Heading Off The Covid-19 Recession

This virus is shoving the U.S. economy – the world economy – into recession, a severe one, too. It is not the virus itself that is doing this or even its threat of debility and death. Rather, it is the quarantines and the lockdowns, the supply constraints and the travel bans that create the powerful recessionary thrust. For the  longer these pressures last, the greater chance of more fundamental layoffs and shutdowns, even bankruptcies. Efforts by the Federal Reserve (Fed) to ease monetary policy may blunt the recessionary thrust, as will the fiscal stimulus measures, such as tax cuts, contemplated by the White House. It would help much more were Washington and the states to target the particular strains of today’s emergency measures and so break the link between them and recession.

The present situation is very different from a typical recession. Usually downturns stem from demand shortages, typically because imbalances in some sector require cutbacks that then multiply generally throughout the economy. Governments combat such pressures by spending and offering people inducements to spend, through low interest rates, for example, or tax cuts. The coronavirus emergency has instead imposed a supply shortage. Quarantines have kept people from productive jobs, initially in China but now globally.  Work from home cannot fill the gap, especially where factories and many service industries are concerned.  Consequent production shortfalls have denied other production operations the parts and materials they need to meet their output schedules. Consumers eager to buy face a paucity of options as public health measures have closed restaurants, events, and retail facilities.  Demands for goods and services remain.  Supply constraints have limited economic activity.

But those stymied demands will not last if the shutdowns and quarantines persist. Business may keep idle workers on the payroll for a while, either in response to government mandates or loyalty, but firms, which must also pay taxes, rent, and interest on their debts, are limited in how long they can meet such expenses while facing the revenue shortfalls imposed by this situation. They will reach that limit pretty fast, and when they do, managers will of necessity turn to more lasting layoffs and staff reductions. Many firms will face bankruptcy, leaving all their employees bereft of income and many suppliers and landlords facing additional revenue squeezes. Meanwhile other businesses in less difficult straits will nonetheless shelve expansion plans, leaving other producers facing a shortfall in demand. The number of firms facing such constraints will surely grow the longer the present economic pause persists, and the greater that number gets, the deeper this economy and the world economy will fall into recession.

Monetary ease, such as the Fed has recently implemented, and the kinds of fiscal measures contemplated by the administration could blunt such recessionary effects. It is, however, doubtful such measures can fully counteract these contractionary forces once they gain momentum.  Better then, before that momentum builds, to take additional, less common policy measures that might short-circuit the transition from today’s supply-short “pause” to a demand-short recession. 

Helping businesses sustain payrolls and other expenses during this “pause” would offer one preventative measure. Since small businesses especially tend to have thin capital cushions, Washington should equip the Small Business Administration (SBA) to make low-interest or zero-interest loans to help small businesses sustain payrolls and stave off bankruptcy during this time of emergency. Under standard disaster relief, the SBA has made provisions for loans of up to $2.0 million, but this disaster requires larger amounts extended over longer terms. States and cities could bolster such an effort with similar programs of their own.  The federal government might support them in this by changing the rules to allow states and cities use tax-free bonds to raise money for such targeted lending. 

Though large firms have the financial resources to hold out longer than small, they, too, cannot survive these pressures indefinitely.  The economy might then benefit if they, too, were offered some sort of special lending, either from the federal government or organized between the Fed and the banking community to help them weather this enforced period of revenue loss. Though the Fed has never made such arrangements for commercial and industrial endeavors, it certainly has done so for banks and other financial firms and so has already gone a long way to establishing the facilities to orchestrate such an arrangement.

It might help further to make arrangements so that buyers could prepay future purchases.  If, for instance, Washington and the states prepay on existing contracts out for one or two years, those firms could use the immediate cash flow to cover expenses during this unusual period. The nation’s retailers might get similar help from arrangements that allow consumers to prepay future purchases at a local shop or favorite restaurant, perhaps with the inducement of a discount. Many firms do such things for themselves as a matter of course, but the need in the present to make such arrangements on a grander scale than usual might gain from local chambers of commerce or even city governments. Perhaps some enterprising person could develop an “ap” for the purpose. 

These are just a few suggestions of what might be done in this unique emergency to defray the business strain it imposes and keep circumstances from precipitating a general recession.  No doubt more imaginative people can add to the list whether they are associated with government or chambers of commerce.  Under normal circumstances, such admittedly odd arrangements would not be necessary, but these times are not normal and demand quick and in some cases novel policies to head off recession.