Letter IEDI n. 1026–Economic measures for the post lockdown
Today's Letter IEDI discusses the document 'A New Policy Toolkit Is Needed as Countries Exit COVID-19 Lockdowns,' written by Olivier Blanchard, professor at MIT and former chief economist at the IMF, Thomas Philippon and Jean Pisani-Ferry, of the Peterson Institute for International Economics, in which they discuss adjustments to the measures adopted against the COVID-19 economic crisis and new actions for the consistent resumption of economic growth.
According to the authors, the initial responses to the coronavirus crisis were similar across countries, both in protecting jobs and supporting companies, although they were broader in Europe than in the United States. The easing of the lockdown, however, will not be enough to put economies back on track for growth.
As social distance remains necessary, many companies will face adverse productivity and demand shocks, which are only likely to disappear as firms adapt and as effective coronavirus drugs or vaccines become widely available.
Other shocks are expected to last longer, according to Blanchard and his co-authors. This is the case of the increase in teleworking triggered by the crisis, which could become permanent and cause implications for the transport system and urbanization.
For the authors, due to the exceptional nature of the crisis, government action will be necessary in the process of adapting to the new reality. First, because many companies, although still viable when the restrictions imposed by the pandemic are lifted, will face cash flow problems and credit restrictions from creditors. Second, because the persistence of a high and lasting volume of unemployment reduces the chances of obtaining new jobs.
For job protection, Blanchard, Philippon and Pisani-Ferry advocate extending the aid programs, but with three types of adjustments: as unemployment decreases, exceptional payments should be reduced gradually, coming closer to the usual unemployment insurance; to encourage companies to bring their employees back to work, the authors propose that the government's contribution to wages be gradually reduced; and programs should restrict the degree of eligibility by applying to only a fraction of working time.
In supporting companies, the subsidies given to employees' payments should be maintained for two reasons, according to the authors: periods of high and long-term unemployment can lead to outdating and loss of skills in the workforce; and the drop in productivity due to physical distancing will not quickly disappear in some sectors, so lowering the wage cost of these activities will prevent the social cost of widespread bankruptcies.
Companies that benefit from wage subsidies should employ more people, given the reduction in hours worked; as unemployment decreases and the number of job posts increases, these subsidies should be reduced.
Public credit guarantee schemes for companies should also be extended, but Blanchard and his co-authors advocate two changes. First, the size of these guarantees should decrease over time, as uncertainty falls. Second, the use of state guarantees must be linked to restrictions on dividend payments and/or to higher future taxes on private companies' earnings.
These loans, like wage subsidies, are not designed for all companies. They are planned for businesses to make socially efficient decisions and it is likely that, even with subsidies and loans, some of them will become insolvent. Thus, Blanchard and his co-authors argue that a debt restructuring scheme should also be considered.
They argue that banks know much more about small and medium-sized companies than the government, but may allow more companies to close than are socially acceptable. To balance this situation, the study suggests that the government delegates the decision to banks, but under the following scheme:
• If a company files for bankruptcy, the government must exercise all of its creditor rights. This must be known in advance, so that creditors are aware of this possibility when making their decisions.
• If the firm continues to operate but needs restructuring, the government may accept minor requirements in some respects like tax deferral and credit guarantee, such as discounts (haircut) agreed by private creditors for the fraction of assets given as collateral on loans.
• The government can also transform a loan into an instrument similar to equity ownership in the company.
Whatever the criteria, for the authors the government must resist the temptation to interfere in the private debt restructuring processes of SMEs and define a menu of clear and previously specified options for private creditors to undertake the restructuring.