A broad topic (at least it is close to the field in which I am most nearly expert).
I am going to write about policy to deal with the economic effects of the Covid 19 epidemic.
There has already been an amazingly quick and huge policy response, which generally seems fairly well designed (with different reasonable approaches in different countries). Also there is, of course, an active discussion of what remains to be done and what could have been done better.
I see two huge topics. One is the simplest possible — preventing a huge increase in poverty due to the huge increase in unemployment. Another is the coming debt crisis (see also). Bankruptcy is very costly with huge amounts of money going to lawyers and accountants (whose hard work to earn the money is a social cost) and with disruption of normally profitable socially beneficial activities because it isn’t clear if people will get paid 100 cents on the agreed dollar.
As usual, I am much influenced by Paul Krugman and Brad DeLong. Krugman in his newsletter (no link) DeLong google jubilee. Also I had a twitter debate with @Frances_Coppola whose position was similar to Krugman’s.
1. Fighting poverty.
Here the problem is extraordinarily simple. Without a huge intervention, there will be huge suffering because the decline in total income is concentrated among the unemployed. The reason the problem is extraordinarily simple is that the unemployment is efficient, at least a lot of it is. Many people who interacted with the public *should* stop working and can best contribute to social well being by staying home. The clearest examples are waiters,bartenders and bariste. It’s time for some home production of food, coffee, and hell cocktails it’s not like we are driving anywhere soon.
This actually simplifies the problem, because normally we want to help people with low income but we don’t want the safety net to be used as a hammock. Right now, in many many cases, we do want the safety net to be used as a hammock.
I don’t have a proposal, I do have praise for the 2.2 trillion relief bill called the CARE act. It includes an extra $600 per week per unemployed person. 4 Republican Senators held up the bill for a few hours saying this must be a drafting error as many people will have higher income when unemployed than they did when working. Lindsey Graham said that this will cause people to quit demonstrating that he doesn’t know that unemployment insurance is not paid to people who quit (unless they quit because of harassment which is how the word first appeared in the legal discussion).
I applaud the US Congress. I understand they first considered a simple 100% replacement ratio and switched to the even simpler $600 per week on top of state benefits because the Department of Labor said they couldn’t handle anything more complicated immediately and time was of the essence. But I also think that $ 600 per week is better policy. My argument is simple, the income of unemployed people is distributed more equally this way. The point is that, normally, the 4 Republicans would have a point. Replacement ratios over 100% discourage job seeking. Normally that’s bad. Right now that’s good. Unemployed people should NOT search for jobs for two reasons. In the USA the unmeployment rate is suddenly 13% not 3.5% so a whole lot of searching per job found would be needed. Also job search is a way to spread Covid 19. At some point it includes some kind of job interview which is the sort of thing which we should NOT encourage.
This actually has an implication for a proposed improvement. I think the $600 a week should not be paid only to the newly unemployed. I think it should also go to families which have no labor income even if they have long had no labor income. In other words, I advocate welfare, not just a return from TANF back to AFDC but much broader and more generous than that.
The logic is exactly the same as the logic of the current US policy. Normally we don’t want welfare to be too generous, because excessive generosity discouraging job seeking. But now that’s a good thing. Not just for the newly unemployed but also for the long unemployed, not in the labor force and especially (as always) the unemployable. The problem is unusually simple. We can do what we always wanted to do without worrying. Of course we, who always wanted to give lots of money to the poor, will learn that they, who argued about bad incentive effects, were always lying. They don’t want to give those people money and don’t care that the argument they made against welfare no longer applies. It was always BS. But it’s time to fight it.
Before going on, the increase in unemployment is *partly* efficient. However, there is a spillover effect as low income causes low demand for goods (mostly) and services (not so many) the production of which is still socially desirable. This means that income support pls the 1200 for each adult and 500 for each child are good policy too. There will be low aggregate demand and the usual case for fiscal stimulus remains valid, even if low aggregate demand isn’t the main problem and aggregate demand stimulus is only part of the correct policy response.
The second topic after the jump