The Corner

Politics & Policy

CARES Act and Regulatory Fixes Needed for a Faster Recovery

The U.S. Capitol during a morning rainstorm on Capitol Hill in Washington, D.C., March 25, 2020. (Tom Brenner/Reuters)

This new paper by economists Jose Maria Barrero, Nick Bloom, and Steven J. Davis called “COVID-19 is also a Reallocation Shock” lays out the labor impact we should expect in the aftermath of this crisis and the government policies that will exacerbate it (h/t to Tyler Cowen):

As noted in a recent Wall Street Journal article, “The coronavirus pandemic is forcing the fastest reallocation of labor since World War II, with companies and governments mobilizing an army of idled workers into new activities that are urgently needed.” In other words, Covid-19 is also a major reallocation shock.

They then go on to explain how the developing “evidence on the extent and character of this reallocation shock for the U.S.” They summarize their results this way:

In other words, the COVID-19 shock caused 3 new hires in the near term for every 10 layoffs. These sizable new hires amidst a tremendous overall contraction align well with our anecdotal evidence of large pandemic-induced increases in demand at certain firms. …

Drawing on our survey evidence and historical evidence of how layoffs relate to recalls, we estimate that 42 percent of recent pandemic-induced layoffs will result in permanent job loss. If the pandemic and partial economic shutdown linger for many months, or if pandemics with serious health consequences and high mortality rates become a recurring phenomenon, there will be profound, long-term consequences for the reallocation of jobs, workers and capital across firms and locations.

Next comes a must-read discussion of the economic forces that will slow down the recover by reducing the job reallocation, including:

Policy responses to major shocks and inherited features of the policy landscape can further stretch out the creation response, slowing the recovery. In this regard, we discuss four aspects of U.S. policy that can retard creation responses to the pandemic-induced reallocation shock: Unemployment benefit levels that exceed earnings for many American workers under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, policies that subsidize employee retention irrespective of the employer’s longer term outlook, occupational licensing restrictions [that] impede mobility across occupations and states, and regulations that inhibit business formation and expansion.

They also list Certificate of Need (CON) regulations (they mention the work of my colleague Matt Mitchell and Center of Growth Opportunity’s Chris Koopman), and land-use restrictions as factors that will delay reallocation and recovery. Finally, they have an important section on the Paycheck Protection Program, which links firm aid to employee retention hence deterring productive reallocation. The line-of-credit proposal I developed with Arnold Kling would do no such thing, which is another reason why it is a vastly superior alternative to PPP. As we write:

Yet another advantage is that it contemplates a flexible economy that adapts to new circumstances, rather than only rewarding individuals and businesses that remain as they were before the crisis. Some businesses are trying to ramp up hiring even while others are laying off workers, and policy should allow individuals to respond to market incentives, rather than condition aid to businesses on their retention of workers regardless of how much those workers are needed.

If Congress must do something in the next few weeks, they would be wise to fix all these regulatory issues that will delay a return employment rather than spend more money.

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