The Case for Public Furlough Assistance (Covid-19 Response)
March 18, 2020
The threat of Covid-19 is bringing the US economy to a standstill. But while the health benefits of staying home and avoiding public spaces are clear, this sudden and severe drop in demand puts vast numbers of businesses at risk of bankruptcy, and millions of employees at risk of losing their jobs. The government is prepared to spend huge sums to shore up US businesses and help workers. The question now is: which interventions will be most effective?
Unfortunately, traditional stimulus measures are unlikely to solve this problem alone. Such measures, including interest rate cuts by the Federal Reserve and stimulus checks mailed to US households by the Treasury, seek to fight a drop in demand by encouraging households to spend more. But while traditional stimulus might work in a normal recession, it is poorly suited to the current environment for two reasons. First, due to infection risk, consumers may rationally be extremely averse to certain types of activity, such as dining in at restaurants, even if they feel they are affordable. Second, to the extent that these policies are successful, they may be counterproductive, by encouraging activities like restaurant visits that may spread infection further.
What might work better is a program of Public Furlough Assistance. This proposed program would allow businesses to temporarily furlough workers, with the government replacing part or most of their salaries. The businesses would be required to maintain each worker’s health coverage during the furlough, and would return them to employment afterwards. This program would be similar in some ways to traditional Unemployment Insurance, but would allow the worker to collect benefits without being laid off, avoiding painful unemployment spells for workers and, just as important, the loss of employer-based health insurance.
What would be the benefits of such a program? First, it would help adversely affected business and their workers at the same time. Businesses would be able to temporarily cut labor costs, helping to keep them afloat in difficult times, while workers would be able to maintain their incomes and benefits without permanently losing their positions.
Second, the program would be targeted, automatically directing relief toward the sectors of the economy that need assistance the most. How would this happen? The key is that only businesses facing severe drops in demand, like restaurants or airlines, will want to temporarily cut their labor force. Firms that may boom during the quarantine period, such as those providing teleconferencing software, may instead want all hands on deck, thereby incurring no expense to taxpayers under this program.
Third, this program would provide assistance without encouraging any additional economic activity that could spread infection. Unlike traditional stimulus measures, it could help restaurant owners and staff without a single additional dine-in meal being served. On the contrary, it provides a way for businesses to remain viable while intentionally cutting back on operations. Perhaps most important, it would allow workers in some of the jobs most prone to infection to keep their paycheck while waiting out the epidemic safely at home.
Fourth, the program would not be a bailout of irresponsible corporate behavior. Public Furlough Assistance would not advantage companies with excessive leverage or a shaky financial position over firms that took more prudent actions leading up to this crisis. For better or worse, furloughs will not be appealing for truly insolvent firms that need to lay off workers or shut down. Instead, the program would provide equal opportunities for relief to all firms wishing to temporarily scale back their operations.
A number of countries are already implementing similar programs, for example the Temporary Compensation Scheme in Denmark. Policymakers in the United States should strongly consider doing the same through Public Furlough Assistance.
The threat of Covid-19 is bringing the US economy to a standstill. But while the health benefits of staying home and avoiding public spaces are clear, this sudden and severe drop in demand puts vast numbers of businesses at risk of bankruptcy, and millions of employees at risk of losing their jobs. The government is prepared to spend huge sums to shore up US businesses and help workers. The question now is: which interventions will be most effective?
Unfortunately, traditional stimulus measures are unlikely to solve this problem alone. Such measures, including interest rate cuts by the Federal Reserve and stimulus checks mailed to US households by the Treasury, seek to fight a drop in demand by encouraging households to spend more. But while traditional stimulus might work in a normal recession, it is poorly suited to the current environment for two reasons. First, due to infection risk, consumers may rationally be extremely averse to certain types of activity, such as dining in at restaurants, even if they feel they are affordable. Second, to the extent that these policies are successful, they may be counterproductive, by encouraging activities like restaurant visits that may spread infection further.
What might work better is a program of Public Furlough Assistance. This proposed program would allow businesses to temporarily furlough workers, with the government replacing part or most of their salaries. The businesses would be required to maintain each worker’s health coverage during the furlough, and would return them to employment afterwards. This program would be similar in some ways to traditional Unemployment Insurance, but would allow the worker to collect benefits without being laid off, avoiding painful unemployment spells for workers and, just as important, the loss of employer-based health insurance.
What would be the benefits of such a program? First, it would help adversely affected business and their workers at the same time. Businesses would be able to temporarily cut labor costs, helping to keep them afloat in difficult times, while workers would be able to maintain their incomes and benefits without permanently losing their positions.
Second, the program would be targeted, automatically directing relief toward the sectors of the economy that need assistance the most. How would this happen? The key is that only businesses facing severe drops in demand, like restaurants or airlines, will want to temporarily cut their labor force. Firms that may boom during the quarantine period, such as those providing teleconferencing software, may instead want all hands on deck, thereby incurring no expense to taxpayers under this program.
Third, this program would provide assistance without encouraging any additional economic activity that could spread infection. Unlike traditional stimulus measures, it could help restaurant owners and staff without a single additional dine-in meal being served. On the contrary, it provides a way for businesses to remain viable while intentionally cutting back on operations. Perhaps most important, it would allow workers in some of the jobs most prone to infection to keep their paycheck while waiting out the epidemic safely at home.
Fourth, the program would not be a bailout of irresponsible corporate behavior. Public Furlough Assistance would not advantage companies with excessive leverage or a shaky financial position over firms that took more prudent actions leading up to this crisis. For better or worse, furloughs will not be appealing for truly insolvent firms that need to lay off workers or shut down. Instead, the program would provide equal opportunities for relief to all firms wishing to temporarily scale back their operations.
A number of countries are already implementing similar programs, for example the Temporary Compensation Scheme in Denmark. Policymakers in the United States should strongly consider doing the same through Public Furlough Assistance.