Economic Policy for the Pandemic II
I am going to attempt a briefer clearer version of this post
I am interested in critiquing (and mostly praising) the CARES Act and discussing what still needs to be done. I think my points (if any) are that an extraordinary unforseen crisis simplifies some issues and relaxes some constraints. I will now go by topic
1. Aid to the unemployed. There are sudddenly many more people without market income. They need help. Here I applaud the decision to give the unemployed an extra $600 a week rather than increase the replacement ratio of unemployment insurance. This was done, because it is simple and it is possible to get the money to households quickly, but I also think it is better targetting.
Consider two workers with different salaries who suddenly lose their jobs. Is it better to give the worker who had a higher salary more when both are unemployed ? Just giving the same amount to all unemployed people implies a more equal distribution of income among the unemployed which implies higher average utility. Normally, this isn’t the only consideration, because an excessively high replacement ratio distorts incentives. In particular 4 Republican Senators were convinced that the CARES act contained a drafting error as it implied some people would have higher income when unemployed than when employed. Normally this is a problem (even though workers who quit don’t get unemployment insurance) because such generous benefits discourage job search and cause workers to turn down job offers. This is not currently a problem. First job search is a possible cause of contagion. Incentives to just sit at home are often optimal right now. Second, there isn’t a long term reallocation of labor problem. Many unemployed workers can and should return to their old jobs when the pandemic ends. This very much simplifies their problem and implies that they don’t need to be given incentives to find entirely new jobs.
This also means that I think the benefit should go to households where no one was employed in 2019. Here again incentive problems are minor. They too should be sitting at home now. They too will not make plans for the future expecting all this to be repeated. This means I am advocating reversing the 1996 Welfare reform (as I always do).
I think in this case the crudest utilitarian calculus is best — to each as he has need — not to each such as he has need and is incentive compatible.
Another issue is whether to bail out firms and, if so, whether to loan at a penalty rate, at a normal rate, or just give them cash. Here the point is that firms face bankruptcy even if they are viable in normal times and therefore solvent and even if their managers didn’t make mistakes. There is no need to punish people for a disaster which no one foresaw. My point (if any) is that there is no need to reward them either.
Normally, I would like to take from wealthy proprietors of small firms. Again this is pure vulgar utilitarian egalitarianism. Normally, this is a bad idea, because one can’t credibly promise to do it just this once. Once off redistribution from rich entrepreneurs can add to utility, but the threat of future redistribution discourages business enterprise. Again, this is not a problem right now. There isn’t a legal or constitutional restriction on imposing tough conditions on a bailout — participation is voluntary. There is a low incentive cost of not rewarding effort and risk taking when there is an unforseen disaster. (the word unforseen is doing all the work there).
So again, I think this is time for simple vulgar egalitarianism. I would take from shareholders, because they are rich. I would take from individual proprietors because they are rich. So I would make the terms of the bailout harsh, because such policy is taking from those who have a lot.
In particular, I think the Treasury should get an equity stake and so a share of the upside risk. I support this here and now, because I support this everywhere and always. The only unusual thing is that, because firms need cash, I now propose buying newly issued shares not buying shares on the market. But here too the right price to pay is the market price, not the market price plus a gift to the rich. That means a low price if a firm desperately needs liquidity now.
So new shares sold at firesale prices. The reasons for the low price, that is harsh bargain, are the usual reasons — paying more than one has to pay distorts incentives, and giving to the rich is inefficient. The first consideration is relatively minor if the policy is a response to a genuine unexpected exogenous event, but it doesn’t switch sign.
So I say it’s time to drive a tough bargain, time to lend freely at a penalty rate or, even better, time for the state to demand an equity stake in firms (and ban share buybacks and limit managment compensation). I think this becase I think it is always time for the state to demand an equity stake in all firms, ban buybacks and limit compensation. But I can also argue that if these provisions are conditions on a voluntary bailout transaction that the usual case against them is very much weaker than usual.
