The Economic Response to COVID-19, Part I: A Q&A with Professor Jesse Rothstein

A shorter version of this Q & A was featured by UC Berkeley News.

As the US Coronavirus death continues to rise, we are reminded that the disease is, primarily and tragically, a public health crisis. But we are also clearly in the early stages of an economic crisis. We sat down with Jesse Rothstein, Professor of Public Policy and Economics and former Chief Economist at the Obama Administration Department of Labor, to discuss the economic consequences of shelter-in-place, the Congressional response, and Professor Rothstein’s recent policy recommendations published in the Washington Post and through Economics for Inclusive Prosperity.

You've spoken about the importance of targeting support towards those who are most vulnerable, as opposed to the Trump Administration’s “knee-jerk, muscle-memory, tax-cut mode.” How has Congress been doing so far?

I think that the CARES Act, just signed into law, is a good step. It's not exactly the bill I would have written, but it has several important pieces. 

At this moment, three of the biggest needs are: 

• keeping families afloat who depend on paychecks and are not getting paid;
• keeping small businesses afloat that we want to continue operating once the quarantines are lifted; and
• keeping the connections between the workers and the businesses, so that businesses can retain their current workers rather than spending weeks hiring a whole new staff, and workers can continue receiving income and avoid filing claims for Unemployment Insurance (UI), which is not equipped to deal with such a large number of applicants.  

This bill does about as well as you can to accomplish that, given the lack of infrastructure set up to support these goals. It has the right provisions such that, if it is implemented exceptionally well, it will help many of the people who need it. I worry about how well it will accomplish its goals, but the provisions that I dislike are using money ineffectively rather than doing real damage. 

What are some of your concerns? 

There's a lot of different moving parts. We need employers to know the types of aid available to them, and to take advantage of that aid before they start laying off their workers. There’s a fairly complicated set of rules about how much aid is available, and what is forgivable. We need businesses to understand those rules very quickly, and decide its a good deal to use the funds and retain their workers.

Then, we need to actually get the aid to employers quickly. That’s hard to do. They made the right call in determining that the banks would issue the loans and the Small Business Administration (SBA) is just guaranteeing the loans. That may help. But SBA has to oversee an enormous amount of loans, much larger than anything they've ever done before.

We're also throwing money at the Unemployment Insurance system, which wasn’t very well built in the best of times and is now facing a historic flood. And we need the UI system to not only process all those claims, but also process new claims, pay new classes of workers (such as contract workers) unemployment compensation, and all these other things that are going to be challenging. One of my recent proposals was a way to help the UI system deal with this.

What didn't the bills get right? Would you have changed anything?

The money to large businesses is likely to be largely wasted on propping up stockholders. We already have an existing bankruptcy system for large businesses with cash flow problems, which allows these businesses to keep operating. It would have been best to handle through that system. It would also have been better to ensure accountability for large businesses: there should have been more provisions requiring that large corporations refrain from laying off workers, for example. The public interest priority is to keep workers employed – so any money that we're giving to companies that is not flowing to the workers or keeping a company from going under completely is not being used effectively.

In addition, almost all of the provisions have calendar date sunsets. While these are not unreasonable timeline estimates, we don't really know the sunset date because we don't know how long shelter-in-place is going to last. It would be better to base triggers on when conditions no longer warrant them, rather than calendar dates. Otherwise, we have to return to the legislature every time we need an extension – and we discovered in the last recession that this creates new opportunities for individual legislators to take hostages (to demand concessions in return for supporting needed stimulus).

The aid packages contain not only support for individuals, but about $500 billion for large businesses. Bernie Sanders recently called this "corporate welfare." Is he right? Does this amount to just another corporate bailout?

We need corporations alive. To the extent that we're keeping corporations from shutting down, that's important. I'm skeptical that we’re doing that for the big corporations, many of which would have been able to stay alive, perhaps under new ownership, without the aid. That criticism doesn’t apply to the aid to small businesses. We absolutely need to bail out small business owners. No small business owner should have been setting aside savings for this. They should have a rainy day fund, not a Noah's flood fund. 

Low wage workers without paid leave are among the most vulnerable as businesses temporarily close their doors. Aside from those who are most vulnerable, what are some of the broader economic consequences of an extended shutdown? How does targeting support towards those who are most vulnerable affect the rest of the economy?

I worry that even with this bill, huge numbers of businesses are just going to disappear. And if they disappear, it just takes a long time to rebuild an economy, sometimes years. And if this shutdown lasts for very long – long enough that businesses start to shut down – then I think you are into the long recovery model. And that's bad for everybody. 

If we wind up there, we also have an aggregate demand problem: people won’t be ready to start spending at high rates when we come out of it. Families will be bankrupt, or their savings will be wiped out. This bill does its best to try to prevent that, but it can only do so much. 

Broader economic effects aside, we should care about low wage workers in low-income households. We should care if they’re thrown out of their houses and unable to afford groceries, even if it doesn't affect the rest of us. But aside from that, low wage workers are also the people who are most likely to spend the money they have, so maintaining aggregate demand depends on ensuring that they have the resources they need.

What else needs to be done?

The big missing piece is that there's just not enough money to bail out states. We're bailing out workers and companies as best as we can – but the hit to state budgets is going to be enormous. While there's some money included for states, we're going to need much more of it. In California, Jerry Brown was criticized for putting too much money into the rainy day fund – but we're already making plans to spend right through that. States bear a lot of the responsibility for taking care of people through this crisis, and we need them to be able to do so.

One part of this would be for the federal government to bail out the unemployment insurance trust funds. The states each have savings accounts through which they pay out unemployment benefits. If those funds go broke, they can borrow from the federal government. But when they borrow, they have to pay back the funds through higher taxes down the road. This bill covers the new unemployment insurance costs, but it doesn't cover the costs of providing regular benefits to the three million people who just filed for UI. It doesn't make sense to pay for this by raising payroll taxes, which are some of the most regressive taxes around.

Read Part II of this story, in which Professor Hilary Hoynes helps us understand additional social safety net supports in the Congressional response to COVID-19.