By introducing a uniquely disruptive shock to both supply and demand, the COVID-19 pandemic has upended longstanding ideological debates almost overnight. Suddenly, far-reaching state intervention in the economy has become necessary to save market capitalism, which is unlikely to emerge unchanged.
NEW YORK – Ironically, just as the “democratic socialist” Bernie Sanders has suspended his presidential campaign in the United States, many of his policy proposals are becoming necessary around the world. Social-distancing measures to mitigate the COVID-19 pandemic have disrupted production and household income streams alike. But the effectiveness of social distancing could be undermined by workers who lack proper health insurance, adequate sick pay, unemployment compensation, or other forms of income support or savings. These individuals will feel that they have no choice but to keep working, despite the health risks. Universal health insurance looks like the inevitable outcome, even in the US, where Sanders, virtually alone among national politicians, has advocated it for decades.
At the same time, the original supply and demand shocks – to labor and household consumption, respectively – from the COVID-19 crisis are being reinforced by the breakdown of global, national, regional, and local supply chains. And all of these real-economy shocks are causing disruptions in the financial system, too.
Under these conditions, central banks have a critical role to play in preventing disorderly financial markets from adding to the strain felt by non-financial companies and households. At a minimum, central banks must step in to ensure ample liquidity in key markets, including those for government debt, commercial paper, and key asset-backed securities such as residential and commercial mortgages.
But, equally important, central banks must ensure that liquidity for households and corporations does not dry up because of self-fulfilling, fear-driven withdrawals. Where appropriate, they can provide monetary financing for fiscal stimulus (helicopter money), so that governments that otherwise might be constrained by sovereign-bond markets do not have their hands tied.
That said, central banks are not the appropriate institutions to address business-revenue shortfalls and the risk of corporate insolvencies, or household-income disruptions and the associated problems in servicing mortgage, consumer, and student debt. True, central banks can carry some of the load temporarily, by purchasing high-yield corporate debt and low-grade commercial paper. But the big job of preventing an economic disaster invariably rests with fiscal authorities.
In the case of the COVID-19 crisis, public funding and mandates are needed to ensure that everyone can get tested expeditiously for the coronavirus. Global cooperation can play an important role here, given the imperfectly synchronized nature of national outbreaks. But, ultimately, all coronavirus-related treatment (including hospitalization) will need to be covered by the state, and only national governments can marshal funding on that scale.
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Likewise, the state will also need to provide full compensation for workers who lose income as a result of the crisis. To maintain aggregate demand, governments could introduce a temporary universal basic income, whereby every adult receives a periodic cash transfer for as long as the crisis lasts. Even the US under President Donald Trump has blundered toward this obvious palliative measure, by including in its recent $2.1 trillion rescue package a disbursement of $1,200 for every adult earning less than $75,000 per year.
But even with government-provided income support, companies are still likely to experience dramatic revenue shortfalls, owing to crisis-related disruptions to the labor force, domestic and external demand, and supply chains at all levels. Here, the state could step in as a buyer of last resort, or it could provide credit or credit guarantees to financially distressed companies. Such credit could be converted into equity, either immediately or once the crisis is over, in the form of non-voting preference shares, thereby impeding the slide into a centrally planned economy.
There should be no restrictions on eligibility for the various forms of financial support outlined here. Large corporations are just as likely as small- and medium-size enterprises, the self-employed, or gig workers to be affected by the demand shortfall and supply-chains disruptions. And though they may be able to tide themselves over for a while – owing to their superior access to bank lending and debt markets – they cannot hold out forever. Given the build-up of non-financial corporate debt before the pandemic, we could easily see a wave of corporate defaults and insolvencies in the absence of state intervention.
Banks and non-bank financial intermediaries did not start the crisis this time, but they will inevitably become a part of it and will also become candidates for state rescues and bailouts as the asset side of their balance sheets deteriorates. And command methods familiar from wartime market economies and centrally planned economies – think of Trump’s invocation of the Defense Production Act to force General Motors and 3M to produce critical supplies – could well outlive the crisis.
Finally, the new socialism will also have an international dimension. Italy, for example, will need support from the European Central Bank or the European Stability Mechanism, or else through the issuance of eurozone coronavirus bonds. Among emerging and developing economies, external debt markets are already constraining the ability of many to provide fiscal support. Addressing these limitations with more foreign aid from advanced economies – including a targeted increase in the International Monetary Fund’s Special Drawing Rights – would be the morally correct and economically sound response.
As the trajectory of the COVID-19 crisis indicates, capitalist market economies will have to give way, at least temporarily, to an improvised form of socialism aimed at restoring income flows for households and revenue flows for companies. We will then see whether the consequences of this experiment with socialism last well beyond the end of the pandemic.