To help save the economy in the coronavirus crisis, governments need to target and design financial assistance at different phases of shutdown, lockdown and recovery and they need to do so urgently and responsibly. The strategy needs to be simple, communicated clearly and use tried and tested Australian policy innovations to succeed longer term.
The emergency health measures of many governments have taken out a huge chunk of national economic activity. The impact on employment through the shutdown on large swathes of economies has already seen the unemployment rate rise rapidly in many countries. It could start to approach levels not seen since the Great Depression in the 1930s in some countries. Without special help, many will become long-term unemployed.
While many stay home during a shutdown or lockdown, assistance has to be targeted to individuals to keep them fed and housed, and businesses to keep them from laying off staff and collapsing. That was the aim of the Australian government's first two stimulus packages. The British government is paying 80 per cent of wages of many employees to achieve the same goals. Other governments are deploying similar policy strategies.
Until the health crisis is under control, assistance has to freeze parts of the economy so that it can be jump-started for rapid economic recovery when it's over. In the recovery phase, governments will need to pump up spending quickly when it'll be desperately needed. Targeted assistance and then rapid stimulus needs to be deployed in a way that helps budget repair when the economy starts to recover, without slowing the recovery.
Now is not the time for complicated rules and formulas to fine tune incentives. That slows down and will ultimately foil the effective response that many economies will need. The threat to the economy from the COVID-19 health crisis is much greater than in the global financial crisis.
The government does not need to choose who gets the assistance, nor does it need banks or others to decide which businesses to stay afloat. Instead it can make extra support available to economically-distressed individuals and businesses via special emergency support (SES) loans repayable as the economy recovers. Any individual eligible for welfare support should be eligible to sign on for additional support of up to the equivalent of a minimum wage for up to a year, for example, and businesses should be able to borrow against their past revenue. Eligibility criteria are necessary but this should not be tightly restrictive. It needs to take account of the thousands trapped in countries without citizenship or residence on work visas.
Individuals and businesses will only need to repay when their income recovery allows. As US economist and adviser to President George W Bush Greg Mankiw explains, instead of selecting who gets the assistance and screening before the fact, there's a way to screen after the fact. This is the policy strategy that has been championed in Australia by ANU's Warwick McKibbin and other economists.
SES assistance can be provided to all individuals and small and medium-sized businesses as a loan. But it would be a loan that is repaid only when the individual's income or business revenue is high enough that they can afford to repay. When the economy recovers, loans can be repaid via a taxation levy after income reaches a threshold level. This is the same mechanism as the income-contingent loan scheme that ANU's Bruce Chapman invented for higher education tuition. Under that HECS or HELP system students repay their university tuition via a repayment levy that kicks in at a certain threshold level after they enter the workforce.
An SES loan will be a loan to those who will be able to repay. For those who continue to struggle, it effectively becomes a grant. Like the income contingent loan for university tuition, loan holders cannot default on the debt. Repayment can be designed to avoid hardship. It is easy to design so that it does not distort economic behavior and is fair and efficient.
Repayment rates can be designed so that the loan is only repaid when times are better. A low marginal rate that only starts to be collected at a high income threshold will not deter re-entry to the workforce as opportunities open up. A high marginal rate at higher incomes will not change behaviour either. The same principle applies to business revenue. Individuals with high income or businesses doing well as they come through the crisis will repay the loan faster. SES contingent loans can strengthen the progressive tax system for the recovery from the downturn.
The university tuition version of this kind of loan scheme has shown it is a trivial cost to administer through the tax office. Sign-on to the scheme could be completed through online registration through a tax office, with a simple eligibility verification process.
Much needed government assistance can be pumped into the economy now, and ramped up as needed, without queues at welfare offices or difficulties with having to show need, and without budgetary or tax restrictions. And that can be done without recklessly spending future taxpayers' money through responsible automatic budget recovery. The scheme acts as what economists call an automatic stabilizer, providing income cover when it's needed and automatically recouping it when it's not.
The economic priority for governments today is to keep the economy ticking over, to keep businesses and their employees tied together, to avoid a deeper downturn that will create huge numbers of unemployed and position for a sharp recovery. Doing so via an SES income or revenue contingent loan program is fiscally responsible and will make it easier to get more assistance out faster to where it's needed. Budget repair is not a priority now but it will be one day, hopefully soon.
This article first appeared on East Asia Forum https://www.eastasiaforum.org/ on March 28, 2020. Reproduced with permission.