When the virus struck, the priority was to protect fragile firms and workers. As the lockdown ends, the focus must change from protection to reallocation. How it should done is the topic of a piece by Jean Pisani Ferry, Thomas Philippon and me. bit.ly/3dIiHCY
The challenge is to do it in an environment of high unemployment, and high uncertainty both about the course of the virus and the end of physical distancing constraints, but also about which sectors will contract and which sectors will expand in the medium run
We argue for the following architecture. For workers, extending the duration of unemployment benefits. Where it exists, maintaining the partial unemployment schemes, that have kept the link between firms and workers, and allowed for a smoother distribution of funds.
For firms, we argue for two types of help. First wage subsidies, for two reasons. The first is that, with such very high unemployment, laying off more workers is likely to lead to a long period of unemployment, rather than a quick move to a new job.
The second motivation is that the adverse productivity shocks triggered by physical distancing will go away. It would be rather stupid to have most restaurants go bankrupt now only to have new ones reopen when physical distancing constraints are gone.
The second type of help to firms is an extension of partial loan guarantees, so firms have access to credit at low rates. The reason is that, in an environment of high uncertainty, banks may be very reluctant to extend credit. Partial guarantees can convince them to do so.
Subsidies and loan guarantees do not imply that all firms will survive. Some will no longer be viable. Others may be viable but burdened by debt, and need to be restructured. Normal restructuring processes are likely to be overwhelmed. A simpler restructuring process is needed.
For most firms, the two main creditors are likely banks and the state. We argue that banks know much more about SMEs than the state does. We also argue that banks are likely to close more firms than is socially optimal.
We thus suggest that the state delegate to decision to the banks by offering a simple rule: If banks close the firm, the state is treated pari passu. If banks restructure the firm, the state accepts a larger haircut than the bank.
Finally, we argue that the degree of wage subsidies and of loan guarantees should decrease over time, in line with the decrease in unemployment and in uncertainty. Such flexibility can for example deal with a second wave, was such a wave to come.
