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The Economics of COVID-19: How to Build the New Normal (UPDATED)

My self-imposed hiatus from Bearing Drift came before COVID-19 became a national concern. Today, Americans are undergoing dramatic social and economic changes as a result of the coronavirus, with some of the more dramatic affects still to come.

The crisis will either “go big” (a massive spike in cases that overwhelms our medical industry and forces life-and-death choices on a massive scale) or “go long” (an extended period of social distancing to prevent the former). I shouldn’t comment very much on the medical impacts, as I am not an expert in the field, and I have grown in humility to the point where I will avoid commenting where I think I shouldn’t.

The economic impacts, however, are also dramatic, and here I’d like to think I can offer more useful advice and ideas. There are calls for a very dramatic increase in government spending, which is understandable. However, we can also make sure that the economic assistance that is planned can be done in ways that preserve the concept of limited and efficient government.

Moving from the Welfare State to a Negative Income Tax

One thing this crisis should do is force a complete review of the 20th-century welfare system currently in place. A system incentivizing people to work for someone else may have made sense in the large-industry era of the 1950s, but with small business formation on a downward slope even before COVID-19, it is no longer fit for purpose. We need to ask ourselves if we really want a large and intrusive government taxing the rich for the purpose of regulating the poor.

In the short term, this can be addressed via either direct payments to Americans or (as I would prefer) an expanded unemployment insurance system that allows for 100 percent of lost wages paid and removes employment-search requirements. Whichever option is taken (and it is likely Congress will use both), they can and should be used to transform our current patchwork of programs into a simple Negative Income Tax as proposed by Milton Friedman. This would ensure government aid to those hard on their luck is more efficiently sent, less expensive to taxpayers, and no longer discouraging entrepreneurship.

If the Fed insists on lending, let more businesses borrow from them

Of course, the above reform won’t mean much to businesses that are in trouble as a result of social distancing. Many industries have been asking for bailouts. Ironically (but understandably), the American people are much more likely to support aid to businesses that are too small to make their voices heard. Meanwhile, there are already arguments about whether the funds should be given as loans, equity purchases, or no-strings payments.

While I reserve the right to change my view on this particular matter, it appears to me that one option is being overlooked: the Federal Reserve. To be clear, I have problems with the Fed’s recent actions. I don’t think moving away from interest rate normalization was particularly helpful (and if the Dow Jones was any indication, I’m not alone).

Nor do I think the de facto return to quantitative easing makes sense from a monetary policy perspective. However, if the Fed is determined to monetize debt wherever it can be found, we should make it easier for smaller businesses to sell bonds. Larger corporations should find it quite easy to loan to a lend-mad Fed (indeed, this is reason enough for any discussion of corporate “bailouts” to be given serious skepticism). Smaller firms shouldn’t be left out of the buying spree. This doesn’t necessarily rule out the need for temporary government support for small businesses, but it should at the very least make it less urgent.

Regarding Health Care Economics: End COPN and Re-engineer Medicaid

One of biggest factors in the push for social distancing has been the danger of overwhelming our health care capacity. If health care supply is a concern (and it is), governments need to get out of the business of restricting it. Certificate of Public Need regimes have been shown to make health outcomes worse [1] even before COVID-19 showed up. The idea that any future hospital or health care facility needs to prove a “need” in the aftermath of COVID-19 is patently absurd.

UPDATE: Governor Northam suspended COPN requirements for hospitals to add beds over the weekend (Patch [2]).

That said, the health care market has one unique characteristic that leads to trouble – a complete lack of credit checks for services rendered. Hospitals in Virginia have complained about this for years – mainly, as the excuse for maintaining COPN to compensate them with oligopolistic power. It has also been one of the reasons hospitals tend to be more sanguine about government-provided universal health insurance (albeit not in a manner as unrealistic as “Medicare for all”).

Unfortunately, much of the discussion about health insurance has been focused on the unique problems of poor Americans, rather than the unique problems of sick Americans. In property and casualty insurance, there is no such confusion: the threat of flooding is such a danger that private insurers won’t touch it unless it’s via the National Flood Insurance Program.

A similar mindset in health insurance would dramatically improve the industry. It would allow healthy Americans (including poor Americans) the chance to buy insurance they could use, while the government would provide a backstop for Americans with problematic health conditions. If initial reports on COVID-19 are accurate, many more Americans will fall into the latter category as a result of the virus. Shifting government-supported health insurance from income to illness would be more practical and more sensible.

Limited government can survive the pandemic, but like everything else, it must adapt

The above measures would, I hope, enable government to be dynamic enough to address the economic effects of the crisis without sacrificing either the dynamism of freer markets or the concept of limited government. Yes, government spending and power will grow in some ways, but they can (and should) be reduced in others. If we do this right, we can transform and revitalize our governments, rather than merely expand them.