As the U.S. economy reels from the fallout from the COVID-19 pandemic shutdown, economic policy has pushed back hard. As economists, we are accustomed to focusing on economic policy solutions. But the present “lives versus livelihoods” tug of war misses the larger point that economic reopening must be sustainable if it is to bring back growth and jobs.
It can.
Fiscal and monetary policy, while an essential part of the solution to mitigate collateral declines in aggregate demand, cannot provide sufficient protection to the economy unless the external threat is dealt with swiftly and decisively at the source — the spread of the virus itself. Otherwise, we risk waves of infection, greater loss of life, and deeper economic collapse, a collapse perhaps beyond our fiscal resources to slow.
Public support for vaccine and therapeutics development is important, of course. And non-pharmaceutical interventions like social distancing have bought us time. But we need an additional step. Fortunately, a solution exists that builds on federalism’s decentralization, while improving the bang-for-the-buck of federal economic recovery support.
The solution involves testing at a scale that will allow people to return to economic and social life with reasonable confidence that neither they, nor those with whom they interact, are spreading the virus.
Given existing bottlenecks in the supply chain, it will be necessary to use a variety of testing approaches, including alternative methods of sample collection and processing, as well as rapid antigen tests. Manual contact tracing — augmented by GPS and Bluetooth technologies that are designed to protect privacy and civil liberties in a credible way — is necessary to identify those at risk when individuals test positive. And those needing to self-quarantine have to be supported both by the provision of necessities and the promise of job security.
Testing, tracing and supported isolation at the recommended scale would permit a reopening of all sectors of the economy in a manner that allows us to stay open, well before the pandemic has been fully contained. The cost of implementing this strategy has been estimated at about $300 billion, which is less than the monthly loss of output we are currently experiencing.
Inaction is considerably more costly in lost economic activity and will blunt the effectiveness of economic recovery measures.
The best way to operationalize the roadmap is through a combination of central and local structures. Centralized coordination is necessary for information aggregation and the building of testing capacity at scale. But implementation is best if decentralized, so that responses can be better tailored to local conditions, and participation and civic engagement is widespread.
A major obstacle to implementation along these lines is that the finances of state and local governments are in shambles. New York City, for instance, is facing a loss of more than $7 billion in tax revenue and is planning to cut municipal services by $2 billion. Declines in tax revenue for New York State are predicted to be in the range of $10 billion, again forcing cuts that are wide and deep. Other states face similar conditions to varying degrees. Such cuts will further depress aggregate demand at a time when the economy is contracting sharply.
The U.S. Treasury is currently the only public entity positioned to borrow at the necessary scale. Congress could appropriate funds for states and, indeed, some funding was included as part of the CARES Act. Funds for pandemic resilience could be provided as part of a block grant to states to support critical public health infrastructures.
As an alternative, the Federal Reserve can step in to finance state expenditures through a further expansion and refinement of its Municipal Liquidity Facility. One possibility would be for state and local governments to issue a new class of bonds specifically tied to developing pandemic resilience, and for the Fed to purchase these bonds, ideally at near-zero interest rates. To address revenue fungibility concerns, limits could be based on the size of such issues by jurisdiction, linked directly to need as measured, for instance, by the Centers for Disease Control and Prevention-endorsed Covid-19 vulnerability index.
A key question is whether the loans could be structured in a manner that allows for partial forgiveness, as in the case of the Paycheck Protection Program. If forgiven, the Fed would record a loss on its balance sheet that would have to be guaranteed by the Treasury. Formally, the Congressional Budget Office would score likely loan losses and that would count against the capital given to the Fed under the CARES Act. To the extent loans are not forgiven, states could service debt over time from property taxes, as property values reflect in part monetary rewards to population density.
Our political leaders rightly desire a reopening of the economy when appropriate. But a cost-effective “when appropriate” standard has an economic catch: Even if state and local governments were to announce a phased reopening, as many are now doing, the wariness of consumers will inhibit recovery unless the problem is attacked at its source, and people feel confident that they can return to more normal economic and social life without undue health risk. For this to happen, we need bold, imaginative action — and a financing structure that can support it — so that we can build confidence for reopening, exploit advantages of federalism in that process, and increase the bang for the buck of economic recovery in stages.
Direct funding by Congress, or the issue of pandemic resilience bonds with the Fed standing by as purchaser of last resort, would not only save lives — it would also save livelihoods.
Glenn Hubbard, Ph.D., is dean emeritus and the Russell L. Carson Professor of Finance and Economics at Columbia University. He was chairman of the Council of Economic Advisers under President George W. Bush. He has written more than 100 scholarly articles on economics and finance, is the author of three textbooks and co-author of five other books, including “Balance: The Economics of Great Powers, from Ancient Rome to Modern America” (2014).
Rajiv Sethi is a member of the Roadmap to Pandemic Resiliency Task Force and a professor of economics at Barnard College, Columbia University. He is a founding member of Curriculum Open-Access Resources for Economics (Core Economics website), a resource for the teaching of economics, and co-author of “Shadows of Doubt: Stereotypes, Crime, and the Pursuit of Justice” (2019).