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Overview of proposals to combat the economic consequences of the Corona crisis
Exploring Economics, 2020
This contribution is part of the Exploring Economics Dossier “The Next Great Recession?” on the economic fallout of the COVID-19 pandemic and the structural crisis of globalization.
Economic policy proposals to combat the economic consequences of the corona crisis globally
We collect currently discussed economic policy proposals and provide you with links to understand & learn more about these proposals. We start with general ideas, continue with ideas for countries of the Global South and end with proposals that have been made for the European Economy but could also inspire other countries. This overview will be expanded continuously! As always we encourage you to participate in the creation of our learning materials. If you have further policy proposals that are missing here, please send them to us either via mail or via our submission form!
This is a link to a Policy-tracker, collaborative project gathering policy responses to the COVID-19 crisis. Participation is welcome!
- Feminist economics emphasize the importance of care work and the provision with basic human goods for the economy and human well-being.
- The validity of this is currently show-cased in the COVID-19 crisis.
- An important demand therefore is the establishment of Systems of Social Provisioning, i.e. the provision of basic goods (among others, food, housing, education, health services) for all
Provide all people with basic universal goods – indifferent to people’s income and the state of the economy. Freed from existential worries, especially the most precarious in a society will experience an improvement of quality-of-life. Systems of Social Provisioning are also a powerful means against poverty. They therefore help to stabilize demand. A communal provisioning of facilities (e.g. communal laundries, kitchens etc.) can also facilitate a green transition because they are less resource-intense.
Using the Corona crisis for the socio-ecological transformation of the economy
- Economist Mariana Mazzucato analyses that our biased idea of the government as an incompetent, poorly equipped bureaucratic monster is partly responsible for the poor health preparation in the corona crisis.
- In the crisis, the government should regain its self-confidence: It should strengthen basic pharmaceutical research, and provide a potential breakthrough for a vaccine for society.
- Companies that receive money from the state in the course of the crisis should have to meet conditions for this: Profits should be reinvested in research instead of dividends to shareholders. Furthermore, the course for ecological and social transformation should be set now.
- Elizabeth Warren argues similarly: companies that now receive state support in the crisis must not lay off employees, must pay a minimum wage of $15 and must never (!) buy back their own shares.
- Tom Krebs argues to strengthen efforts to decarbonize the economy in the course of the crisis. Any “stimulus package must also be a transformational package” for the economy.
In a crisis, the state has leverage over private business. Now the course could be set for restructuring the economy and implementing what in normal times fails because of the economic lobby.
Support for Families and Care Work
For many families, providing both childcare and paid labour while being at home is difficult to manage.
In particular, single parents, mostly women, are facing significant hardship. But also in (heterosexual) households with two parents working full time, it's usually the mother who carries the additional child care burdens.
- Therefore, a Corona-Parental-Benefit is proposed. This idea implies that parents can reduce working hours in their regular jobs to focus on childcare while receiving government subsidies to replace lower labour income.
- For heterosexual parents, the subsidy should require that both parents reduce their working hours so that the measure doesn't reproduce existing stereotypes in childcare work (i.e.: the mother reduces working hours to raise the children while the father continues working full time).
- Alon et al. also propose to extend unemployment benefits to parents who left their job to raise their children during Corona.
- Also, universities should extend tenure spells for all faculty members with young children.
The proposed measures take into account the significant hardship of parents with young children during Corona, in particular single parents which are often women.
Government as "Buyer of last Resort"
Economists Saez and Zucman propose that the government pays a direct transfer to companies affected by Corona. There is no need to repay this money, so it is not a loan.
The proposal is a targeted compensation for the decreased demand and the lost revenues of the companies. Figuratively, one can imagine that the state pays the tickets for all flights that are now cancelled due to the Corona crisis.
- Saez and Zucman follow up on the work of Hyman P. Minsky, who already started advocating for an investor of last resort and an employer of last resort in the 1970s.
