Eakinomics: The Coming COVID-19 Policy Shift

Eakinomics: The Coming COVID-19 Policy Shift The theory undergirding the case for a v-shaped recovery from the COVID-19-induced downturn is pretty simple. It assumes that firms, either from their own sources or via the vast amount of federal support, have enough liquidity to stay in business until the economy re-opens. At that point, a commerce-starved public steps up to start buying, labor-starved businesses quickly hire, and Americans happily head back to their jobs. The various programs in the Coronavirus Aid, Relief, and Economic Security (CARES) Act were designed to address the cash-flow needs for this evolution of the economy. A key part of this logic is that it simply involves recovery – restarting what was there before – and not restructuring. That almost certainly will not be the case. United Airlines, for example, has announced it plans to furlough roughly 40 percent of its pilots. More generally, one suspects that the airlines will not be profitable with their current costs and will begin to restructure. The phenomenon applies more broadly. Transportation services, hotels and other accommodations, performing arts, amusements and gambling, and eating and drinking places account for about 5 percent of gross domestic product (GDP) and 11 percent of employment (at the end of 2019). In these industries the 2020 problem (and perhaps beyond) is not liquidity; their business models are no longer viable. There will be firms in these industries that will transform from illiquid to simply insolvent. This is among the factors that will slow the pace of the recovery and prevent an immediate rebound to levels of activity present in January and February. The changing economic landscape also means that the policy design should change as well. It does not make sense to put taxpayer dollars into companies that market forces may eliminate. Over the next few months, the emphasis should shift from speedy, indiscriminate lending and grants to targeted lending programs where needed. Policy should also shift its emphasis away from keeping workers attached to their firms and toward supporting shifts in the demand for workers as some industries shrink and others expand. Strong policy support will be an important element of recovering from the COVID-19 recession. But it will have to be more nimble than simply repeating CARES again and again.