The government should pay businesses and workers to be productive, not to do nothing (opinion)

The government typically provides aid to workers who have lost their jobs. Once they accept new jobs, the benefits cease. At first glance, this policy looks sensible, but it has terrible consequences. In effect, the unemployment benefits amount to a reward for being unemployed, and their withdrawal functions like a tax on work. People who would normally be doing what it takes to find new jobs — intensive searching, relocating, reskilling — instead opt to remain unemployed.

The same holds true for businesses hurt by the pandemic. In effect, the government grants and low-interest loans offered to businesses amount to highly subsidized insurance against the pandemic. In the same way, the government aid gives them an incentive to remain in a subsidized zombie state, rather than making the costly changes needed to revive their operations despite the pandemic.

Suppose, for example, that you own a small restaurant that has never done deliveries and your business is currently shut. Turning the restaurant into a delivery service would require you to make costly investments, such as reorganizing your kitchen, buying delivery vans, starting online operations, notifying your customers and much more. Under the current stimulus package, it is worth your while not to make these investments, but rather to take advantage of various business grants and loans, as well as unemployment insurance, which pays your furloughed workers part of their salaries for the next four months.

If that government support was instead devoted to investment tax credits for staying open, you would make the investment needed to transform your business, thereby generating more income for your workers, more profit for yourself and more tax revenue for the government. The current stimulus package, however, specifies that the government support is withdrawn as soon as your workers are back at work.

That’s how the government’s stimulus package will leave the country mired in debt. And that will eventually cause the federal funds rate to climb higher than it would otherwise have been in order to induce people to buy the new government bonds. The higher interest rates, in turn, will dampen investment and economic growth in the future. Furthermore, businesses will need to repay government loans, and this debt burden will cramp their ability to grow. Finally, the people who are currently unemployed will tend to save less and be more indebted than they previously were, and this debt burden will make it more difficult for them to recover once the pandemic is over.

There is a simple way out of this trap. The government can amend the recently introduced stimulus bill by giving businesses the opportunity to use the money to support productive activities. For example, employers could be given tax rebates for employing and training currently unemployed workers, provided that these workers do not displace current employees. The funds for the tax rebates would run out after a year and amount to no more than the expected cost of unemployment benefits. These tax rebates would reduce the costs of hiring and training workers, and businesses could redirect that saved money to wages. This policy would create win-win-win opportunities for workers, firms and the government.

Even if companies are allowed to lay off their newly hired and trained workers after the tax rebates have run out, this policy would still stimulate employment. For one thing, employed people have a much higher chance of remaining employed than unemployed people have of getting hired. And since the tax rebates for training would be less than the total training cost, companies would not train people they had no intention of keeping once trained. Even if these companies laid off their newly hired and trained workers after the tax rebates were gone, these workers would have a better chance of gaining new employment than if they had been previously unemployed.

Along the same lines, businesses could be given the option of receiving tax rebates for putting their idle property and equipment to new productive uses that are compatible with social distancing. For example, a clothing company’s vacant factory space could be used to increase the storage capacity of online supermarkets and medical suppliers that are currently seeking to expand. The funds for the tax rebates could not exceed the expected value of the grants and low-interest loans that the businesses currently receive.

This new stimulus package should be devoted primarily to supporting productive activities rather than maintaining incomes from idle human and physical capital. In response, many businesses would be encouraged to reorganize their operations to make them compatible with social distancing and appropriate sanitization. This may involve moving more business online and improving workplace hygiene. Similarly, many workers would be encouraged to move from collapsing sectors to rapidly expanding ones, such as online delivery services, production of medical supplies, logistical and financial services, and more. Delivery vans that are idle in the contracting sectors could be used in expanding sectors. Commercial real estate could be repurposed from vacant restaurant and entertainment space into testing and medical facilities and logistical support hubs.

Many businesses that are currently shuttered could reopen once they have made the appropriate workplace adjustments: distancing desks in offices, installing plexiglass separations between salespeople and customers, providing disinfectant, regularly cleaning doorknobs and handrails, building separators between customers in checkout lines, staggering work breaks, increasing the number of work shifts, forming small, stable work teams, and so on. All these changes can be funded simply by redirecting the existing fiscal stimulus package from support for workers and firms that are idle toward support for new productive activities. It would make the economy more resilient to shocks, more pandemic-proof and less debt-ridden than before.

In short, the massive government fiscal stimulus is being misspent, making our economy more sclerotic. It is time to use this money to promote economic flexibility, adaptiveness and innovation. These are dollar bills on the sidewalk. Let’s pick them up and put them toward something productive.

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