Companies do not suffer corona-related losses and therefore do not have to go into insolvency. Consequently, this also means that wages are still paid and there is no mass unemployment. Household incomes remain stable, the costs of the corona shock are almost completely socialized and borne by society.
Universal Basic Income
- Several proposals call for a "corona money".
- All inhabitants receive a regular unconditional income sufficient enough to cover all their living expenses.
- This is currently discussed in Spain.
Unbureaucratic way of securing income of households (and therefore demand). Protects those affected most by the crisis. Unlike other measures (which bear primarily firms in mind), this directly aims at helping people. Direct help for cultural workers, unemployed, precarious and self-employed persons who are not sufficiently covered by other support measures. Demand will be stabilized and lost household income will be replaced in a lump sum matter. In addition, basic income is a sign of solidarity and appreciation.
Direct state-financing by central banks
- Central banks in the Global North can make X billion euros directly available to its domestic government by buying up government bonds and holding them. This money is not a loan, so the state does not have to pay back. It is a gift and the state can spend it at its discretion (this is similar to the ideas of "Modern Monetary Theory").
- The state distributes the money to affected households and companies. The costs of the corona shock are therefore financed directly by the central bank
Potentially massive support program without increasing taxes or public debt.
De Grauwe: The ECB Must Finance COVID-19 Deficits
Measures for emerging and developing countries:
- Only the US-Dollar and a handful other currencies (Euro, Yen, Yuan, Pound-Sterling, Swiss Franc etc.; international currency hierarchy) are accepted in international contracts, for example in trade or debt. These currencies also have fairly stable exchange rates. Therefore, these currencies are perceived as secure.
- When a crisis kicks in, investors prefer security over high profits. They go then into these currencies.
- Currencies from developing and emerging economies and the financial assets denominated in them, on the other hand, are perceived as very risky. Therefore these countries and firms in these countries have to pay high interest rates to compensate for these risks.
- In times of crisis, investors, therefore, sell-off the assets they hold in these currencies.
- As a result, developing and emerging economies have seen a massive capital outflow when the Covid-19 crisis broke out. This was three times worse than that in reaction to the last financial crisis.
- This outflow makes it hard to pay for imports or service external debt. It also destabilizes the domestic financial sector.
- Policy autonomy needed to confront the health and economic crises is constrained.
- These outflows devalue those countries’ currencies, which impoverishes those with income in those currencies in real terms.
- Capital controls administered by the IMF could help to put a hold on this drainage of funds.
- The need for capital controls for international economic stability is widely acknowledged by mainstream and more critical economists (e.g. Hélène Rey).
Slow down or at best put a stop to capital flight. The IMF is better in administering these capital controls because it can do this globally. If only individual countries do, this would feed into the perceived risk associated with those countries from the perspective of investors.
Critical Macro Finance: Developing and emerging countries need capital controls to prevent financial catastrophe
Extend the use of IMF special drawing rights
- José Ocampo and others called for a change in the function of the International Monetary Fund (IMF).
- The IMF has its own international “currency”, Special Drawing Rights (SDR; a currency basket it uses as a unit of account).
- IMF should use those SDRs when a crisis threatens international stability.
- The IMF should allocate more special drawing rights (SDRs) to countries with balance of payments or capital outflow difficulties due to the crisis. This provision should last till crisis has abated and should be done without conditions as a liquidity injection.
- Furthermore, David Adler and Andres Arauz explain the current situation. Currently, the Federal Reserve provides the major global monetary facility. With the swap line system, they have granted certain nations a stable exchange mechanism for billions of dollars that are needed to finance emergency measures. However, Adler and Arauz argue that the International Monetary Fund, not the US, should make sure nations are able to receive the monetary means to beat the crisis. The problem of the swap line system is that "no single country—no matter how exceptional—should have the right to decide who lives and who dies in the face of a pandemic."
