The US economy has plunged due to the coronavirus epidemic. Congress has passed three stimulus packages, totaling over 2 trillion dollars (about 10 percent of annual GDP). Last week the Federal Reserve announced 2.3 trillion in programs to support the economy. Yet even those funds may not be enough. A fourth stimulus will probably be needed, and it should focus on sustaining ongoing businesses. It must spur a quick, broad-based economic recovery once the worst of the pandemic has passed, with the objective of minimizing the number of domestic business failures during the course of the domestic epidemic.
It should be shaped by four principles:
Discourage businesses from closing or furloughing workers. Any additional stimulus should be structured to maximize the speed by which the economy recovers once business operations resume. The key to accomplishing this is to discourage businesses from closing or furloughing workers. A business that remains solvent is much easier to start than one that has been shuttered. Reformation of a failed business can take many years due to multiple factors, including access to credit following business collapse or bankruptcy, damaged supplier and customer relationships, and a host of other reasons. Moreover, by keeping individuals employed, companies can mitigate problems such as lost health insurance and other benefits, and the contagion that stems from closed businesses can be limited.
Err on the side of spending too much. Certainly, the fiscal consequences of an unprecedented deficit are deeply concerning. Yet the fiscal consequences of a slowdown prolonged by businesses struggling to restart are probably even greater. The federal government should err on the side of short-term overspending to avoid long-term economic damage from a prolonged recession.
Tolerate some unfairness and inequity in distribution of funding. Fairness should be a core objective of any stimulus, but the conceptual complexity and administrative burden associated with trying to optimally target stimulus will inevitably be imperfect and may lead to detrimental delay. Economic recovery will be far more robust if we aim to alleviate anxiety faster, even if this means somewhat increased spending and overpaying certain stakeholders.
Do not discriminate based on industry type or company size. In times of a dramatic downturn, it is nearly impossible to differentiate between affected and non-affected businesses. When the whole system is in turmoil, it is impractical to design precision-targeted “treatments.” Therefore, targets based on industry type or size should not be our sole or primary focus in devising a cure. Subsequent, more targeted treatments, such as infrastructure spending, should be considered separately rather than as part of the main economic rescue package.
Using these core principles, a future stimulus package should create a program of deferred, low-interest, forgivable loans similar to some programs in the previous stimulus packages and Federal Reserve programs, but on a more significant level, across a wider swath of American production. Under our model, any business could apply to cover a portion of its operating expenses (less any other stimulus already received) over a period of several months. The loans could be administered by banks and savings and loans.
Importantly, banks participating must agree to serve businesses that have not had prior relationships with them. The loans would not require repayment until at least 2022, based on taxes filed for 2021, and could be extended longer. The portion of the loan that could be forgiven could be based on estimates of the reduction in revenue minus the reduction in payroll in 2020 relative to 2019. This encourages employment because it both provides current financing under favorable terms and penalizes firms that furlough workers. The forgivable portion could also be based on firm profitability. The longer the payback period, the less of the loans that would need to be forgiven.
The extended supports to businesses recommended here should encourage compliance with distancing mandates and support a rapid economic recovery. Social distancing actions will help the nation shorten the duration and severity of the public health epidemic. A shorter and less damaging epidemic will also reduce the economic impact of COVID 19. These business supports should allow the economy to restart operations once it is safe to do so without delays associated with reestablishing failed businesses. This should lead to the rapid recovery we all are hoping for.
Michael E. Chernew is a professor of health care policy at Harvard Medical School. Bahaa W. Fam is managing partner at Greystone Partners LLC.