If government simply credited to all households an amount equal to NGDP proportionate to need, there would be no need for bailouts or other government expenditures. And accurately assessing “need” could mot possibly be more more difficult or subject to corruption than our current disjointed expenditures.
I like Dean Baker’s plan.
“When he fired the inspector general who would have overseen the bailout fund, Trump made it clear that he fully intends to use the money to advance his re-election campaign, just as he has done with his presidential powers throughout his term in office. While the Democrats ceded their ability to prevent the corruption of the fund (they could have just made rules for how the money would be distributed, with zero discretion – like the small business loan program), they still can act to ensure that there is a limit to the extent that Trump’s friends are able to profit at the expense of the rest of us. They can impose an excess profits tax that would nail the corporations that do especially well in this crisis.
The best route to do this is to require corporations to give notional shares of stock to the government, equal to 15 percent of outstanding common shares, that would be priced at a level halfway between the stock price peak for 2020 and its trough at the worst point of the crisis. These notional shares would convey no voting rights, but the government would get the same return on each of its notional shares as the company’s shareholders get on their shares. This would effectively be a 15 percent tax rate on the returns to shareholders.
The reason for going this route would be it gets around all the tricks that companies have developed to avoid their normal income tax liability. The Trump tax cut package was supposed to be a trade-off where companies paid a lower tax rate (21 percent rather than 35 percent), but that there were fewer loopholes.
While the tax rate was lowered sharply, the loopholes were mostly still there. In 2019, corporations paid less then 11.0 percent of their profits in taxes. Their accountants are every bit as adept as avoiding the new tax system as the old one.
The link between tax and returns to shareholders removes this problem. Companies cannot escape their tax liability unless they also rip off their shareholders. And, their shareholders tend to include powerful people who would likely want to see top management in jail for ripping them off. We should go the notional share route for all corporate taxes, but we can get a big foot in the door with a special excess profits tax.
The way this would work is that the government would get an amount of notional shares equal to 15 percent of total outstanding shares (no voting rights) that would get all the same payouts as other shares. Since the shares would be assigned the value of the midpoint of the stock’s high and low in 2020, this would mean if the peak was 120 and the low was 80, the price assigned to these notional shares would be 100.
From this point, for the next five years, these shares would get the same treatment as other shares. If the company paid a $2 dividend on its other shares, it would pay a $2 dividend on each of the government’s shares. If it bought back 10 percent of its outstanding shares at $110 per share, it would pay the government $110 for 10 percent of its shares, with the government refunding the $100 implicit purchases price (i.e. the government would net $10 on each share).
Since this is only intended to be a way to get excess profits associated with the government bailout, the government’s stake would phase down to zero in three steps, beginning in year six. This means that it would effectively sell back one-third of its notional shares (based on year-round average price) in each of year six, seven, and eight, pocketing the difference between the current market price and $100 ostensible purchase price of each share. This will not fully offset the ill-gotten gains of the Trump family and their political allies, but it would at least be a foot in the door.
(We also need to construct a comparable tax mechanism for privately held companies with revenue above a certain cut-off, like $10 million. We can perhaps target revenue, with the assumption that 10 percent of revenue is profit, and we will tax away 15 percent of this.)
Anyhow, since Congress clearly will not have any oversight mechanism that will prevent Trump from using the bailout money as a slush fund, it can at least propose a route for retaking part of what Trump has given away. The Republican Senate will of course block this, but they can at least be made to pay a political price for giving tens of billions of dollars to Trump’s family and friends. ”
https://cepr.net/a-special-gift-for-donald-trumps-friends-an-excess-profits-tax/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+beat_the_press+%28Beat+the+Press%29
Thanks, Robert.
It is so important that we learn as much a possible from these past 3 and 1/2 months. I like what you are saying; want to add to it.
1. Beyond the administration’s dawdling and incompetence; we weren’t prepared.
The nation should have held earth-quake/fire like drills.
Supermarkets could have acted to prevent the overbuying panic by limiting purchases.
Face masks for the populace should have been on hand, at hand.
