Thread by @R2Rsquared

** Package of fiscal policies for the quarantine times

Follows my earlier thread emphasizing the impact of #covid19 crisis on the productive capacity of the economy. Focusing policy on making the loss of potential output smaller and more transitory.

[1/16]

a) No limit to spending on respiratory equipment, emergency hospital beds, and hiring health staff. Pay for factories producing ventilators to work round the clock at fastest rate possible, as a national emergency. International aid going around border lockdowns.
[2/16]

b) Keep automatic stabilizers well funded, and make payments and approvals faster than usual: unemployment benefits, food support, safety net. Social insurance is crucial to support vulnerable households.
[3/16]

c) Strengthen layoff and recall policies, including government loans to firms to fund them, so that workers can be home temporarily and keep getting paid X% of wage, with a high X.
[4/16]

d) Firms and the self-employed can defer social security, payroll, and other tax payments and pre-payments. Emergency short-term credit lines for firms, plus a debt moratorium of X days. Firms need credit to keep paying wages when revenues fall. In Europe, involve EIB.
[5/16]

f)Governments and legislative action: don't let workplace regulations and labor laws prevent firms and workers from moving as much work to the home as possible. Be vigilant about licensing and other restrictions that hinder the fast adjustments the economy will need to make
6/16

g) Some firms in infrastructure transport sector may not make it past the shock. Get ready for public support and bailouts of airlines. Two concerns: first, nationalisations that are captured by interest groups; second, how to split support when owned in different countries
7/16

What I did not include:
i) Tax cuts as opposed to payment delays: if people can’t get to work or spend, see little point increasing marginal rewards to do so. For now, focus on credit and on avoiding cascading defaults.
[8/16]

Not included:
ii) Permanent transfers as opposed to safety net payments, and credits: if people can’t get to work or spend, see little point relying on MPC aggregate demand channel. For now, focus on social insurance that prevents temporary shocks becoming permanent.
[9/16]

iii) Keeping government deficits low and public debt stable: a main purpose of public debt is to fight national emergencies, now is the time to spend. For now, focus on health and the macroeconomy.
[10/16]

Missing important dimensions are financial and monetary policy measures, as well as the crucial policies post lockdown, and distribution of public support. These are left for later posts, but some words right now:
(On health policies, I’m not competent)
[11/16]

Missing:
1. Measures above put *huge* pressure on the banking sector. Need financial policies to complement the fiscal policies, and these are crucial. More on those later.
[12/16]

Missing:
2. Inflation: in the next few months, we will have large relative price movements that will make measuring pure inflation hard. Monetary policy needs nerves of steel. More on those later.
[13/16]

Missing:
3. As important as the economy at t, so is the productive capacity in period t+1, after the quarantine is over. Plan now for stimulus to economy on both supply and demand side once we can get back to work. More on those later.
[14/16]

4.Many regions were (rightly) advised to run massive deficits in 08-10 to fight global recession. Legacy debt later contributed to debt crises that caused huge pain. Raising public debt yes, but is it local, national, international, guaranteed by who or what? More later
15/16

Final words: In these times of emergency, it is a duty to contribute to discussion on topics of your expertise. You can disagree, rebut, note the many things I’m missing, or where I may be wrong. Please also read what others write. I dont have an economic panacea to offer
[16/16