America is at war. We are facing an enemy, COVID-19, that has already killed 45% more Americans than the Vietnam, Korea, Iraq and Afghanistan wars put together. This enemy has created countless non-public tragedies, divided the country, and is attacking the engine of our economic expansion and prosperity: the sector and the middle class. So far, according to the maximum indicators, we are losing. It’s time to rethink our strategy to fight economic warfare.
While the Fed’s $3 trillion financial policy reaction has been broad, there are apparent geographical and socioeconomic inequalities as to who benefits from this reaction. Disturbingly, our research suggests that states where politicians are extremely reluctant to higher restrictions and higher spending (e.g. Texas, Florida, and Georgia) are doing much less economically – and with fewer prospective benefits from existing economic policy reactions – than states with a more cautious attitude. (e.g. Pennsylvania, Delaware, and Maryland).
Given the inequities and limitations of the existing financial policy response, we call on Congress to respond with a fiscal policy that recognizes two realities. First, we’re at war with our ultimate damaging adversary in over 70 years. Second, victory is not imaginable without expense and sacrifice.
To illustrate the limited effect of the reaction of existing financial policy on spatial properties, we have developed an index of the degree to which spatial properties can benefit from low interest rates. To build our index, we use the latest knowledge, after COVID-19, on employment, source of income, housing property and space prices. Then we categorize the states into 3 groups: the best, the middle, and the weak. As this map shows, spatial properties in the Midwest and South are incredibly poor and are the least maximum likely to gain financial policy benefits due to low median income sources (Louisiana and Georgia), higher unemployment (Florida and Nevada) and/or low asset rates (Texas).
The inequality in the ability to gain advantages directly from financial policy suggests that Congress will have to open a front for the time in our economic war opposed to COVID-19: a significant fiscal policy in times of war. The CARES Act and the initial stimulus were a smart start. But it was transience and provided an immediate recovery, which did not materialize. Congress will have to counterattack on 3 fronts:
The Treasury has services for low-quality corporate debt loans, and Fannie and Freddie Mae have a history of buying mortgages. Congress deserves to develop those amenities to buy customer loans. By sharing threats with the government, such an facility would protect banks that lend cash to families and maintain clients’ access to capital. While buying customer loans may seem dangerous, the default rate for credit card loans is traditionally lower than mortgages, suggesting that these loans carry fewer threats than those already purchased through the government.
We propose to create a reimbursable corporate tax credit that provides a payroll subsidy equivalent to one hundred dollars to workers up to $2,500 to the worker per month. A beneficiary wage subsidy would inspire corporations not only to layoffs, but also to resume hiring, as hiring would be subsidized directly through the government. The worker may be fired at any time (in which case the company would lose tax credits) and employers would still be guilty of offering non-wage benefits, such as fitness insurance. If this program worked so well that it restored the economy to pre-COVID-19 employment levels, the maximum cost of those subsidies would be less than $2 trillion in lost tax revenue, such as the CARES Act.
We want wartime fiscal policy. We pay maximum value for wage wars in Afghanistan, Iraq, Vietnam and Korea, wars in foreign countries with questionable direct benefits for American households. The negative consequences of spending another $2 trillion to combat economic warfare at home are less than the threat of a global recession, countless non-public tragedies, and the polarization of the accompanying American policy.
Yadav Gopalan is an adjunct professor at the Kelley School of Business at Indiana University. Thomas Lys is Professor Emeritus at northwestern University’s Kellogg School of Management. Daniel Taylor is an associate professor at the Wharton School at the University of Pennsylvania.
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