The U.S. economy – and the rest of the world – is at the gates of a severe recession. The economic downturn is emerging neither from the COVID-19 virus nor from its threats of debility and death. It is the quarantines, the lockdowns, and the supply constraints that have created a powerful recessionary thrust, because the longer those pressures last, the greater the possibility of more fundamental layoffs, shutdowns, and bankruptcies. Efforts by the Federal Reserve (Fed) to ease monetary policy may blunt the recessionary dynamic, as will the fiscal stimulus measures, such as tax cuts, contemplated by the White House. But what would really help is if Washington and the states focused on the specific drivers of today’s emergency and thus break the chain dragging us into recession.
The situation today is very different from a typical recession. Downturns usually grow out of shortages in demand. Governments combat demand shortages by spending themselves and by offering people inducements to spend, for example through low interest rates or tax cuts. The coronavirus emergency has instead imposed a shortage of supply. Quarantines are keeping people from productive jobs, first in China and now globally. Working from home cannot fill that gap, especially with factory work as well as many service industries. The consequent shortfalls in production have denied other production operations the parts and materials they need to meet their output schedules. Consumers who are otherwise eager to spend face a paucity of options as public health measures have closed restaurants, events, and retail facilities. Though the demand for goods and services remains, it is supply constraints that are limiting economic activity.
A recession will arise because these stymied demands cannot last if the shutdowns and quarantines persist. Businesses may keep idle workers on the payroll for a while, either in response to government mandates or from loyalty, but the businesses (which must also pay taxes, rent, and interest on their debts) cannot long meet these expenses in the face of shortfalls in revenues imposed by the closing of businesses and public spaces. Companies are reaching that limit quickly and when they do they will have to turn to more permanent layoffs and staff reductions. Many businesses––small firms especially––will face bankruptcy, leaving employees without income and many suppliers and landlords facing additional revenue squeezes. Other businesses in less difficult straits will nonetheless shelve expansion plans, leaving producers down the line facing a shortfall in demand for their products. The number of companies in this situation will grow the longer the present economic pause persists, and the greater that number gets, the deeper into recession the U.S. and the world will fall.
Monetary easing, such as the Federal Reserve (Fed) has recently implemented, and the kinds of fiscal measures being contemplated by the administration, could blunt such recessionary effects. But it is highly doubtful that such measures can fully counteract these recessionary forces once they gain momentum. It would be better to take additional, if less common, measures to help stop the transition from today’s “pause” to the layoffs and other cutbacks that will bring on recession. Though not a complete list, here are five suggestions for what needs to be done:
- During this time of emergency, Washington should enable the Small Business Administration (SBA) to make low-interest or zero-interest loans to help small businesses sustain payrolls and stave off bankruptcy. Under the standard rules of disaster relief, the SBA has made provisions for loans of up to two million dollars, but this emergency requires larger amounts extended over a longer repayment period.
- States and cities could bolster such an effort with similar programs of their own, and the federal government could support them by changing the rules to allow states and cities to raise money by offering tax-free bonds for such targeted lending.
- Though large firms have the financial resources to hold out longer than small ones, these larger ones, too, cannot survive the current pressures indefinitely. They could get essential help if Washington were to offer them “special lending,” perhaps contingent on maintaining payrolls. Such loans could come from the federal government directly or they could be organized between the Fed and the banking community. While the Fed has never made such arrangements for commercial and industrial endeavors, it certainly has done so for banks and other financial firms.
- Washington and the states might prepay (in effect, pay ahead) existing contracts for one or two years enabling those firms to use the immediate cash flow to cover expenses during this emergency.
- The nation’s retailers might obtain similar help from arrangements that allow consumers to prepay future purchases at a local shop or favorite restaurant, with the inducement, perhaps, of a discount. Many firms already offer such “gift cards,” but today’s greater need might involve help from local chambers of commerce or even city governments.
More imaginative people could add to this list. Normally such admittedly unusual arrangements would not be necessary, but these are hardly normal times.