The government should have been prepared to hand out face mask, soap and hand-sanitizer, …
A plan for handing out food should have been in place, it’s going to be needed
A plan for emergency shelter/housing should have been in place
…
These are not task for the market in a pandemic or at any other time. These are government’s tasks, what government is for.
2. Address all the other glaring weaknesses that have come to light
Employer furnished health care ends with employment
Crowded, unsanitary mass transit is a petri dish
Lack of paid sick leave
Any and all additions to my listing are most welcome
Surely the purpose of an economy is to provide for the populace. Of late, ours has not been doing very well at this assignment. Globalization, offshoring, automation, … , an outdated economic model, and a non-functioning democracy is what we have wound up with. How did we get here? More importantly, how do we get out of this mess? What needs to be done?
Ken,
The Republican Party needs to die.
Emichael
The Capitalism model only worked well when well fettered by regulation and taxes and had parity opposition imposed by a large union work force. We’ll not be seeing another time with large union work forces. Not even if we could somehow get all the capital that went to China/Asia back on shore. There needs be a new economic model for this new Age of Technology — a new mechanism for distributing wealth. We can no longer even use the term workers, we need to think in terms of the populace.
“…There is no need to punish people for a disaster which no one foresaw…”
[By “no one” then you are mysteriously excluding all credible epidemiologists and microbiologists along with various other well-informed individuals of global stature (e.g., Bill Gates). This global pandemic disaster was inevitable given that all of the prerequisites were in place such as wet markets, wild game consumption, and traditional animal husbandry practices comingling people with their live meat (the petri dish for selectively breeding cross species viral infections) and a high volume of global travel and trade (the dispersion mechanism). True, the event timing was not estimable prior to its early stages of inception, but inevitability has a sneaky way of coming around before you know it once one chooses not to watch the pot.
However, you made an entirely valid point albeit safely obscured behind an unfortunate choice of semantics. Punishing worker people and business owners for a failure of the political elite to mind their own business by staying well informed and responsive on matters of global security would be misguided. Your specific reference to “people” presumes the ownership and managerial classes I suppose I would make TS Eliot’s “The Hollow Men” required reading for all political and economic elites ten thousand times while standing in a corner wearing a dunce’s cap. Free trade and globalization failed repeatedly to bring about lasting peace over the course of centuries until the H-bomb came along, yet we are still willing to sacrifice global health security in order to not insult our trading partners with whom our partnership is primarily for the benefit of the large corporate executive and capital owning classes. We are sacrificing both economic and health security for the purposes of globally arbitraged rentier profits.]
@EMichael
“The Republican Party needs to die.”
A quick painful death this November.
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7086482/
COVID-19: a novel zoonotic disease caused by a coronavirus from China: what we know and what we don’t
At the end of December, 2019, a new disease of unknown aetiology appeared in Wuhan, China. It was quickly identified as a novel betacoronavirus, and related to SARS-CoV and a number of other bat-borne SARS-like coronaviruses. The virus rapidly spread to all provinces in China, as well as a number of countries overseas, and was declared a Public Health Emergency of International Concern by the Director-General of the World Health Organization on 30 January 2020. This paper describes the evolution of the outbreak, and the known properties of the novel virus, SARS-CoV-2 and the clinical disease it causes, COVID-19, and comments on some of the important gaps in our knowledge of the virus and the disease it causes. The virus is the third zoonotic coronavirus, after SARS-CoV and MERS-CoV, but appears to be the only one with pandemic potential.
An outbreak of cases of pneumonia of unknown aetiology in the city of Wuhan in Hubei Province, China, was announced and notified to the World Health Organization (WHO) by the Wuhan Municipal Health Commission on 31 December 20191. The outbreak was linked epidemiologically to the Hua Nan seafood and wet animal wholesale market in Wuhan, and the market was subsequently closed on 1 January 2020. A week later, on 7 January, the isolation of a previously unknown betacoronavirus was reported as the aetiological agent.
