BY PAUL H. KUPIEC
Emergency lockdowns have been successful in keeping ICUs from being overwhelmed, but as the economy reopens, virus spread continues, generating recessionary pressure on the economy. There are at least two competing views on how the federal government should respond to the COVID-19 recession but no objective way to identify the better approach. Still, it is becoming increasing clear that the consequences of choosing the wrong approach will be incredibly costly.
One school of thought is that a COVID-19 vaccine will be ready and widely available relatively soon. Folks in this camp think we should prioritize government assistance to keep virus-impacted business out of bankruptcy and their employees on payroll and off unemployment assistance. If government funds are used to keep businesses and employees hibernating but solvent, the economy can quickly recover once the vaccine is available and fears of virus spread subside.
To date, the government’s response has revolved around the forecast of a V-shaped recovery. Congress passed $1.8 trillion worth of spending in the CARES Act to support American workers and businesses. Despite widely publicized implementation issues, the $659 billion Paycheck Protection Program has funded hundreds of thousands of businesses and kept millions employed through the end of July. But this massive stimulus may not be enough. Many in this camp believe that an additional $1 trillion or more in federal support will likely still be needed in the coming months to supplement CARES Act assistance.
There is another school of thought that believes that the effects of the pandemic are durable and have already caused fundamental changes in the economy. The pandemic has caused world-wide economic disruption. Realistically, it will take years for world trade to recover. This camp thinks it is folly for the government to fight the fundamental economic changes taking place by trying to keep the pre-crisis economy intact. It discounts forecasts of a quick rebound and believes that appropriate policy responses should be designed to let the markets work. Better to release idle resources so they can find more productive uses than to keep them frozen and unproductive while we wait for a return to “the good old days.”
Federal policies and resources should be targeted to ease the pain of transition, possibly through supplemental assistance channeled through enhanced state unemployment insurance, but workers should not face disincentives to return to work. Federal programs should not be designed to keep nonviable business intact, but should instead speed the development of pandemic-viable businesses and bring critical supply chains back on shore.
Despite the $659 billion of forgivable small business loans made available in the CARES Act, thousands of small businesses have exhausted their PPP assistance and closed for good. Restaurants and retailers have been especially impacted. Yelp estimates that among the 26,160 restaurants listed on its website that closed because of COVID-19, as of mid-July, 15,770 (60 percent) have closed for good. Yelp reports similar fatality rates for retail establishments, beauty salons, and bars. And, it is difficult to imagine that cruise lines, airline travel, conventions, restaurants, and hotels will quickly rebound to pre-crisis levels even under the most optimistic forecast of a vaccine becoming available by early next year.
The COVID-19 toll on travel-related business has truly been devastating. After restarting business, French and Norwegian cruise lines were recently forced to close again because of new virus outbreaks. The hotel business has been especially hard-hit and, according to McKinsey, it may not recover before 2023. In a recent survey of its membership, the American Hotel & Lodging Association reports that 36 percent have not rehired any furloughed staff, and only 24 percent are operating with at least 60 percent of their full-time pre-crisis staff. Fully half of hotel owners responding said they may lose their hotels to foreclosure by commercial real estate lenders. Airlines have also been virus-stricken. When $50 billion in CARES Act assistance expires, airlines plan to layoff thousands. Predictably, airline unions are lobbying Congress for $32 billion in additional support to keep their members on the payroll through next March.
How long should taxpayers be asked to support industries and their employees at pre-crisis levels when the demand for their services may not rebound for several years? It may sound cruel, but airplanes, cruise ships, and buildings can be re-leased when demand returns or repurposed for new productive uses. The federal government (i.e. taxpayers) cannot afford to support all COVID-impacted industries and their employees indefinitely no matter what politicians may say. When it comes to viable businesses, history shows that the government is bad at picking winners and losers. There is no reason to think that programs like PPP will be any better at picking the winners in a post-pandemic economy.
It is also important to understand that there are long-term negative consequences associated with many of the emergency measures that have been employed in this crisis. Those that abridge contracts and property rights could inflict long-term damage on the economy. For example, programs that defer rent and loan payments without a monetary penalty or impact on a consumer’s credit score are only good policy if they do not destroy the underlying market mechanisms and credit culture that have made consumer loans widely available in the past. But in the aftermath of these measures, there is growing evidence that banks have become reluctant to lend to consumers and small businesses without a government guarantee.
Finally, government assistance erodes the important cultural norm of personal responsibility. Households’ proclivity to rely on their own emergency savings fades as they become conditioned to believe that the federal government is capable and willing to save them from any economic hardship that befalls the economy. If only it could.
Learn more: Intrusive interventions have unintended consequences | Will the global liquidity tsunami rekindle economic growth or spark inflation? | The coronavirus could send hundreds of small banks to the ICU
Paul H. Kupiec is a resident scholar at the American Enterprise Institute.