The Three Best And Worst Ideas Of The Crisis

Authored by Veronique de Rugy via The American Institute for Economic Research,

In typical fashion, politicians in Washington already are talking about passing, before the August recess, another COVID-19 bill. Never mind that between the Federal Reserve and the spending, the sum injected into the economy now exceeds $10 trillion. Overlook also the fact that we don’t know what the economy will look like when businesses are allowed fully to reopen. And forget that only half of it has been spent so far, so there is still a lot of money to go around. Yet, they still want to spend more.

But in the spirit of being constructive, let’s actually look at what are likely the three best policies Congress should consider going forward. And then let’s compare these policies to the worst ones that have already been implemented. That’s the challenge that I was given at a recent Webinar for the Mercatus Center. Here are my answers.

I picked as my three best policies ones that target America’s most significant looming issues. (Some of these issues, unsurprisingly, were created by government interventions in the first place.) Good policies, of course, should allow for flexibility and innovation without bankrupting future generations, which I think these do. And the ones I picked also capitalize on the many deregulations that were implemented in the last few months. 

The first policy comes from an idea proposed originally by Arnold Kling. It was put forward as an alternative to the Payroll Protection Program (“PPP”). Rather than inject more money, as does the PPP, into businesses through agencies like the Small Business Administration, a better policy would be to extend a line of credit to every checking account in the country, individual and business alike (You can find the details here).

The individual part matters because 81 percent of small businesses are sole proprietors that do not exist as businesses in the eyes of the federal government and, thus, have a hard time getting loans through programs such as PPP. The money could be used for whatever individuals and businesses need, because if most people stay on top of their rents and car payments, it will help businesses but also reduce large distortions to the economy. 

The key part of this plan is that these loans are repayable. This requirement creates all the correct incentives needed to inject liquidity into the market and firms without having to worry about the debt and about abuses. This is not a silver bullet for an economy that would continue to be frozen for many more months—nothing can save us from that—but it could help as the economy recovers and people return to work and consumers return to their post-COVID lives at different speeds. It doesn’t require an entire bureaucracy and shouldn’t cost as much as alternatives aimed at achieving the same goal.

The second worthy idea for policy is to continue to free civil society from all the rules, regulations, and bad incentives that get in the way of us as individuals helping one another not only through the market process but also through charitable giving, churches, and other nonprofits. The most moving of the many different responses to this pandemic are the ways that people and companies went the extra mile – or two! – to help one another. 

For instance, companies changed their business model to supply food for low-income families, as well as the likes of hand sanitizers, face masks and other needed goods to their communities. And let’s not forget the ways that companies, because of the globalization of science, have organized and collaborated to study the virus and to search vigilantly for a vaccine or a cure.

Unsurprisingly, regulations got in the way of much of this private initiative. And while some of these regulatory obstructions were removed, many remain that will get in the way next time around. We must get rid of all of these barriers so that businesses and everyone can more freely and better adapt and innovate whenever the next crisis comes around–whatever that crisis is.

The final worthwhile idea is the brainchild of my colleagues Patrick McLaughlin, Matt Mitchell, and Adam Thierer. They propose creating a commission similar to the Base Realignment And Closure. This new commission would identify and study all the rules revised or suspended during the current crisis and then make recommendations for each rule to be terminated or reformed, thereby crafting “a plan and timetable for automatically sunsetting or comprehensively reforming those policies or programs as part of a single reform package.” 

They call it the Fresh Start Initiative.

The next question that I and the other panelist were asked is, “What are the three worst policy suggestions that have come across your desk?” 

That’s a hard question to answer since there are so many terrible policies to choose from.

That said, I believe that possibly the worst one, hands down, is the matter that I wrote about in this space last week: that’s the way Congress designed the unemployment-insurance expansion. My issue here is less that government expanded the benefit – under the current UI system the federal government always does so during recessions – but by how much these benefits have been expanded.

In response to the COVID crisis, benefits were expanded by $600 a week to most people unemployed or furloughed, including those who weren’t eligible for such benefits before and who decided to quit their jobs (as opposed to being laid off). The disincentives to work are and will continue to be huge since 68 percent of those getting benefits now make more by not working than they did when they were working. It’s clear to me that these benefits in their current form should not be further extended past July. Better yet, the UI system should be reformed entirely.

The second bad policy put in place is the bailout of airlines. Bailouts are never the right way to address a company or industry’s financial troubles. Such handouts create serious moral hazard and other perverse incentives going forward.

You see these terrible incentives with the airline bailouts. Gary Leff and I laid out the case here. But as with all bailouts, one of the worst things about these in addition to the cronyism of it all, is the bad precedent that it sets. Bailouts beget more bailouts without financial accountability. It is not surprising that airlines, many of which were bailed out in the past, were the first ones to beg for federal help out of the gate when the crisis started. 

This fact is even more infuriating given that these companies have a perfectly good and safe alternative available to bailouts – namely, bankruptcy. Airlines have gone through bankruptcy in the past. Moreover, bankruptcy does not prevent them from flying safely during the process.

The last bad policy that I highlight is actually a mix of all the many policies implemented. (I was tempted to pick the design of the PPP, including or maybe mostly because someone thought it was a great idea to have the aid flow through the Small Business Administration, an agency that has an impressive track record of messing up emergency relief.) Instead, I focus on the incoherent and conflicting approaches bundled together in the CARES Act.

Rather than figuring out whether we should rescue companies or individuals, Congress tried to rescue both. And when it gave money to individuals, Congress didn’t just send individual checks; it also implemented paid leave, as well as massively expanded unemployment benefits and more.

Adding insult to injury, unemployment benefits, as explained above, created incentives to drop out of the workforce, while PPP’s requirement for loans to be forgiven was that companies needed to keep their employees. This COVID-19 response was, to say the least, irresponsible and poorly thought through, and more about pushing through policies Congress already wanted before the pandemic but couldn’t get through.

There are many other bad policies that Congress has adopted, and there are many more terrible ones, I am sure, that our ‘leaders’ are tempted to adopt, such as state and municipal government bailouts, extending reemployment bonuses or making federal paid leave permanent.

The problem is that politicians will always be politicians, oversight never works, and the size of government grows.