Wuhan is a city of 11 million inhabitants and is a major transport hub, and over the ensuing weeks the virus spread to other provinces in China and later to an increasing number of other countries. This spread prompted the WHO Director-General to establish an Emergency Committee (EC) under the International Health Regulations (IHR). The EC recommended that the outbreak constituted a public health emergency of international concern at its meeting on 30 January2. In so doing, the Committee believed that it was still possible to interrupt virus spread, provided that countries put in place strong measures to detect disease early, isolate and treat cases, trace contacts, and promote social distancing measures commensurate with the risk…
….Final comments
SARS-CoV-2 is the seventh coronavirus known to infect humans, and the third zoonotic virus after SARS-CoV and MERS-CoV. Bats are the reservoir hosts of a number of additional novel coronaviruses, particularly Chinese horseshoe bats, and a number of these novel coronaviruses can efficiently use multiple orthologs of the SARS receptor, human ACE2, and replicate efficiently in primary human airway cells and achieve in vitro titres equivalent to epidemic strains of SARS-CoV48,49. This indicates that other potential cross-species events could occur in the future. There is therefore a strong reason to ban unregulated wild animal sales in Chinese wet markets, particularly exotic species, both from a public health perspective and for ecological reasons. Such a ban would be difficult to instigate for cultural reasons, but China’s top legislative committee on 24 February 2020, passed a proposal to ban all trade and consumption of wild animals. If this is legislated as a permanent ban, it might help reduce the risk of another novel virus emerging from wildlife in China in the future.
https://www.businessinsider.com/people-who-seemingly-predicted-the-coronavirus-pandemic-2020-3
Bill Gates has been warning of a global health threat for years. Here are 11 people who seemingly predicted the coronavirus pandemic.
Bill Gates warned that a viral outbreak will likely happen “every 20 years or so.”
In an interview with the Financial Times, he said that the coronavirus pandemic outbreak will cause future governments to have “standby diagnostics, deep antiviral libraries, and early warning systems.”
“The cost of doing all those things well is very small compared to what we’re going through here,” he said. “And so now people realize, ‘OK, there really is a meaningful probability every 20 years or so with lots of world travel that one of these [viruses] will come along.’ And so the citizens expect the government to make it a priority.”
Gates has been warning of a pandemic for years, as have notable disease and flu experts. Former White House officials have also previously warned of an upcoming pandemic threat…
@ davebarnes
You can’t kill it in one election. It will take them losing elections for 10-20 years.
It may happen, and the main reason will be the dying off of old racist voters.
You can probably time it best by watching Fox News ratings down the road.
When that abortion of the airwaves dies, the GOP will follow shortly.
@EMichael.
“You can probably time it best by watching Fox News ratings down the road.When that abortion of the airwaves dies, the GOP will follow shortly.”
i am actually more concerned about Sinclair Broadcasting than Fox News.
I think we make a mistake when we think in terms of who or who did not see this coming as to whether we are punishing people, the labor class.
The issue is not that this is a pandemic. Truth is, if the government finds a reason to tell everyone to stop working (or at least a vast amount of people) then the crisis is not the issue. The issue is that the government has told people they can not work and thus use the system put in place to secure themselves from the risk of life and living. They can not earn money.
That being the case, the government is obligated, morally or by fault of creating the problem to pay the people to stay home. Period.
No need to rationalize, reason it any further than that. Government decided people could not work. Government needs to pay the people.
Same holds true for business that have been told they can not operate. Issue there is the ability to game the system put in place that the labor class, the worker does not have. If any group has shown they will not do work when given money it’s the top of the money pyramid as show with stock buy backs etc.
Same holds true for state and local governments as they are dependent on the labor class and business class being able to do what they do when everyone/entity is working. Federal Government shuts down the ability to generate revenue by shutting down the labor class and business class. So, the Federal Government needs to pay them. Again, no need to rationalize/reason it any further.
Additions to my list:
High speed internet for everyone
Every K-12 student furnished a computer
Yes, DSL should be removed from the law as being high speed. Internet should be treated as a public utility.
The $600 addition to UE checks is probably not getting enough credit.
22 million claims times $600 means an immense amount of cash is going where it is most needed. If my math is correct that is $1.3 billion a week.