A COVID-19 Economic Recovery Package That Spurs Short-term and Long-term Recovery

| Jul 20, 2020 | Coronavirus

With surging COVID-19 cases in many parts of the country and a widely available vaccine months away—and with consumer and investor confidence and spending likely to be weak even with a vaccine—the odds are quite high that economic recovery will be long, drawn-out, and weak. As such, Congress is rightly debating a fifth economic recovery package.

Other than the size of the package, the most important issue for debate is whether it should be designed to support a weakened economy in the way that hopes most existing businesses will come back to full strength, or should recognize that significant industrial and occupational reallocation is likely and that policy should accelerate, not retard this. Making the former choice might result in somewhat less short-term pain, but it would also result in a much more drawn-out recovery with slower rates of overall GDP growth for many years.

Lawmakers should address both challenges by structuring a recovery package that addresses the short-term economic contraction while also effectively laying the groundwork for more robust long-term recovery, growth, and competitiveness.

The United States is not in a typical recession where demand is down somewhat evenly across all sectors and occupations. This is a recession where some sectors and occupations are extremely hard hit while others actually are growing. And for a number of reasons, at least some of these changes are likely to be long-lasting, with some sectors not coming back to normal for many years, if ever.

For example,  millions of households have started buying a wide array of goods online, and it is likely that many will stick with that habit. Businesses now realize that at least a significant share of activity that they thought required face-to-face activity, including that requiring air travel, is no longer required. Many companies and workers realize that at least part-time telework is feasible and desirable.

Congress largely ignored the issue of reallocation in its prior economic recovery packages. In fact, the major policies enacted have deterred needed reallocation. As Barrero, Bloom, and Davis write, “Unemployment benefit levels that exceed earnings for many American workers under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, policies that subsidize employee retention irrespective of the employer’s longer-term outlook… inhibit business formation and expansion.” They add, “policy efforts to preserve all pre-COVID jobs and employment relationships could prove quite costly, if pursued. They are analogous to policies that prop up dying industries and failing firms. These policies are feasible, but the cost is high in terms of resource misallocation and taxpayer burden.”

So, rather than provide a waiver of payroll taxes or send checks to most American workers or give unemployed workers a $600 a week payment, Congress should mandate that all states provide unemployment insurance that replaces 75 percent of wages up to an annual salary of $100,000, and compensate states for the costs.

And rather than provide more forgivable loans only for small firms, Congress should provide very low-interest loans for all firms, regardless of size. Providing loans, rather than forgivable loans reduces the risk of propping up companies that will be out of business when the aid ceases.

Finally, because the recession will likely lead to a reduction in investment in R&D, machinery and equipment, and workforce education, Congress should put in place investment incentives. It should should provide a temporary bump-up of the R&D tax credit—to 40 percent for the Alternative Simplified Credit, and to 60 percent for the regular incremental credit—for all R&D expenditures made in 2020 and 2021. It should provide a temporary tax credit of 20 percent for investment in capital equipment, including software. And it should provide providing funding to create community college tuition vouchers for any American who wants to enroll in classes for up to six months related to growing occupations between now and the end of 2021.

The economic crisis created by COVID-19 will likely be the worst since the Great Depression, especially if Congress does not act forcefully once again with a strong recovery package. However, such a package can and should be designed to keep overall economy-wide demand up, while not hindering, and even actively encouraging inevitable and positive occupational and industrial relocation.

Return to the Commons
Rob Atkinson

Rob Atkinson is the founder and president of the Information Technology and Innovation Foundation.

@RobAtkinsonITIF