We have seen alarming estimates of the potential impact of the Covid-19 pandemic on disease and death, as well as on our economy. Some have suggested that more than half of our population could be infected – more than 160 million people and that one or two percent of those could die. The President’s Treasury Secretary, Steven Mnuchin was quoted as saying that 20% unemployment is possible without effective action to combat it. President Trump’s former economic advisor, Kevin Hassett said that a “great depression” is possible if people are forced to stay home for six months. It’s important to note that these statements are not facts. They are informed guesses about what might happen under hypothetical conditions.
Although the most important priority for government in the current Covid-19 pandemic is to preserve human life, the economic impact of the actions taken to combat the virus is already substantial. In states like New York that are seeing large numbers of people sickened, steps like requiring people to work at home, closing restaurants and bars, entertainment venues, indoor shopping centers and other retail outlets are already causing unemployment to increase in those industries and others, such as hotels and transportation as well as suppliers to those industries. The impacts are extending to manufacturers as well – note the closure of all plants by Fiat-Chrysler, Ford and General Motors.
Efforts to combat the economic damage caused by the Covid-19 pandemic reflect the uncertain extent and duration of the dislocations. What are the impacts and issues confronting policymakers?
Affected Industries
A look at employment in some of the affected industries shows the magnitude of the problem. About 33% of employment in New York State metropolitan areas is in industries that are directly touched by the public health measures that have been imposed. To be sure, some of the people in each of these industries remain employed. Retail trade includes food stores and pharmacies that remain open. Some supermarket chains are hiring to meet demand. Some food services continue to employ people to provide take-out meals. Hotels remain open, but with limited staffing. We must wait for official unemployment data to know the actual extent of layoffs in New York State. But, there are many people who are or will be unemployed as a result of the virus.
Average Incomes in Affected Industries
Average wages in the largest of the affected sectors are relatively low – $26,124 for upstate retail workers and $31,756 downstate. For accommodation and food service workers, the upstate metropolitan average is $18,218, while downstate the average is $26,141. Because employees in affected industries are mostly low wage workers, they are more vulnerable to wage interruptions than most people. Four in ten Americans, according to a 2019 Federal Reserve Report, would have difficulty in meeting an unexpected $400 expense, and would borrow money to pay the obligation and those with lower incomes are most likely to have problems.
Also of concern are those in non-traditional work arrangements – independent contractors, workers provided by contract firms, on-call workers and temporary help agency workers. Because these workers are often hired by companies to meet seasonal or other temporary needs, they are more likely to be affected by economic downturns that employees. People in these arrangements are estimated to make up about 10% of the workforce, and are in most cases not covered by unemployment insurance.
Policymakers Face Uncertainty
The development of policy remedies to the economic damage from the virus and the public health responses are made more difficult by uncertainties about the future extent and duration of the pandemic. Although current expectations indicate that the Covid-19 virus will continue to infect patients for at least the next two or three months, the duration could be increased by effective strategies to smooth the peak of infections, by slowing transmission. Economic policymakers can only estimate what impact current personal isolation strategies will have on the extent of transmission of the disease, or its effect on the length of the epidemic. Nor do they know whether the disease will continue during the warm Summer months, or if it does fade in Summer, whether it will return as temperatures cool in Fall and Winter. A number of epidemiologists believe that we may see a series of infection spikes.
These factors make the development of policy responses more difficult. Relatively short work interruptions would result in less economic hardship for affected workers and for the economy as a whole, but would reduce the likelihood that the spread of the disease could be slowed. Current Federal guidelines for social distancing, such as encouraging work at home, and recommended limits on groups to ten people or less are described as “15 Days to Slow the Spread,” but there is a widespread belief that that Federal guidance and state imposed requirements that people work at home and closures of restaurants, bars, and other retail entities will last two or more months at a minimum. It is clear that the disease will peak in different states at different times. New York, California, and Washington are at the forefront of the epidemic. Other states will confront its full force later.
Policy Responses Must be Multifaceted
Policy responses to the economic damage that the Covid-19 pandemic is beginning to cause must respond to multiple needs. Much of the assistance should be directed primarily to those people and businesses most affected. Because the percentage of income replaced by unemployment insurance is inadequate for longer term dislocations and because typical workers in the most hard hit economic sectors have low incomes, Federal action to supplement existing unemployment insurance is essential.
Contract and other independent workers who lose employment face even greater challenges, because most of them are not covered by unemployment insurance. Because there isn’t an existing assistance mechanism like unemployment insurance that helps them, constructing programs to identify and assist them poses a greater challenge. They may be best served by strengthening existing programs for low-income people, like the Supplemental Nutrition Assistance Program, Temporary Assistance for Needy Families, Medicaid and others, and providing new forms of assistance for contract and other independent workers. In the long run, consideration should be given to imposing taxes on businesses using contract and other independent workers to provide some assistance for those who lose their jobs.
Small businesses also have critical needs that must be met to reduce unemployment caused by the public health response to the virus. Because smaller firms typically have fewer capital resources than large, well established businesses, many will be unable to continue to pay fixed and operating costs if they face even a few months of no significant revenues. The Federal Small Business Administration is an important potential resource, but will need additional lending authority, and the ability to offer loans with terms that will not unduly burden those who have been hard hit by the controls imposed in the name of public health. A proposal from Senate Republicans would forgive a portion of small business loan amounts that go toward wage payments. Loan payment deferrals should be part of any plan. Approval of these provisions would help stabilize the financial condition of assisted small businesses.
With high levels of unemployment, aggregate demand should be stimulated to increase the demand for workers. But, in an environment in which controls intended to isolate people in order to limit the spread of disease are present, there are relatively few opportunities to spend more money on discretionary purchases. Many stores, bars and restaurants are closed and travel is discouraged. In the longer term, putting more money into the economy will help, but the benefit will be delayed. Because policymakers do not know how long and how deep the dislocations will be, it will be difficult to determine how much assistance is and will be needed and for how long. But, given the likely duration of public health measures to combat Covid-19, even large aid packages will only partially ameliorate the economic damage that we face as a nation.