Everyone agrees the economy needs help fast. What is far more difficult is figuring out exactly how to help a virus-plagued world of locked down stores and socially distant consumers.
For many experts, the current crisis is like entering a Bizarro world, where normal challenges get flipped inside out.
Economists, for instance, are used to devising incentives to prod people to get out of bed and go to work. They’ve never before had to encourage people to stay home.
Central bankers are accustomed to calibrating consumer demand to maintain steady economic growth. But this is the first time they have attempted to keep national economies intact at a time when many businesses are barred from opening their doors, no matter how much demand exists for their products and services.
“There are no really good options to deal with the economic impact of the virus outbreak,” says Joshua Gans, a professor of management at Rotman School of Management in Toronto. “There aren’t even any options where we can say, ah, that sort of thing worked last time – because the last time we faced anything remotely like this was in 1918, when the world was a much different place.”
The core of the challenge is how to freeze a complex, intricate economy and preserve it in reasonable health for the time it takes to contain the novel coronavirus.
A big problem is that nobody knows how long the deep-freeze will last – maybe a couple of months, maybe a year or more if a recent report on the outbreak from researchers at Imperial College London is correct.
What is clear is that lockdowns will devastate business activity for as long as the economy is shuttered. Without help, many companies won’t be able to pay invoices or salaries, and many households won’t be able to make rent or mortgage payments. A temporary downturn could spiral into a much deeper slump.
So what to do? More government support for businesses and households is a given. But in Canada and elsewhere, some eyes are turning to more radical notions, ranging from grants for stricken industries to simply giving away money to everyone.
To its credit, Ottawa has already rushed in with a barrage of programs, ranging from wage subsidies and tax deferrals to a new loans program for entrepreneurs.
Measures announced this past week alone amount to $82-billion. If you exclude the tax deferrals, which will eventually be made up when people pay their tax bills, and look only at direct support to businesses and workers, Ottawa is spending $27-billion.
That is equal to roughly half the $55.6-billion deficit the federal government ran in the 2009-10 fiscal year, during the depths of the previous financial crisis. But many economists figure it isn’t enough, which Finance Minister Bill Morneau implicitly acknowledged during a press conference Wednesday when he kept referring to the package as a first step in dealing with the crisis.
The question is how additional money could best be spent. As the extent of the emergency becomes clear, ideas that would once have been considered radical are being rushed onto centre stage.
Take “helicopter money,” the notion of creating money and simply sending it out to people, no strings attached, as if government were dumping dollar bills into people’s backyards from a whirlybird. Or the idea of a guaranteed basic income, in which government would ensure every citizen gets a basic level of support.
For years, both were regarded as extreme notions, appealing mainly to diehard leftists or monetary extremists. But late on Thursday, reliably right-wing U.S. Republicans unveiled a US$1-trillion economic rescue package that includes sending out US$1,200 to every low- and middle-income American adult, as well as US$500 for every eligible child. In some ways, the money-for-nearly-everyone plan resembles a limited-time mash-up of helicopter money and guaranteed income.
The stampede to adopt such concepts speaks to the growing sense of urgency in many different countries as policy makers scramble to deal with the exploding size of the economic challenge.
The global downturn this year is likely to be much bigger than in 2009, the worst part of the financial crisis, according to Capital Economics. In the United States, economic activity will plummet by an unprecedented 24 per cent in the second quarter, according to Goldman Sachs.
In Canada, a recession is now unavoidable, according to the Bank of Nova Scotia, which forecasts an 11-per-cent plunge in gross domestic product in the second quarter. For the year as a whole, expect Canada’s economy to contract by 1.5 per cent, says Bank of America Global Research.
The worst of the downturn may be over in a quarter or two, but it will be brutal for as long as it lasts. Claudia Sahm, a former top forecaster at the U.S. Federal Reserve who is now at the Washington Center for Equitable Growth, told MarketWatch this week she expects the virus-induced plunge in economic activity to be “twice as deep” as in the Great Recession.
The danger is that this abrupt fall will set off a chain reaction of business failures and unemployment that will extend the downturn. To avoid that grim possibility, Ms. Sahm called for Congress to deliver at least US$1.5-trillion in stimulus to offset the hit, and to do so immediately. Time is wasting, she said in a tweet on Thursday. “Set political differences aside,” she urged Congress. “GO BIG! GO NOW!”
Comparisons between countries are always tricky, but Ms. Sahm’s call for US$1.5-trillion in stimulus works out to an amount equal to about 7 per cent of U.S. GDP. A similarly sized stimulus package for Canada would come in at around $150-billion.
That is well in excess of what has been announced so far. The $82-billion package unveiled by Ottawa this week amounts to 3.6 per cent of Canadian gross domestic product. If you strip out the temporary impact of the tax deferrals – which will give individuals and businesses up to the end of August to pay their 2019 taxes – the more permanent stimulus package works out to a mere 1.1 per cent of GDP.
“This means the fiscal package may be enough to prevent the forthcoming recession from turning into a longer slump – providing even more stringent containment measures are not put in place – but it is too small to ensure a strong recovery further down the road,” said Stephen Brown, senior Canada economist at Capital Economics.
Ottawa is likely to wind up supersizing its financial stimulus. But it must find ways to do so that avoid waste and abuse. And it must move fast, because a huge swath of Canada’s service economy is struggling with a sudden stop to sales as a result of lockdowns.
Virus-containment measures are “going to have devastating consequences for many companies and many will not come back without immediate help,” says Greg D’Avignon, president of the Business Council of British Columbia. “The key issue is speed.”
He recommends immediate rollbacks to taxes, including carbon-related levies, as well as extending the deferral of tax payments even further into the future.
Many of the industries that are being hardest hit – airlines, oil producers and restaurants – are already asking for grants and other government help to help them through this rough patch. Prof. Gans at Rotman says it is vital to maintain these productive sectors and all the jobs they create. But he is skeptical of government simply giving money away.
A better notion, he suggests, would be to set up large loan programs for those afflicted sectors. Companies could choose how much to borrow, but would not get a free ride – they would eventually have to pay back their loans, although at rock-bottom rates to reflect this crisis not being of their own making.
Government may have to take on an even more direct and immediate role in the case of cash-strapped small businesses. Emmanuel Saez and Gabriel Zucman, economists at the University of California, Berkeley, recommend governments step in and act as payers of last resort for businesses that face closing as a result of the virus. For as long as lockdowns persist, government would cover their rents, utility payments, debt payments and other vital costs.
“The amounts don’t need to be exact,” the professors write. “Verification and correction can take place once the lockdown is over.” That sounds like a recipe for abuse, but in a world without perfect options for dealing with a virus-induced downturn, it may be better than nothing.