What Would Fight a Recession?

The good news is that economists know plenty about how to fight a recession. It's just very, very expensive.
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Recessions happen from the ground up.

In a modern economy the recession cycle begins with an event that shakes consumer confidence, typically involving significant layoffs. This causes newly-nervous people to stop spending, saving in case of an emergency. This sucks the revenue from businesses, which begin to lay off workers as they lose customers.

Every laid off worker was someone else’s customer, though. So those newly unemployed consumers clutch their savings even tighter, dropping confidence further and causing still more businesses to lose money. This is called the negative feedback loop of recession.

Any number of events can trigger this cycle, from a stock market dip to a shortage of raw materials in a critical industry. Sometimes, though, it’s what economists call a “black swan event” – a disaster that absolutely nobody could have seen coming–like the coronavirus, a disease so frightening it has caused the government to shut down businesses and impose curfews across the entire nation.

Fighting the coming recession will be difficult. Young people and new graduates are about to have their careers kneecapped (again). Retirees will have to carefully consider their investments and workers of all ages face an imminent wave of layoffs. But policymakers can prevent the worst suffering. It just won’t be cheap.

Replace Incomes, Not Assets

At time of writing, members of Congress have begun hashing out the idea of making a cash payment in either one or two installments to all adult Americans. It’s a good start, but nowhere near enough.

To really push back on the recession, it isn’t enough to guarantee a single payment to each American, nor even two. Congress will need to guarantee a short-term income.

Stimulus bills are designed to kick-start a sluggish economy through an infusion of cash that gets consumers spending again. This can work in a traditional recession, when that spending can lead to a consequent uptick in hiring, but not in this case. There is no restarting the U.S. economy right now because the government has literally ordered it shut down. Businesses are either closed by government order or bleeding customers who fear getting laid off next.

A one-time cash payment won’t fix this. It can’t send waiters back to work at restaurants that have been ordered closed, and when fearful consumers get a one-off payment they tend to hoard that money as much as possible. They don’t know when, or if, the next check might arrive so the prevailing attitude becomes “this is what you have, make it last.”

Only certainty can push back that fear. To fight the coming recession, and get people spending again on the businesses that remain open, policymakers can't just give Americans money. They’ll need to give people the confidence to spend that money by guaranteeing every American that this is not the last check they’ll see. They can safely spend it because they’ll get another, then another and another until the crisis ends.

Subsidize the Businesses the Government Closed

The average restaurant and retailer has about 16 to 19 days' worth of cash on hand. The quarantine will force many of them to stay closed for more than twice that long. To survive, they will need a way to cover their costs.

Small businesses can scale some overhead by halting new orders, disconnecting services and laying off workers (all of which has ripple effects on other businesses and individuals), but many costs will remain fixed. There’s nothing a business can do to avoid paying rent, taxes, basic utilities, debt and other monthly bills. With no revenue coming in, those liabilities will bury most in just a few weeks.

The only way to avoid simply deleting bars, restaurants and retailers en masse during the quarantine is to replace the monthly income they depend on to pay these fixed monthly costs.

A burst of cash through something like a loan program is at best uneven help. Like with individuals, a business owner can’t plan around that. They don’t know when this crisis will end, so can’t plan for the kind of debt they can afford to assume. A loan might work for a period of weeks, but if the quarantine lasts for months? Few small businesses can assume that kind of debt and ever count on reopening their doors.

Businesses deserve extraordinary relief right now because we, as a country, have asked an extraordinary thing of them. They’ve been ordered to stop activity altogether for an indefinite amount of time. The only thing that can reliably make sure they reopen when the quarantine lifts is a simple guarantee: we will make sure you have the cash to meet your minimum obligations. Full stop.

Suspend Debt Collections

Debt is a recession multiplier. It functionally eliminates entire sections of income from households, dragging down their saving and spending power at exactly the time we need them to feel better about their finances. Worse, there’s nothing a household can do to budget around debt during hard times. Those payments remain fixed, sucking up money that could go to productive spending and local businesses.

A nationwide debt suspension plan would functionally boost incomes for Americans across the spectrum without any direct federal spending. It would let people spend the money that they dedicate to student loans, credit cards and auto payments on food, rent, medicine or even just keeping the local flower shop in business.

The first step should be a directive to suspend all collection and interest on any direct or subsidized federal lending. Among student borrowers alone this would amount to an average $200 - $300 per month income bump.

The plan needs to go further, though. While the government prevents millions of Americans from working, it also needs to prevent lenders from collecting pre-existing debt. Just like small business owners need to press “pause” on their livelihoods and dreams for the next few months, banks and lenders need to press “pause” on their collections. This will be an expensive policy, to be sure. Some lenders will need to be made whole, while others may simply have to take a haircut.

But if local flower shops and booksellers can lose months of profits and risk their very existence, there’s nothing wrong with telling banks to make some sacrifice for the common good.

Don’t Wait for Job Loss

It is simply not good enough to shore up America’s unemployment and safety net programs.

House Democrats in particular have led the charge on expanding unemployment benefits, Medicaid and SNAP as part of the coming fiscal stimulus. This is not a bad plan. In fact, it is essential, because no matter what we do a lot of people are about to lose their jobs. It has a central flaw though: Typically those programs don’t kick in until after someone loses their job.

The goal of a recession-fighting package should be to prevent mass unemployment and business closure as much as possible. Backstopping unemployment benefits will help to make sure that people are protected when they’re laid off but policymakers should also focus on preventing as much damage as possible, not merely alleviating the consequences.

Shoring up the social safety net is important at a time like this. It isn’t enough.

The truth is, fighting this economic battle will be a unique challenge for our nation’s economists and policymakers. Turning an economy off and then on again is something extraordinary and new. It will require solutions equal to the size of the challenge and its novelty.

These measures are only a start. For the government to truly prevent America from slipping into a deep recession (or even depression) it will have to launch sustained, committed projects. It will have to maintain the kind of spending not seen since World War II, and never undertaken in peacetime, and work with the business community to minimize layoffs. It will have to monitor for inflation, a particular risk while the Treasury pumps money into the pockets of consumers who have little to spend it on besides the last roll of toilet paper.

But this can be done.

Some of us will bear hardships for the sake of our fellow citizens. We don’t have to let them suffer alone, nor for very long, and we don’t have to slip into a recession. Not if we commit to avoiding it.