Of course, providing this assistance to people directly can make it hard to tailor it to individual circumstances as well as to ensure that the repayment of any assistance is not onerous. As it turns out, however, an innovative Australian debt scheme used for higher education tuition could be readily applied. Australian universities are (mostly) public but still charge tuition to students. The rationale for that is that while education has public benefits, when you have an education you are the main financial beneficiary and so should be responsible for some of the costs. Thus, in the 1990s, the left-wing Labor government ended two decades of free tuition and put in its place an income-contingent loan.
The idea was this. You want to ensure that student loans are automatic and not onerous to administer. Thus, when tuition was charged, students could opt not to pay it immediately but, instead, incur a debt to the government. However, what you did not want is the repayment of those loans to depend too much on career paths. After all, a lawyer or doctor may be able to earn more than a high school teacher, so you don’t want the latter to have debt repayments that presumed too high an income. The scheme instead gave students a slightly higher marginal tax rate until their loan principal (plus modest interest) was repaid. Thus, the high-income professionals would, by virtue of their higher income, be required to pay more sooner than those with lower income.
Higher education was a natural candidate for this type of loan, but in 2004, my economist colleague Stephen King and I proposed a similar arrangement for housing.17 We suggested that when there were temporary shocks to someone’s income as might arise should they lose employment, then rather than evicting or foreclosing on them (as would be their initial worry), the government would step in and cover those housing-related payments for a time. A debt would accrue, but, as for students, it would only be repaid through the tax system, when people had income again. This would both provide stability for households when there were economic shocks and also, by providing financial breathing space, make lending or offering housing to people who might be more exposed to such shocks a better proposition for lenders and landlords.
There is little reason that such a scheme could not be enacted to cover short-term expenses associated with a pandemic recession. Presumably, only those who believed that they could pause their economic activity would avail themselves of this loan, but then they could spread the burden over time. It would provide liquidity but at the same time ensure that those who received payments were responsible for them somewhat in proportion to their benefits.
The Final Stimulus
In many respects, the previous discussion is a somewhat optimistic one. It assumes governments can implement policies that pause the economy and that actually work. Since it has never been done before, economists have no idea whether it will be enough. Conceptually, it is a strong proposal. In reality, as with all of these things, there are consequences we cannot predict.
Bound up in the US approach to macroeconomic support in the United States is a program to send a stimulus of $1,200 (in the form of tax rebates) to every citizen as restrictions were put in place. This was done after 9/11 and also during the 2008 financial crisis. The idea then, as now, is to restore consumer confidence and spending. With COVID-19 or any pandemic, as the recession is not normal, one must wonder if such direct stimulus is appropriate. The worry is that, while this cash may support those people who have loan and other immediate obligations, with social distancing policies in place, the money may not be consumed but instead saved. Saving can be beneficial if there is a need for liquidity, but in this case, that was already being provided by aggressive actions from central banks.
The determination of when a direct stimulus is likely to be required is part of the effort to restart the economy as social distancing is no longer required. Thus, we might be concerned that directing policy toward a stimulus prematurely might hamper that option arising later and might detract from the decidedly not-normal task of pausing the economy at the outset of the crisis.
Key Points
1. The worst economic outcome from COVID-19 is a dark recession where there are insufficient workers available to restore economic activity to its previous level.
2. To prevent this, we need to engineer a recession that would accompany social distancing to contain the outbreak. In doing this, the key objective is to be able to preserve job matches and prevent businesses from closing so that economic activity can be restarted again.
3. This requires payments, subsidies, and loan guarantees that can ensure that people’s short-term disruptions are not translated into long-term breakups that would require a lengthy period of time to overcome. One way of doing this would be to institutionalize loans by the government that could be paid back through taxes when incomes (or business revenue) is restored.
4. Following the crisis, there will likely be a need for the usual macroeconomic policies to stimulate and accelerate the recovery.
5
The Testing Economy
The cows were not safe. They were mad. But what made them unsafe was that anyone consuming them may well become mad. That is what the United Kingdom discovered in the 1990s. It was found that cattle affected by bovine spongiform encephalopathy (or BSE) could cause a variant of Creutzfeldt-Jakob disease in humans. That disease would mentally impair its victims and eventually take their lives. As of 2013, 177 people in the United Kingdom had died. Not surprisingly, no one wanted to consume cattle that might have BSE.
The reaction of the United States to cases of BSE is instructive. In 2003, a cow imported to the United States from Canada was found to have BSE. Imports were banned. In Canada, cattle prices fell by a half and retail beef prices by 14 percent. Canada’s annual beef export revenues to the United States fell by two thirds. At the time, Canadian beef made up three quarters of US beef imports, so this imposed costs on both countries, with losses estimated in the billions.1 When, later in 2003, an infected cow was discovered in Washington State, the trade bans fell on the other foot.
As internal bans were neither palatable or practical, the US Department of Agriculture (or USDA) ramped up testing. It favored what was argued to be a less accurate “rapid” immunologic test (with results delivered in hours rather than weeks). The cost of these tests was about $200 million, but the positive impact on reviving the US beef export industry was far in excess of this.
This chapter is about the value of testing and how it can improve the functioning of markets when there are infectious diseases. The BSE example indicates the value of testing for the beef trade and has strong lessons in the wake of COVID-19 for how the testing of humans can make it safe for people to interact with one another. But before getting to the meat (!) of the issue, there was one more twist in the USDA’s handling of BSE testing. Having successfully demonstrated the economic value of tests, the USDA promptly banned them.
You read that right. The USDA forbade cattle exporters from paying for the tests themselves for their own livestock. A producer of black Angus beef for sale to Japan, Creekstone Farms Premium Beef, wanted to use the USDA’s approved rapid test as part of its production and marketing efforts. The reasons were obvious. It was commercially lucrative to provide that information to customers. However, the USDA claimed that using the test was for “surveillance” purposes and was concerned that if some producers tested their cattle, this would imply that the cattle of others was unsafe. Cattle trade associations feared that this would lead to an unravelling, necessitating all producers to incur the costs of testing.