BERKELEY – In just a few short months, the COVID-19 pandemic has done massive damage to the United States economy – and the workers who make it run. Unemployment has already reached its highest level since the Great Depression, with about 42 million workers – largely lower-income, less educated, and disproportionately black and Hispanic – having filed jobless claims since mid-March. Without concerted government action, America’s economic prospects – and its inequality problem – will only worsen.
To be sure, America’s monetary and fiscal authorities took early, bold action to support the economy. The US Federal Reserve cut the federal funds rate nearly to zero and worked with the Treasury to deliver credit to households, businesses, and state and local governments. And the US Congress and the White House have so far approved almost $3 trillion worth of economic relief, including the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act.
But whereas the Fed has committed to using its emergency tools “for as long as it takes” to ensure a strong recovery, a divided Congress and chaotic executive have yet to make a similar pledge. The House Democrats have passed a second $3 trillion recovery package, but its prospects are uncertain in the Republican-controlled Senate, which is about to start a two-week recess without considering it.
The International Monetary Fund now expects the US economy to contract by 8% in 2020. If the US government does not change course, the outlook will become even worse.
The US needs a recovery plan that, first and foremost, extends payment of an additional $600 per week in unemployment benefits – part of the CARES Act. Unemployment insurance is a powerful countercyclical tool: $1 in benefits adds $1.50 to the economy. So, rather than canceling the extra benefits at the end of July, as currently planned, the federal government should phase them out gradually. As the unemployment rate declines, it should adjust benefits according to targeted wage-replacement rates.
But that is only the beginning. US policymakers must also tackle longer-term problems in the unemployment-insurance system, including the insolvency of many state programs. And incentives should be strengthened for employers to use short-time compensation or work-sharing programs that allow employees to replace a portion of their lost wages with pro-rated unemployment benefits.
The recovery plan should also reward those who work. Though many states raised their minimum wages before the pandemic, the federal minimum wage is shockingly low, and many of those who lost their jobs were not receiving a living wage in the first place. A temporary subsidy to all low-wage workers, in the form of a “Pandemic Earned Income Tax Credit,” would strengthen the recovery and set the stage for a permanent expansion of the EITC – a proven policy tool that supplements the pay of low-wage workers and rewards work.
Another priority should be affordable loans for small businesses (up to 500 employees). Prior to the pandemic, small businesses accounted for nearly half of all private-sector jobs. From February to May, however, they lost about 18% of their employees. And they stand to lose many more: small businesses account for an estimated 54% of the jobs – including many low-wage in-person service positions – that COVID-19 has rendered most vulnerable. Given shifting patterns of demand, many of these jobs may remain insecure long after the virus is contained.
To avoid a wave of closures and further job losses, viable small businesses need access to affordable capital. But building on the CARES Act’s Paycheck Protection Program (PPP), was scheduled to end on June 30 with more than $130 billion unspent, is not the way forward.
About $520 billion in PPP loans have been issued to nearly five million small businesses, out of a total of around 31 million. Many of the loans went to larger businesses such as professional services firms that never intended to lay off their workers (not least because they rapidly digitized their services), and businesses in communities that suffered relatively small employment losses.
Most microenterprises and sole proprietorships – many with minority or female owners – were left out, owing largely to their lack of relationships with banks. And recent research indicates that PPP loans had no meaningful effect on employment in small businesses: percentage reductions in hours worked were similar in both small and large firms.
A better approach would take advantage of the Fed’s Main Street Lending Program, which provides subsidized federal loans to qualified small and medium-size businesses. With $75 billion in capital and Treasury backing, the MSLP could issue $600 billion in loans to SMEs, judged solvent by specified eligibility criteria, relatively quickly. Over time, the MSLF can and should be expanded further through a larger infusion of Treasury funds, a reduction in the acceptable loss rate on loans, interest-rate cuts, and stronger incentives for banks and fintech companies to participate.
But the MSLP is not well suited to providing loans to small businesses and microentrepreneurs, particularly those operating in low-income and minority communities. Fortunately, some states and cities, along with community banks and credit unions, are establishing their own loan facilities to fill the gap. For example, California’s Infrastructure and Economic Development Bank has a $50 million disaster-relief loan-guarantee program that mitigates the risks of loans to small businesses. And the new California budget includes an additional $50 million that can be used to leverage private and philanthropic capital for small business loans and an additional $25 million to provide capital to CDFIs and other mission-based lenders that serve economically disadvantaged small businesses including the underbanked and unbanked.
The final crucial element of a US economic-recovery plan is significant additional federal funding for state and local governments that are on the front lines of fighting the pandemic and confront major revenue shortfalls. Without generous and flexible federal support, they will have to slash spending, undermining federal stimulus measures and causing a deeper recession and a slower recovery.
The US is facing a quadruple crisis: a public-health catastrophe, a deep economic recession, deep-rooted and mounting inequality, and dysfunctional leadership. As matters stand, the last crisis is exacerbating the rest. But it is not too late for US policymakers to develop the pandemic-response plan the country needs.
Laura Tyson, former chair of the US President’s Council of Economic Advisers, is Distinguished Professor of the Graduate School at the Berkeley Haas School of Business and Chair of the Blum Center Board of Trustees at UC Berkeley. Lenny Mendonca, Senior Partner Emeritus at McKinsey & Company, is a former chief economic and business advisor to Governor Gavin Newsom of California and chair of the California High-Speed Rail Authority.
By Laura Tyson and Lenny Mendonca