Social distancing and fiscal stimulus amid Covid-19

Across the world, as governments take their first economic stimulus measures to address the Covid-19 crisis, debate is intensifying over the right form and size of that
assistance. But this discussion hasn’t yet come to grips with five fundamental realities:
First, mandating social distancing in response to the
Covid-19 crisis requires socialising the economic costs of doing so. We as a society can’t reasonably require social distancing, with the massive economic consequences it entails, and believe that most of those costs should be privately borne. We therefore need to either abandon social distancing (thereby overwhelming health systems and sparking untold deaths) or enact much larger stimulus measures. And this is far larger even than the eye-popping figures the Trump administration is now pursuing in the US.
Second, the disruption is so vast — the economy in many sectors and areas has effectively come to a standstill — that government failure to act will result in an avalanche of bankruptcies and extended unemployment that will, in turn, inflict lasting damage on businesses and families, even after the health crisis passes. Economists call this phenomenon hysteresis; others call it not being able to put Humpty Dumpty back together again. It is why government intervention cannot be limited to the sectors most directly affected (airlines and hotels, for example) and must take new forms beyond the conventional tools (such as rebates to individuals).
While many existing stimulus measures are necessary and helpful — especially support for unemployed workers and state governments — they are terribly inadequate given the scale of the economic damage already occurring.
Third, given governments’ adoption of social distancing, the dilemmas we face will continue until an effective anti-viral or therapeutic can be found that allows us to contract the disease without suffering significant harm.
In the meantime, even if current efforts are successful at attenuating the spread of the disease over the next several weeks, social distancing will need to be re-imposed in cycles. Given the plausible timetable for developing a vaccine, and unless we get very lucky and the virus itself mutates in a less harmful direction, these cycles could continue for well more than a year.
Fourth, a proper response to the Covid-19 crisis will stress test the increasingly popular proposition that government deficits don’t matter. This is a fiscal risk worth taking. Indeed, those who argue that the cost is too high or that a stunning increase in the deficit is too risky need to return to the first point above, because the budget impact reflects the economic consequences of social distancing. If you don’t like the fiscal cost but you favour social distancing, what you’re really saying is that you are willing to accept millions of bankruptcies and the ripping apart of corporate and social fabrics across the world.
Fifth, the economic harm comes mostly from the sudden stop in business activity due to social distancing, not the lost productivity of those suffering or dying from Covid-19. The demographics of those suffering from coronavirus and those suffering from the economic virus are quite different.
Governments around the world are awakening to these truths, and beginning to debate how to assist businesses suffering from the downturn. The UK is considering making grants to companies for up to 80% percent of salary, capped at 2,500 pounds ($2,900) a month; offering loans to small and medium-sized businesses; and taking equity stakes in airlines and other companies. Denmark has put forward a programme to subsidise 75% of payroll for companies facing a need to cut jobs by 30% or more. France is considering equity injections and loan guarantees.
The economists Emmanuel Saez and Gabriel Zucman have proposed that governments simply pay companies to cushion the shock: “In the context of this pandemic, we need a new form of social insurance, one that directly targets and works through businesses,” they wrote earlier this month. “The most direct way to provide this insurance is to have the government act as a buyer of last resort. If the government fully replaces the demand that evaporates, each business can keep paying its workers and maintain its capital stock, as if it was operating under business as usual.”
And Andrew Ross Sorkin of the New York Times has suggested a universal loan programme, with a zero interest rate and extended repayment terms. One thing is clear about stimulus measures in this crisis: Bigger is better.

—Bloomberg

Peter R Orszag is a Bloomberg Opinion columnist. He is the chief executive officer of financial advisory at Lazard. He was director of the Office of Management and Budget from 2009 to 2010, and director of the Congressional Budget Office from 2007 to 2008