Pierre-Olivier Gourinchas

Foreign Affairs, March 26, 2020

After wasting nearly three months watching the pandemic crisis from afar, Americans awoke to a new reality in the last two weeks: no one is spared. The world is engaged in a momentous battle against an invisible enemy.

Unchecked, the disease caused by the novel coronavirus, known as COVID-19, will overwhelm any health-care system, leaving vast numbers of people with no proper treatment and a grim prognosis. The numbers are almost beyond comprehension. According to a recent and widely circulated report from the Imperial College COVID-19 Response Team, the demand for critical-care beds could exceed maximum capacity 30 times over in both the United Kingdom and the United States. That same study estimates the loss of life at 2.2 million for the United States alone.

Most countries were caught largely unprepared. Some, including the United States, were even outright complacent. The time will come to draw the proper lessons.

Right now, the priority is the pandemic. Health experts are unanimous: we need drastic social-distancing policies.

Suppression policies buy time. That time must be used well. Ultimately, the battle can be won only by drastically raising the capacity of the health-care sector: more beds, more ventilators, more facemasks, more tests, more health-care professionals, more vaccine funding, more testing, more tracking. Such an expansion requires an important reorientation of part of our productive sector. That shift is (slowly) happening in many countries.

Shutting down the economy, even for a short period of time, inflicts considerable damage. Imagine that, relative to a baseline, suppression policies reduced economic activity by 40 percent for two months, after which time the economy returned to the baseline. Such a sharp but short-lived decline would deliver a powerful blow to economic activity, leading to a decline in annual output growth of about 6.5 percent, relative to the previous year. Imagine that it took another month to return to the baseline, and the decline in annual output growth reaches 10 percent.

Not by coincidence, the measures that can help solve the health crisis can make the economic crisis worse—at least in the short run—and vice versa: stricter health policies force a larger economic shutdown, a larger blue-shaded area. Yet, although this dynamic may look like a tradeoff, it is not really one: in the short run, there is no other choice but to buy time so that the United States can ramp up its public health response to the virus. As it does this, it will gradually be able to relax the confinement policies to control both the disease and the economy.

Moreover, even if there were no containment policies, a severe recession would eventually occur, fueled by the growing disorganization that an uncontrolled pandemic would provoke and the resulting precautionary and panic behavior of households and firms. This likelihood makes it all the more dismaying to see the current administration tempted to reverse course. Ultimately, ending the containment policies may not help the economy, but it will definitely increase the body count.

Instead, the right economic policy is to act to prevent this economic contagion.

The first economic priority should be to ensure that workers can remain employed—and collect paychecks—even if they are quarantined or forced to stay home. Short-time work policies, which lay off workers for a certain number of days per week or hours per day but still guarantee some payment and continuity of employment, can be an important component. Germany has adopted such policies. So have France and the United Kingdom. Direct cash assistance should be considered for the self-employed and for workers with weak attachments to the labor market. The U.S. federal government has the further imperative to channel financial support to the state and local governments that manage many safety nets. Without such policies, it is even unclear whether public health advisories can be followed. With them, households can make basic payments while confined at home and resume work quickly when allowed.

At the same time, economic policy has to ensure that small and medium enterprises can weather the storm without going into bankruptcy. Authorities can do this by offering easier borrowing terms, temporarily waiving corporate and payroll taxes, suspending loan payments, or providing direct financial assistance where needed. Finally, policies will be needed to support the financial system as nonperforming loans mount, so as to ensure that the crisis does not morph into a full-blown financial crisis.

The need for taxpayer money to support large nonfinancial corporations is much less obvious. The bankruptcy code is here to protect corporations from creditors, allowing them to continue to operate during and after a crisis. Lobbyists should not be permitted to use this national emergency to line the pockets of their masters.

The timing of these economic measures is important. They are most acutely needed while the economy is in shutdown mode. Stimulus packages after the health crisis is over will be necessary only if we do not manage to act decisively right now, and they could potentially be much costlier.

The cost of the measures outlined above will be momentous. Governments may need to provide income support on a scale roughly comparable to the output lost. If total output loss is on the order of ten percent of annual GDP, a government may need to spend a comparable amount to buttress the economy. Authorities now understand this, and the fiscal packages announced in the last few days in many countries are substantial. They will be financed by debt.

Should we worry about that debt? The short answer is no. To start with, borrowing rates for sovereigns are at historic lows—even more so since the crisis began. The yield on ten-year U.S. Treasury bonds is close to one percent. Rates in the eurozone are similarly low. At these rates, a ten percent increase in the ratio of debt to GDP would increase annual interest payments by only 0.1 percent of GDP. If now is not the time to borrow to support an economy on the verge of collapse, when is?

Bold policy initiatives can help contain the looming recession. They all start with public health policy in the driver’s seat, limiting “human contagion.” Fiscal and financial policies should be designed to address the resulting shock to our economic system and prevent “economic contagion.” Bold actions are called for, but boldness must not provide a cover for corporate handouts. Fiscal support must be at scale, but it also must go where it is needed most.

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