Moments after being sworn in as Treasury Secretary in 1995, I stood in the Oval Office to advise the president on how to address the threat posed to us by the unfolding economic crisis in Mexico, an experience repeated two years later during the Asian financial crisis. I know what it’s like to recommend complex responses with no certainty of success.
Today, as our nation grapples with the worst pandemic in living memory, policymakers’ immediate focus is on containing the virus, caring for the sick and providing near-term economic aid and stimulus. But, while remaining focused on those imperatives, officials must begin planning when and how to regenerate economic life for the shorter and longer term.
A threshold issue is timing. We must avoid resuming economic activity too soon and creating a wave of new infections. But if we wait until there’s zero risk of further contagion, the hardship caused by this severe economic disruption could become far worse.
With the White House and some states already formulating guidelines for when to reopen, one way to reconcile any differences is for the administration and Congress to convene a small group of independent and respected public health experts and economists to weigh these interdependent health and economic considerations. The experts’ framework should reflect economic forecasts under different health scenarios and start with the emerging consensus that the transition will be gradual, that large-scale testing is essential, that different cities or regions may be on different timelines and that the guidance for people with antibodies may differ from that for those who remain vulnerable.
The second issue is how to best support economic revival. The relief for individuals, specific industries, state and local governments, and small businesses enacted by Congress provides some fiscal stimulus. And the Federal Reserve is offering liquidity to various parts of the economy.
But too many small businesses can’t survive without more being done. Even those that receive loans under the Paycheck Protection Program are likely to find the funding insufficient to reopen. And many very small businesses, like local restaurants, may not receive funds. A loan pegged to 2.5 months of payroll that must be spent within two months of receipt is unlikely to enable small businesses to weather the shutdown.
Small businesses will need working capital to restart. Unless the crisis ends sooner than expected, many businesses receiving government loans will not have enough capital remaining to finance their reopening. There should be an additional fund in the next congressional stimulus package to extend credit to viable small businesses seeking to reopen. Unlike the existing program’s, the purpose would be not to maintain payroll but to revive our economy. The design could be a variant of the conventional Small Business Administration loan program, with the government and lenders sharing risk.
Banks participating in the loan program are generally going to lend only to existing borrowers. That excludes most small businesses in poor urban neighborhoods and distressed rural areas, potentially exacerbating these communities’ already acute problems. There should be additional funding, therefore, for Community Development Financial Institutions, which lend to small businesses in underserved communities.
The recovery, once started, is likely to be slow and long, requiring intermediate and longer-term stimulus. A large-scale investment in our nation’s infrastructure could both provide stimulus and increase productivity. We should also address glaring deficiencies in our social safety net laid bare by the crisis, such as the inadequacies of health care, paid leave, unemployment insurance and food stamps.
And that leads to the final issue for policymakers. The federal government can — and should — continue to borrow vast amounts to address the current crisis. Our longer-term debt/G.D.P. ratio might well be worse if we don’t take robust action, because gross domestic product could decline more precipitously.
But Congress should commit now to address — when conditions allow — the increase in debt as a share of our economy, which was already seriously worsening before the crisis. This is partly to do the necessary planning and partly because it might influence how deficits are funded — for example, with long-term Treasury maturities, given low interest rates.
Federal revenues were roughly 16.5 percent of G.D.P. before this crisis, compared with the historical full employment average of 18.5 percent, and 20 percent at the end of the 1990s, with excellent economic conditions. There will be ample room to increase revenues, on a highly progressive basis, for example, by increasing corporate taxes, restoring individual rates, repealing pass-through preferences and imposing a financial transactions tax. We should also pursue universal health care coverage, preferably through a public option, while at the same time reducing our system’s overall costs, which far exceed other developed economies’. Addressing our debt/G.D.P. ratio is in our longer-term economic interest and also benefits us in the nearer term, as greatly increased debt could impede the recovery.
We continue to face harrowing health and economic conditions. Responding to these twin crises will require unprecedented action — and as always, sound decision-making.
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