The increased availability of SDR exchanges at a fixed and secure rate would decrease hurtful currency speculation. This would reduce the instabilities spilling-over from one market to another. Overall confidence in a quick recovery from the crisis increases significantly. Furthermore, by setting a precedent, the SDR expansion would stabilize the financial and economic markets of DECs in the long term. This would relieve DEC governments from many persistent financial market insecurities and enable them to focus on the real issues.
José Ocampo: The SDR’s Time Has Come
David Adler and Andres Arauz: It’s Time to End the Fed’s ‘Monetary Triage’
International Clearing Union
- John M. Keynes thought it impossible to have mobile capital, flexible exchange rates, sustained growth and economic stability at the same time.
- After World War II he suggested introducing a central bank of all central banks – something he called International Clearing Union (ICU)
- Every central bank has an account with the ICU. The ICU administers international financial transactions with fixed but adjustable exchange rates. It can also apply capital controls.
- In earlier proposals, Keynes also suggested punishing countries for a too aggressive export strategy. This way he wanted to ensure that exporters are incentivized to give surplus money to net importers. In later proposals, he dismissed the idea of penalty interest on trade surpluses in the hope that the proposal would be accepted.
Because of the fixed exchange currencies would stop being a means for speculation. This would reduce the instabilities spilling-over from one country to another and from the currency market to other markets. A penalty rate on exports could help to reduce global imbalances.
Implement reparation payments and debt relief
- International crises always do not originate where they cause the most harm. This applies to the climate crisis and the financial crisis 2007/08 in specific. The Covid-19 crisis is nobody's fault but was certainly spread by the more privileged international travellers.
- Many argue that reparations are long overdue (e.g. for the climate crisis, which is exerting additional pressure on the balance of payments).
- Jayati Ghosh points out the urgent need to tackle the debt crisis that will soon unfold. She describes measures for debt resolution and restructuring.
A global pandemic requires global solutions to avoid repeated circles of reinfections. With the additional funds, countries can focus on providing crucial funding to the health sector to overcome the pandemic.
A historic monetary crisis in DEC countries can be averted and the covid-19 crisis has lead to real global solidarity.
Suggestions for Europe
- In Germany, the state-owned development bank KfW provides unlimited loans to companies affected by Corona. However, not all countries in Europe can offer such a broad support measure as Germany.
- Therefore, the authors suggest developing a "European KfW". The European Investment Bank (EIB), should provide long-term loans to companies affected by Corona. The interest rates for this should be 0%, which means that the financing conditions are extremely favourable.
- In order to finance these loans, the EIB should issue new bonds on the financial market. Normally certain investor groups would buy such bonds. In the proposal, however, the ECB should act as a buyer for the EIB bonds and finance them in full.
- As in the helicopter proposals above, the ECB would thus bear part of the crisis costs, but not by directly financing the governments (which the ECB is not allowed to do under its statutes), but to the EIB.
Direct, unlimited credit support for European companies. Fewer insolvencies and thus less stress in the banking sector, which, should corporate insolvencies spike, could also slide into crisis. Signal for Europe.
Brunnermeier, Landau, Pagano, Reis: Throwing a COVID-19 LIQUIDITY LIFE-LINE
Protective Shield / ESM-Banking Recapitalization
- The European Stability Mechanism (ESM) was created during the euro crisis. This is a fund that has billions of euros of financial firepower at its disposal in order to be able to finance countries or banks that have difficulties to finance their debt.
- Schularick and Steffen propose that the ESM should use part of its financial volume to support European banks.
- Should the situation of banks deteriorate, the ESM should intervene quickly, early and strongly in the market ("be bold, be early"). Specifically, the fund should proactively provide banks with equity capital, thereby partially nationalising them.
- If the fund were to do this only for particularly affected banks, there would be so-called stigma effects. It would be clear to everyone that these banks are particularly affected. In order to avoid the stigma effect, all large banks should be supported. The entire banking market would be targeted.
- The role model for this action is TARP, the US bank recapitalisation programme following the financial crisis of 2008. The state buys equity shares of its banks, thereby supporting them, and when the crisis is over, it sells back its shares, possibly at a profit.
