalist schools of thought.

About SCEPA

SCEPA works to focus the public economics debate on the role government can and should play in the real productive economy - that of business, management, and labor - to raise living standards, create economic security, and attain full employment.