Think:Act Magazine "Robustness"
How the US can rebuild its economy post-Covid-19
Nicholas Bloom and Steven J. Davis weigh in on how government can help stave off a recession.
by Nick Bloom and Steven J. Davis
The US economy is reeling in the wake of the coronavirus outbreak and all lockdown exit strategies have implications. Business and government are faced with some stark choices.
Milton Friedman famously likened recessions to strings on a musical instrument. The harder you pluck a string, the faster it snaps back. Adapted to the economy, Friedman's plucking model says that sharp recessions lead to rapid recoveries – a "V-shaped" path in the parlance of forecasting. Fast in and fast out. Many recessions fit Friedman's view; some do not. The financial crisis of 2007-08 brought a deep recession trailed by a long, slow recovery. We fear the same, or worse, could happen in response to the coronavirus crisis. If you pull too hard on a guitar string, it warps, frays or breaks. You get a feeble snapback or none at all. Likewise, a severe shock to the economy can produce an "L-shaped" slump rather than a short recession and quick recovery
Why are we so concerned? Large parts of the economy are in full or partial shutdown as of April. The one-third of us who can work from home are often sharing space with kids and spouses, coping with inferior equipment and using slow internet connections. The makeshift conditions undercut productivity.
Looking at the longer term, we fear a steep drop in innovation and a rupture in human capital investment. Universities, government labs and commercial facilities have shuttered non-COVID-19 research projects. Schools have sent students home and universities are making do with remote classes. Most job training programs have stalled. Immigration and trade – two facilitators of innovation – have shriveled.
Then, on the fiscal side, huge deficits will push government debt-to-GDP ratios to their highest levels in 75 years or more. There will be confidence crises in some countries, and incentive-sapping tax hikes in almost all countries.
How can policymakers lessen the near-term pain and stave off a long-term slump? One course of action is to provide unemployment benefits to cushion income drops for those who lose jobs. Here, design details matter. Letting gig workers and the self-employed into the unemployment insurance system makes sense – as does relaxing job search requirements while the pandemic persists. The CARES Act does both for the US.
Unfortunately, the Act also raises benefit levels above what most workers earn on the job. For taxi and Uber drivers with no passengers, the CARES Act says: Don't deliver groceries and meals to elderly folks who are highly vulnerable to COVID-19. Don't take one of the hundreds of thousands of new jobs at Amazon, Walmart and other growing businesses. Instead, stay home and collect a bigger paycheck, courtesy of the government. To the restaurant owner who contemplates a shift from dine-in to take-out meals, the Act says: Don't try to save your employees' jobs. Instead, lay them off, so they can collect a bigger check from the government. To those who stay on the job in hospitals, nursing homes, grocery stores and other essential activities – often risking their own health and that of family members – it is terribly unfair that others get paid well for not working.
A key first step is to restore unemployment benefits to sensible levels. Put the right incentives in place and markets will respond. Supermarket chain Kroger created an exchange with Sysco and Marriott Hotels to hire workers laid off from food service and hospitality companies. CVS Health partnered with the Hilton hotel chain, clothing retailer Gap and Delta Airlines to recruit 50,000 new staff. Uber now lists job openings at 7-Eleven, Amazon and McDonald's for its unemployed drivers.
An even more important step is to be generous with funding to spur development of coronavirus tests, treatments and vaccines. Accelerate regulatory approvals. Pay companies well to produce and deploy tests, treatments and vaccines as they become available. Nothing will more quickly resuscitate the economy than an effective, widely deployed vaccine.
The third step is to selectively relax the lockdown. Many jobs in construction, manufacturing, warehousing, landscaping, gardening, auto repair and more can be readily adapted to safe social distancing practices and routine health checks. Starbucks coffee shops in the US adopted practices first developed and deployed by Starbucks in China: aggressive cleaning, paying workers to quarantine and an emphasis on take-out offerings.
Fourth, governments must promulgate best practices in sanitation, hygiene, virus detection, and contagion control. Multinational firms like Starbucks have the resources and knowledge to identify and adopt best practices. Smaller businesses do not. National and local authorities have a vital role to play in telling businesses, employees, and customers what it takes to operate safely in the new world, so we can all get back to work – in old jobs or new.
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