Targeted averting of the banking crisis. Keep the market in a "positive equilibrium" through readiness to act. European signal.
Schularick & Steffen: A Protective Shield for Europe’s Banks
- The Eurozone is to issue one-off long-term common bonds ("Corona-Bonds") in the amount of 1000 billion euros (= 8% GDP of the Eurozone).
- There is a precedent: during the oil crisis in 1974, a Community bond was issued to combat difficulties during that crisis.
- The funds are to be used to finance corona-related fiscal measures by the states.
Joint liability ensures favourable financing conditions; creation of a European "safe asset"; above all: European signal; enough fiscal leeway for countries like Spain or Italy to combat the crisis.
- Common Corona (Euro)bonds would probably be a "first-best", but cannot be implemented in practice (and politically) as there is no institution that can issue such a bond (not even the ESM).
- Also, the support programmes of the ESM are also carried out according to the rules only for limited periods of time or against (sometimes harsh) conditions.
- The ESM should, therefore, create a new Corona credit line. Euro-zone countries can receive ESM loans in proportion to the severity of the Corona crisis in their country.
- Funds received may only be used for Corona-related expenditure. The term of the loans is long and is without fiscal consolidation requirements.
Faster and politically more feasible than Corona Bond. European signal and stabilisation of the government bond markets.
Temporary Capital Loss
- In order to cushion the drop in labour demand due to the crisis, several countries have implemented a short-time working allowance. However, there is no comparable support for capital expenditure (rent, leasing obligations, etc.).
- Furthermore, previous aid measures have been too one-sidedly directed at capital owners. For instance, a current rescue loan might finance the rent payments of a company.
- With the presented proposal, companies that are closed down due to Corona should be able to temporarily suspend parts of their payments to the capital owners of production (e.g. their rent payments).
- Capital owners can be supported by the government, as in the case of short-time work benefits.
Broader distribution of burdens by including capital owners; protection of companies or the self-employed by eliminating (e.g.) rent payments.
European Pandemic Equity Fund (EPEF)
- The majority of government support programs in the Corona Crisis are in the form of credit: firms receive loans through the government at favourable costs to compensate for their shortfall in revenues.
- However, even if credit conditions are attractive, the firms have to repay these loans eventually. This raises the indebtedness (or leverage) of firms. It is not unlikely, that firms will limit their investments after the crisis because they have to repay their rescue loans (a so-called “debt overhang” problem).
- Therefore, the present proposal doesn’t want to support firms with credit (a form of debt) but with equity. For large companies, the government would buy part of their stocks, thus partially nationalizing those firms. For smaller firms, the government would pay direct support but would require a raise in the corporate profit tax after the crisis.
- Both forms of support have a similar effect: Firms receive debt-free support today, to survive the crisis. Once Corona is subdued, the government could also benefit from the program: either by selling the shares it bought from larger firms or by the higher corporate tax inflows from smaller firms.
- The fund that is to make these cash transfers should be organized on a European level. It could, for instance, be funded by a Corona-Bond. It is also possible (but not mentioned in the proposal) to attach conditions to the firms that receive equity funding (see the proposal above): pay minimum wages, don’t give out bonuses, follow ecological guidelines.
Companies that receive government support don’t leave the crisis overindebted. It is also a compromise between a direct transfer (a gift without repayment) and a loan. Also: European perspective and potential for ecological transformation.
Safety-Parachute for new hiring
- Current work contracts are stabilized during the crisis by short-term working subsidies. However, layoffs probably can’t be prevented. On the other hand, firms will start to hire new labour once the crisis withdraws.
- This proposal aims to subsidize new hiring by deleting any social security contributions for newly hired employees for one year. This measure would make new hiring much more attractive, including for low-income jobs.
- The researchers estimate this proposal to cost 12 billion Euro for Germany.
After the crisis, firms can quickly drive up capacities and hire new employees. The rise in unemployment will be reversed more quickly.