Our economic situation changed dramatically over the weekend when several of the nation’s mayors and governors effectively shut down the services sector of their economies in an effort to fight the spread of the coronavirus. Solutions floated last week, such as expanded unemployment insurance and direct cash relief to households, are still a good idea. But much more is needed.
To help understand the scale of what happens when you close down shops, restaurants, hotels, and the like, consider today’s updated GDP forecasts from Goldman Sachs. Their economists are now forecasting that the economy will shrink by 6 percent in the current quarter, and by 24 percent in April, May, and June. (Those rates are annualized.) Over the year, the economy will shrink by over 3 percent, according to their forecasts.
It’s hard to forecast right now, given so much uncertainty about the virus and the nation’s response to it. But the thrust is correct: Workers and businesses are in great peril — in much greater peril than was thought as recently as last Friday.
The Senate is trying to design an economic recovery package. Senator Marco Rubio’s plan is critical. I discuss it in a Bloomberg op-ed with economist Glenn Hubbard.
A crucial part is a plan by Senator Marco Rubio of Florida for government grants and loans of up to $10 million to eligible small- and mid-sized businesses, conditional on those businesses retaining their employees during the crisis.
There is much to commend in Rubio’s bill. Notably, it would provide grants to eligible businesses to cover all payroll expenses incurred between March 1 and June 30. A full grant would only be available to businesses that did not lay off workers. The program uses commercial banks, which would allow small businesses to work with bankers they already know and trust. The bill also contains provisions to expedite the delivery of capital to businesses.
This kind of help for smaller businesses is desperately needed to prevent a collapse of key services, including restaurants, shops, cafes and hotels. Providing payroll grants is a critical step in keeping service workers in their jobs, and in stopping the economy from losing the skill, networks and specialized knowledge these businesses have built up.
Rubio’s plan can be improved. The legislative language needs to allow grants to be spent on rent, and not just payroll.
Critically, the size of the bill needs to be expanded. Rubio allows for $300 billion in aid to businesses. Dr. Hubbard and I calculate that the actual need will be in the range of $1.2 to $1.5 trillion.
Hubbard and I have a paper on this. Here’s the summary:
The federal government should offer significant assistance to small- and mid-sized service sector businesses so that they can retain their workers. Financial assistance to small business is financial support to workers, allowing workers to continue being paid by their employers during the coronavirus crisis. The goal should be to replace a large portion of the revenue (not just the payroll expenses) those businesses would have generated in the absence of being shut down due to the coronavirus. Low-margin businesses will face great financial difficulty losing multiple months of revenue, and many if not most small businesses would rather shut down or lay off a significant fraction of their workforce than take out a loan, even with a favorable or zero interest rate. The number of potential layoffs the U.S. economy is facing is deeply troubling, and an aggressive policy response is urgently needed. We estimate the cost of replacing 80 percent of the revenue for three months of private-sector firms with fewer than 500 employees, excluding the manufacturing, health, education, and finance industries, to be $1.2 trillion.
Click here to read the full paper. And click here to read our full op-ed.
Congress is in a race against a massive wave of mass layoffs and business closures. The good news: The economic damage from shutting down the services sector can be confined to the spring. But that’s only possible if Congress acts immediately — and aggressively.