The announcements from Macy’s and Gap on Monday that they are furloughing the majority of their more than two hundred and fifty thousand employees didn’t come as a surprise. With large swaths of the U.S. economy effectively shut down, businesses large and small are slashing payroll and other costs to try and ride out the public-health crisis. Faced with online competition, bricks-and-mortar retailers like Macy’s and Gap were struggling even before the coronavirus hit. Given the current economic environment, the companys’senior executives arguably didn’t have much of an option in resorting to mass idlings.
In the coming days and weeks, countless other firms may well act in a similar way, if not more drastically. According to calculations from economists at the Federal Reserve Bank of St Louis, the COVID-19 outbreak could, absent government intervention, lead to forty-seven million lost jobs, and an unemployment rate of 32.1 per cent this quarter. Thanks to the stimulus bill that Congress passed last week, most workers who lose their paychecks will be eligible to receive expanded unemployment benefits. But, even if their short-term financial losses are limited, they will suffer the trauma of being laid off and not knowing whether they will be rehired when the crisis ends. And the sight of unemployment mounting dramatically could trigger alarm in the rest of the economy, creating a downward spiral.
Does it have to be this way? Not necessarily. As the virus and lockdowns have spread around the world, other countries have created a different type of economic environment—one that incentivizes businesses to keep employees on their payrolls rather than giving them a pink slip. On Friday, March 20th, Rishi Sunak, Britain’s Chancellor of the Exchequer, who has only been in the job since February, announced that “for the first time in our history, the government is going to step in and help to pay people’s wages.” Under the U.K. Coronavirus Jobs Retention Scheme, any British employer, large or small, is now eligible for a government grant that covers about eighty per cent of the wages it pays to employees who aren’t working because of the crisis but are kept on the payroll.
Britain didn’t originate this approach. It copied Denmark, whose government had announced, five days earlier, that it would pay seventy-five per cent of the wages of salaried employees who are furloughed, and ninety per cent of the wages of hourly employees who are in the same position. In Denmark and Britain, there is an upper cap on the government payments, which is tied to the typical wage level, but there is no limit to how many workers can be included in the schemes. “It’s an investment that will be very expensive,” the Danish finance minister, Nicolai Wammen, said in announcing his country’s plan. “But the alternative is that even more people would be sent out into unemployment at a time when the opposite is needed.”
The governments of Ireland and Italy have also vowed to pay the cost of keeping workers employed. France and Germany, the two biggest economies in the European Union, are expanding existing subsidies that were provided to workers placed on reduced hours. In responding to the effects of the virus, throughout Europe, the guiding principle has been the same: everything possible should be done to avoid mass unemployment.
In theory, at least, the same principle could have been applied here. A few weeks ago, when a big stimulus bill was being debated, some economists on both sides of the political divide called for the federal government to pay firms to keep employees on their payrolls even if they weren’t working. In a policy brief published in March, Emmanuel Saez and Gabriel Zucman, two liberal-leaning economists at the University of California, Berkeley, argued that the federal government needed to “act as a payer of last resort so that hibernating businesses can keep paying their workers (instead of laying them off).” Four days later, Glenn Hubbard, who served as the chairman of the White House Council of Economic Advisers in the George W. Bush Administration, and Michael Strain, an economist at the American Enterprise Institute, put forward a coronavirus plan focused on “allowing workers to continue being paid by their employers during the coronavirus crisis.”
Under the Saez and Zucman proposal, any employer adversely affected by the virus shutdowns would tally its total monthly running costs, including things like rent and interest payments as well as wages, and the Internal Revenue Service would issue a payment to cover them. This is similar to the British scheme, which is being run through H.M. Revenue and Customs, the British equivalent of the I.R.S. The Hubbard and Strain proposal is restricted to small and medium-sized firms, and it would operate largely through the commercial-banking system. Firms would take out bank loans to cover their running costs for the duration of the crisis, and, as long as they didn’t lay off any of their workers, the federal government would repay the entire loans.
Despite the differences between the two plans, they share the common goal of preventing businesses from going bust and avoiding the sort of mass layoffs that we are now seeing. When I spoke with Hubbard, on Tuesday, he said that allowing mass unemployment to develop, even on a temporary basis, would create at least three big problems: states would struggle to deal with a deluge of unemployment insurance claims; valuable relationships between individual employees and firms that have taken years to cultivate would be destroyed; and many firms would go out of business. “It disrupts the entire economic system,” Hubbard said. “You don’t want massive business failures. The notion that these businesses will just pop back up when the crisis ends is fanciful.” Zucman, whom I spoke with later on Tuesday, echoed much of Hubbard’s analysis, and he also stressed the human cost of getting laid off. “Unemployment is anxiety-inducing,” he said. “It’s very different being laid off rather than keeping your job at eighty per cent of your wages.”
The stimulus bill concentrated, first and foremost, on providing immediate assistance to people who saw their incomes fall or who lost their jobs. In addition to providing a cash payment of twelve hundred dollars to most adult Americans, it raised unemployment benefits by six hundred dollars a week, extended their duration by three months, and made gig workers eligible to receive them for the first time. Arindrajit Dube, an economist at the University of Massachusetts, Amherst, reminded me that there were some strong arguments for going down this route. With many service-industry workers already being laid off, the quickest way to help them was to use the unemployment-insurance system and cash transfers. “What Congress passed has some issues,” Dube said. “But it did provide a first level of support, a safety net, for many millions of families that are facing unemployment.”
The bill also went some way in the direction of what Hubbard and Strain had proposed. It set aside three hundred and sixty-six billion dollars for the federal government to recompense small and medium-sized firms that employ fewer than five hundred people and keep their payrolls intact. Rather than having the federal government dispense the money directly, as Britain and Denmark have done, the scheme would rely on private lenders to extend forgivable loans, with the Small Business Administration playing a supervisory role and the federal government paying the banks a processing fee. “It is not as generous as I would have proposed, but it’s the same basic idea,” Hubbard said. “You go to your bank, show them last year’s tax return, and get a loan to cover payroll and other costs for eight weeks.” If, at the end of that period, you haven’t reduced your payroll numbers, the federal government would repay the loan in full.
