Faculty Viewpoints: The Economic Policy Response

By Dylan Walsh

The economic crisis associated with COVID-19 isn’t going to be resolved by states or countries gingerly restarting commerce after weeks of lockdown, according to Yale SOM’s Andrew Metrick. Until a vaccine or effective therapeutics arrive on the market, we’ll all be doing less, making less, and consuming less—and the world’s collective economic output will fall.

Spread out evenly, a reduction in consumption by 10% or 20% might be manageable. But that economic shock won’t fall equally on everyone. “There are some people whose livelihoods have completely disappeared, there are some people who are busier than they have ever been, and there are some who are basically doing their jobs and getting paid almost the same,” said Metrick, director of the Program on Financial Stability and the Janet L. Yellen Professor of Finance and Management, in a recent online conversation about COVID-19. “The main problem we face as a society—this is true in the U.S. and it is true across the world—is how do we share this burden, how do we share this risk?”

For Metrick, this question of burden sharing is ultimately political; it is about the transfer of resources from people who are generally okay to those who are desperately in need. And much of the solution, he said, lies in three stages of fiscal policy.

The first phase is an urgent rescue operation, “trying to make sure the house doesn’t burn down,” he said. In the U.S. this came in the form of more than $2 trillion in relief. (Congress is currently discussing further infusions of money.) He described the second phase as “stabilization,” which involves both continuing to get money into the hands of those who are most desperate and insuring “crucial infrastructure” doesn’t collapse—that is, companies don’t go bankrupt, banks don’t run out of capital, work relationships don’t atrophy. The final phase, recovery, must stimulate demand and push the economy back to where it was before the pandemic began.

Professor William English, a professor in the practice of finance who for years worked at the Federal Reserve, explained the rescue efforts initiated by monetary policymakers. When markets tumbled in February, the Fed provided an infusion of liquidity to secure them; it also lent money to foreign banks that, in turn, extended credit in their jurisdictions. This rapid response served as a tourniquet to prevent the collapse of financial markets. To further shore up market stability, the Fed has since taken unprecedented steps like purchasing municipal securities. “This is something they were wary of doing for a long time because of the political ramifications: buying securities from one state and not another can be very awkward,” he said. “But this has been an astonishing time for monetary policy.”

Sigridur Benediktsdottir, who helped lead a post-mortem of Iceland’s 2008 banking collapse and is now a senior lecturer at Yale’s Jackson Institute for Global Affairs, described a difficult balancing act underway in the banking sector: banks must be willing to offer loan forbearance for many who are in default while, at the same time, avoiding widespread instability in the system as a whole. JP Morgan alone, she said, bumped its loan losses this quarter up from $1.5 billion to $8.5 billion. These losses must be closely watched, since the collapse of banks triggered financial catastrophe in both the Great Recession and the Great Depression.

But, Benediktsdottir added, what we’re dealing with is primarily a healthcare crisis. “What we need to do now is prevent this healthcare crisis from morphing into a financial crisis or a banking crisis—we have to have all of this in mind at same time,” she said. “But this is first a healthcare crisis, and we will not see a full recovery until we’ve solved all of the issues there.”

Metrick agreed: “Governors can open up all they want, but right now I’m not going to a movie theater, and I’m not going to a restaurant, and neither are a lot of other people my age and older,” he said “Until we have that vaccine, we’re going to be in a stabilization phase.”

Fiona Scott Morton, the Theodore Nierenberg Professor of Economics, is an expert in healthcare markets. She described the policy roots of the failure to adequately test for COVID-19 in the U.S.—an essential ingredient of safely reopening the economy. The U.S., she explained, relies on the private sector to provide tests, but determining reimbursement prices that will sufficiently get entrepreneurs involved in the project has proven almost impossibly difficult. Instead, she said, the president should have activated the Defense Production Act, and that way compelled companies to manufacture COVID-19 tests while reimbursing them at cost. “This should’ve been done the first week of February,” she said. “It certainly should be done now.”

Scott Morton noted that the pandemic is highlighting a larger structural flaw in the U.S. healthcare system: attaching a person’s health insurance to their employment. Many people are losing their jobs, and so their health insurance, at precisely the time when they are at risk of serious illness. A large pool of uninsured people is avoiding testing and treatment, and so putting at risk the population at large. And the healthcare response, while heroic, has been disturbingly disorganized.

“So we have a very expensive system that doesn’t cover everybody, that severs your health insurance when you get unemployed in a pandemic, and that cannot perform,” she said. “I’m just hoping that what this makes clear is what health economists have known for decades, and that is we have a terrible system in the United States. It’s really bad. And we need some substantial reform.” Medicare for All, she said, is one idea that may now have its time. “To be sure, there are a lot of different ways to do Medicare for All, but we clearly need something better in the U.S.”

Watch the discussion: