If you haven’t played it already, go ahead and give this game a try: The Fed Chairman Game. I have a lot of fun playing this game in class, especially with students who have been taught monetary policy. It usually turns out to be the case that they haven’t understood it quite as well as they think the have! (To be clear, that’s the fault of our educational system, not the students.)
But the reason I started with that is because the game always throws up a scenario that mimics a crisis, and asks you what you would do if you were the Chair of the Fed.
In this case, policymakers the world over are now staring at a very real crisis, and they need to be asking themselves: what should we do?
There are two broad answers, of course: monetary policy, and fiscal policy.
The Federal Reserve has cut interest rates to zero, and while it has other tools to stimulate the economy, a crisis like this requires fiscal as well as monetary responses. The legislation passed thus far has been important, but another round of fiscal policy will be required immediately to fully address this crisis.
A robust fiscal response can provide income support to households, ensure broad and continuous access to safety net programs, provide incentives for employers to avoid layoffs, provide loans to small businesses, give liquidity cushions to households and firms, and otherwise stimulate the economy.
That’s a write-up from Brookings. The specifics follow in that article, but the article makes the point that more of the lifting will need to be done by fiscal, rather than monetary policy. And that is true for a variety of reasons, which the article does not get into, but long story short – fiscal, more than monetary.
But, ok, fiscal policy of what kind? Should we give money to firms or to workers? Here’s Paul Krugman with his take…
Since it sounds as if Trump still wants a payroll tax holiday, a wonky point that is actually crucial: workers wouldn't get any significant benefit from a cut in the employer contribution. We shouldn't do this in any case, but definitely no employer cuts 1/
— Paul Krugman (@paulkrugman) March 17, 2020
And here’s Alex Tabarrok with his response:
Paul is still thinking in Keynesian rather than supply shock terms. A payroll tax holiday may be a good idea to keep businesses afloat, e.g. restaurants. Workers will benefit if firms will hold on to employees long enough to weather the crisis. https://t.co/baUUmu7MVc
— Alex Tabarrok (@ATabarrok) March 17, 2020
So what’s the correct answer? Well, as we’ve learnt before, and will learn again, macro is hard! In an ideal world, all of the above, but as is manifestly clear, we are not in an ideal world. If we must choose between giving money to firms or to people, to whom should we give it? My opinion? People first, businesses second. This is, of course, a US centric discussion, what’s up with India?
Here’s, to begin with, a round-up from around the world – you can search within it for India’s response thus far.
Calls are getting louder for governments to support people and businesses until the new coronavirus is contained. The only questions are how much money to shovel into the economy, how to go about doing it, and whether it will be enough.
Already, officials from Paris to Washington DC are pulling out the playbook used in Asia for slowing the spread of Covid-19: they’re restricting travel and cracking down on public gatherings. While those measures have the potential to reduce deaths and infections, they will also damage business prospects for many companies and cause a synchronized worldwide disruption.
Here’s the FT from two weeks ago about the impending slow down:
Venu Srinivasan, whose company TVS is one of India’s largest makers of motorcycles and scooters, said the business had lost about 10 per cent of production in February owing to a lack of Chinese-made parts for the vehicles’ fuel injection system. He added that TVS has now managed to find a new supplier.
But Mr Srinivasan said he was bracing for India’s recovery to take longer than anticipated. “One would have expected a V-shaped recovery, but instead you have an L shaped recovery,” he said. “It’s been the long haul.”
R Jagannathan in the LiveMint suggests this:
This is how it could be designed. Any unemployed urban youth in the 20-30 age group could be promised 100 days of employment and/or skilling options paid for by the government at a fixed daily rate of ₹300 (or thereabouts, depending on city). At an outlay of ₹30,000 per person annually, the unemployed can be put to work in municipal conservancy services, healthcare support, traffic management, and other duties, with the money also being made available for any skill-acquiring activity chosen by the beneficiary (driver training for Ola-Uber, logistics operations, etc). All companies could be given an opportunity to use the provisions of the Apprentices Act to take on more trainees, with the apprenticeship period subsidized to the limit of ₹30,000 per person in 2020-21. If the pilot works, it could be rolled out as a regular annual scheme for jobs and skills. Skilling works best in an actual jobs environment.
He also mentions making the GST simpler, which the Business Standard agrees with:
Certainly, the rationalisation of GST will also affect government revenues. However, a simpler and more transparent system would allow greater collection and reduce evasion. The government will receive a windfall this year from lower crude oil prices. The moment to move on the structural reform agenda is now. The GST Council has done well to address the inverted duty structure in mobile phones. Further rationalisation will give confidence to the market that the government is serious about reforms. It was promised that GST would remain a work in progress, and that the GST Council would act often to improve it. So far, however, the changes have been marginal and haphazard. A more structured and rational approach, which outlines a quick path to a single rate, would pay dividends for the economy in the longer run. It would also be an effective way to manage the immediate effects of a supply shock such as is being caused by the pandemic.
Also from the Business Standard, a report on the government now considering (not happened yet) relaxing bad loan classification rules for sectors hit by the corona virus. That’s pretty soon going to be every sector!
Assorted Links about the topic – there’s more to read than usual, please note.
Here is Tyler Cowen on mitigating the economic impacts from the coronavirus crisis.
Here’s Bill Dupor, via MR, about the topic:
First, incentivize behavior to align with recognized public health objectives during the outbreak.
Second, avoid concentrating the individual financial burden of the outbreak or the policy response to the outbreak.
Third, implement these fiscal policies as quickly as possible, subject to some efficiency considerations.
Again, via MR, New Zealand’s macro response.
Arnold Kling is running a series on the macro response to the crisis.
Claudia Sahm proposes direct payment to individuals:
This chapter proposes a direct payment to individuals that would
automatically be paid out early in a recession and then continue annually
when the recession is severe. Research shows that stimulus payments that
were broadly disbursed on an ad hoc (or discretionary) basis in the 2001 and
2008–9 recessions raised consumer spending and helped counteract weak
demand. Making the payments automatic by tying their disbursement to
recent changes in the unemployment rate would ensure that the stimulus
reaches the economy as quickly as possible. A rapid, vigorous response to
the next recession in the form of direct payments to individuals would help
limit employment losses and the economic damage from the recession.
Here are the concrete proposals, the entire paper is worth a read:
Automatic lump-sum stimulus payments would be made to individuals
when the three-month average national unemployment rate rises by
at least 0.50 percentage points relative to its low in the previous 12
• The total amount of stimulus payments in the first year is set to
0.7 percent of GDP.
• After the first year, any second (or subsequent) year payments would
depend on the path of the unemployment rate.
Macroeconomics IS HARD!
The NYT, two weeks ago, on the scale of the problem facing policymakers.