How can the U.S. get more transformative with its coronavirus-shock response? With payroll guarantees and an economic ‘deep freeze’ plan.

Since March 8, Congress has passed three bills to provide resources for health care and economic relief and recovery in response to the shock of the coronavirus. Yet more remains to be done. We should continue to make marginal improvements on the existing framework of response, but we should also think about how to move our policy response closer to the international best practices established by other countries.

At the heart of those best practices are payroll guarantees and a willingness to “deep freeze” the economy.

Other nations have shown greater social solidarity and a much keener recognition of just how different the coronavirus shock is from previous recessions. In essence, the public health response to the coronavirus has mandated an economic “sudden stop.” The challenge is giving households and businesses resources to live on during the shutdown (relief), while making an economic bounceback once the all-clear sounds as fast as possible (recovery).

One key ingredient in fostering a rapid recovery is preserving labor market matches between workers and their employers and allowing employers to continue paying fixed nonlabor costs during the shutdown period.

We should certainly hope we never have to do something like this again. But hope isn’t a plan.

Nations like the United Kingdom, Denmark, and the Netherlands have all taken on this kind of “payroll of last resort” plan, with the central government paying up to 90% of all payroll costs for firms affected by the public health shutdowns. Some proposals—like that forwarded by economists Emmanuel Saez and Gabriel Zucman—would go even further and would have the government essentially replace all demand in the economy over the shutdown period, becoming the purchaser of last resort and covering every business payment over this period.

In essence, all of these plans envision an economic “deep freeze,” in which large swaths of the economy shut down, but workers and businesses are held as near harmless as possible.

Given that the U.S. has passed three bills and allocated trillions of dollars already to approaches that do not lead to this kind of comprehensive “deep freeze” of the economy, it may be hard now to completely mirror other countries’ ambitious approach in the current crisis. However, it is far from guaranteed that we will never experience an epidemic-mandated shutdown ever again. The only thing worse than preparing to fight the last war is being unprepared even for a repeat of the last war. Further, even the current coronavirus might induce localized shutdowns in the coming years before a vaccine is developed.

Having a plan to “deep freeze” local economies without causing great human misery would be a smart thing.

One attractive plan going forward would hinge on a vastly improved unemployment insurance system (UI). If our UI system allowed temporary changes in the replacement rate of UI benefits relative to previous earnings and allowed for temporary changes in maximum benefits, then it could pay 100% of benefits for nearly every worker facing loss of employment during an episode like the one we’re facing now. Further, if the system could handle furloughs and short-hours compensation and not just layoffs, then all labor demand extinguished by a public health shutdown could be compensated for by the UI system, and furloughs would allow employers to temporarily shed labor costs but still remain attached to their workers.

Other changes to our UI system—like the ability to waive one-week waiting periods or requirements for active job search—have been undertaken already in the response to the coronavirus, so these could serve as models for future response.

Finally, and most fundamentally, the biggest change needed to our UI system would just be the simple ability to process claims in a timely manner. One of the best parts of bolstering our UI system in these ways would be that the system would simply function much better and more flexibly even during run-of-the-mill recessions. Decades of neglect of our UI system left us deeply unprepared for the coronavirus shock.

For fixed costs (rent and interest payments, for example) faced by businesses—particularly small businesses—during the downturn, provisions that extended grants to firms to make rent and debt service payments during a shutdown could be instituted, based loosely on the small business provisions of the recently passed CARES Act (we’ll talk a bit more about these provisions below).

Having wages paid directly to furloughed workers who remain attached to employers through the UI system would minimize the amount of money that had to run indirectly from the federal government through employers to employees during an economic “deep freeze.” For many firms, just having labor costs lifted off of them during this type of shutdown might be enough to allow them to get through the period, and the inevitably bureaucratic process of applying for grants to cover fixed costs could be skipped. If some subset of firms with particularly high nonlabor costs needed to lean on the ability to get aid for rent and interest payments (restaurants, perhaps), this could be more easily accomplished with fewer businesses overall crowding into this program.

Another option that leans less heavily on the UI system could have both labor and nonlabor fixed costs paid by the federal government for shutdown firms. This is largely what the money appropriated for the Small Business Administration (SBA) in the CARES Act is meant to do. However, the administrative capacity of the SBA and of banks serving small and medium-sized businesses is not obviously up to the task of having this money reach firms in time to keep workers attached to employers throughout the downturn.

A fundamental transformation of the SBA paycheck protection program (PPP), to make it more like what countries such as Denmark and the UK have done,

  • would likely see Treasury, not the SBA, manage the plan;
  • would remove size caps;
  • and would remove the role of banks as loan processors.

If it worked smoothly enough, many employers could choose to pay for continuing payroll with money allocated through this program rather than furloughing workers and having them claim UI directly. This would be an appealing near-term workaround for not having a well-functioning UI system.

Just because Congress has acted already and taken steps down a different path than the comprehensive “deep freeze” approach doesn’t mean it’s too late to come forward with a more transformative plan. We know that more help for relief and recovery is absolutely needed—our recommendations for filling in some of the more substantial cracks in the existing coronavirus response framework are detailed here.

Importantly, there is already talk of modifications to the SBA PPP plan that could let it function more substantially as an instrument for “deep freezing” small business payroll throughout the crisis, even without the fundamental transformations described above. For example, one provision that triggers forgiveness of the payroll protection loans is the share of the total loan that is not spent on payroll (25%). As noted before, some small businesses have higher nonlabor costs than this and so this might worry them that their loans will not be forgiven. Boosting the share of allowable nonpayroll costs would make this more attractive (to be clear, firms will still have to preserve their entire payroll to get loan forgiveness).

Congress could also think about boosting the overall allocation of money to the PPP, to reassure potential borrowers that money for loan forgiveness will not run out before it reaches them. Extra money could also slightly bump up the fees banks get for processing loans, with bonuses for timely processing. Finally, in recent days the Federal Reserve has also indicated a willingness to buy these guaranteed loans from banks to ensure banks retain enough capital to keep making loans. This was identified as a potential bottleneck for making loans that may now be removed.

The work in providing relief and priming recovery from the coronavirus shock is not done.

There are gaping cracks to be filled in to even the most admirable bits of relief and recovery measures that have passed. And we should move our national response as close as possible to international best practice as we can before the end of this crisis. This best practice is letting the large swaths of the economy enter a deep freeze that does no harm to workers and business owners, and lets them preserve labor market matches throughout the crisis. Getting as close as possible to this best practice in the current crisis will reduce human suffering, and having this model for the next time the national economy—or a large local economy—must reimpose physical distancing measures to fight an epidemic could be valuable.

We should certainly hope we never have to do something like this again. But hope isn’t a plan.