5 questions for Stan Veuger on combating the COVID–19 recession | American Enterprise Institute
The coronavirus pandemic has become a public health crisis for the United States and the world. It also poses a serious economic challenge. What can we do to mitigate the harm through public policy? On a recent episode of Political Economy, I discussed these questions with Stan Veuger.
Stan is a resident
scholar of political economy and public finance at AEI, as well as the editor
of AEI Economic Perspectives. He is also a fellow at the IE School of Global
and Public Affairs in Madrid and at Tilburg University in the Netherlands.
Pethokoukis: How is dealing with the COVID–19 downturn going to be
different than any traditional approaches to dealing with recessions?
Veuger: The usual response would be fiscal stimulus and cuts in interest rates to get back to full employment and full use of all of our productive resources. Whereas now, we are trying to shut down entire industries because of the pandemic, so the last thing we need is to raise demand for those sectors.
Instead, on the household side, we need to make sure people can feed themselves and their families, as well as pay their bills, rent, or mortgage. We need to assist households that have lost their jobs because their industries have been shut down or dramatically restricted.
On the business side, there’s about as many people who work in restaurants and food preparation as in all of manufacturing — we’re not talking about minor industries on the side. We have to make sure that those businesses are surviving, because a lot of them are completely vulnerable. We can’t expect them to be ready for a months-long shutdown.
There was talk about a payroll tax cut, and now the discussion
seems to be about sending checks individually. So ideally, how would you target
it, and how much would people get?
It’s progress that we’re no longer talking about an employee-side payroll tax cut, because payroll taxes are paid by people who are in fact employed, in proportion to their wage income. People who’ve lost their jobs or whose hours have gotten cut — they would specifically be the people who would not benefit.
What I would do instead is
prop up the businesses in industries that are under
tremendous pressure. Basically, allow businesses to get federally-backed loans
to make up for their revenue shortfalls. This wouldn’t be quantitatively
different from sending everyone $1000. Businesses would later be reimbursed by
the federal government for their expenses.
We can use businesses’
usual relationships with lenders to get the money out. Our banking system is
used to dealing with small and medium-sized businesses. Administratively, I
think it’s easier than some of the alternatives people have in mind.
The airline industry has gotten the most attention for wanting a
bailout. They wanted loans and actual cash grants. How’s what you’ve described
different from a bailout?
programs now circulating on the Hill and in the White House are very focused on
politically connected, heavily regulated industries that are more accustomed to
asking for support. I don’t think they should get special treatment.
Instead, our plan is open to all industries. But you could still adjust and make things a little more sector-specific in some ways. For instance, while you want to make up for revenue loss, you don’t want to let people just cut their variable inputs and run a larger profit than they did last year while they’re in the program. So you could allow industries that have been forcibly shut down to run a larger relative profit than firms that were not forcibly shut down.
Based on that underlying
logic, I’m more comfortable with distinguishing between industries. But not on
how politically connected certain industries are. Obviously, a lot of members
of Congress fly constantly. So the airline industry probably looms larger for
them than it really should.
What about putting conditions on aid? I know Elizabeth
Warren would put limits on executive compensation buybacks, put workers
on the boards, and enact a higher minimum wage. I’m sure other politicians have
other strings they would like to attach.
I understand people
would like to attach their favorite policy to any emergency package. But I
don’t think that’s a great idea. The conditionality in our proposal is simply
that a firm should keep up a payroll and not shift payments to directly
connected third parties. I think those kinds of restrictions are reasonable.
I wouldn’t directly try to attach other kinds of detailed conditions, especially because it’s very important to act quickly. We’re going to see massive employment losses very soon. We’ve known now for about two months that this was going to be a big problem, and the federal government just hasn’t really done anything yet. I’m concerned that the more detailed you try to make these plans, the more delays you’ll get.
What is the one thing that you would like American policymakers to
keep in mind as they figure out what to do next?
All of these economic
solutions aside, what’s very important is that we solve the public health crisis.
It’s been months now.
We’ve produced zero additional ventilators compared to what we normally would
have. Testing levels are very limited, even though weeks ago the executive
branch promised that would be completely up and running.
We had a press conference at the White House, where simple questions like “Where are the tests?” and “How many ventilators are there?” could not be answered by the president, the vice president, or the head of the coronavirus task force. That’s worrisome.
The longer the crisis goes on, the harder it will be to maintain these super-expensive, super-comprehensive economic programs. We can do this for a few months, but obviously we can’t prop up 25 percent of the companies in the economy for five years.