Five National Policy Responses for COVID-19 / Coronavirus

Containing the epidemic and stabilizing the economy will require further action from Congress and the administration.

Epistemic Status: Moderate. I am an economist by training who works on national public policy, not a medical professional or epidemiologist. Defer to infectious disease experts for information on the likely evolution of the virus and on how best to protect yourself from infection. While I have high confidence in the specific mechanics of the proposals below, I cannot be 100% sure of their appropriateness given the complex and unprecedented nature of this epidemic.

The U.S. government’s response to COVID-19 has so far left a lot to be desired. Lab testing for the virus was initially restricted by arcane Food and Drug Administration (FDA) regulations, forcing the Centers for Disease Control (CDC) to ration its limited testing capacity. Meanwhile, President Trump’s nonchalant attitude has downplayed the gravity of the situation to the public, and squandered whatever extra response time was bought by the early imposition of travel restrictions.

The spread of COVID-19 in the United States is still in its relatively early stages, and testing is finally beginning to roll out. Yet even if local governments and private citizens follow every best practice to contain the virus’s spread, the economic fallout of COVID-19 still promises to be large. Major event cancellations and supply-chain disruptions are only the first-order effect, as supply-side disruptions feed back into the demand-side of the economy. This week’s stock market sell-off, falling oil prices, and the collapse in treasury yields are all leading indicators that America is headed for a recession, if we’re not already in one.

The U.S. federal government must act decisively to both contain the virus and mitigate its global economic impact. The following actions should be taken immediately:

First: Keep Congress Open

The $8.3 billion emergency spending package passed by Congress last week boosted funding for detection and treatment of COVID-19, but it should only be the start. With the severity of the epidemic changing in real time, Congress must remain open and be prepared to pass follow-on legislation.

Instead, some in Congress are demanding they go on recess out of fear that the virus will spread to members. This is understandable, particularly given the virus’s much higher mortality rate among the elderly (the average age of House members is 57.6 years; of Senators, 62.9 years). Reports that 10 percent of Iran’s legislature is infected with the virus, and that one legislator has already died, are hardly reassuring.

Nevertheless, it is entirely possible for members of Congress to self-quarantine without suspending the possibility of additional legislation. Businesses and organizations around the country are advising their staff to work from home, and are experimenting with tools to make telework more efficient. Congress can and should do the same.

Congress banned proxy voting in House committees back in 1995. Rather than go on recess, Speaker Nancy Pelosi and the House Rules Committee should rescind the ban and allow lawmakers to cast votes from their district, if only for the duration of the epidemic. In the event that the virus worsens substantially in the D.C. area, debate and deliberation on pending legislation may also have to occur electronically. There are clearly no technological barriers to providing every member of Congress with basic video conferencing software, however this sort of contingency planning must begin well in advance.

Fund Emergency Paid Sick Leave Through Unemployment Insurance

The U.S. is one of the only industrialized countries in the world that doesn’t guarantee paid sick leave nationally. This is largely a byproduct of the American system of federalism. Ten states, D.C. and 19 cities have sick leave programs of some form in place, and many employers provide sick leave benefits voluntarily. Nonetheless, the Bureau of Labor Statistics estimates that nearly 30 percent of private sector workers do not have access to paid sick leave of any kind.

Expanding access to sick leave may prove incredibly valuable for arresting the spread of COVID-19. This is not just about basic empathy. An infected worker who cannot afford to take unpaid leave risks spreading the virus to his or her coworkers and thus to society at large.

Nor is this the appropriate time to debate irreconcilable visions of the American republic. On Friday, for example, Representative Rosa DeLauro (D-CT) and Senator Patty Murray (D-WA) unveiled legislation that would mandate employers provide workers with 7 days of paid sick leave, and 14 additional days when there is a public health emergency. Whatever the merits of this proposal, DeLauro and Murray have introduced versions of this bill in the past and will no doubt do so again in the future. For better or worse, Republicans are simply not about to pass a new and permanent paid leave mandate, but they may be open to something more temporary.

Emergency federal funding for state Unemployment Insurance (UI) programs is the most promising option on the table, based on the model provided by Disaster Unemployment Assistance (DUA). According to the Congressional Research Service, DUA “provides federally funded unemployment benefits to individuals unable to work as a result of a federally declared major disaster and otherwise ineligible for regular UC benefits.” Unfortunately, a disease outbreak is currently not included in the DUA’s definition of a “major disaster,” however this could easily be amended by Congress.

It is standard policy during a recession for the federal government to advance funding to state-level UI trust funds in order to extend benefits and ensure reserves don’t run dry. An analogous cost-sharing arrangement would enable employers to offer temporary paid sick leave to any worker showing flu symptoms for the duration of the epidemic, without forcing states to adopt paid sick leave as a new status quo.

Expedite Drug Approvals and Regulatory Waivers

Scientists and drug companies are working around the clock to develop a COVID-19 vaccine and novel treatments for the worst effects of the disease. In normal times, the FDA requires new drugs to undergo extensive testing for safety and efficacy before approval — a luxury that time does not afford.

There are presently no therapeutics approved by the FDA to treat COVID-19, but there are some that show promise. Gilead Sciences, an American biotechnology company, has begun testing a broad-spectrum antiviral compound known as remdesivir. Although the drug has already been administered to a handful of patients, Gilead Sciences is working with the National Institutes of Health (NIH) and University of Nebraska Medical Center to conduct a randomized, clinical trial.

While the world awaits the results, the FDA should expedite COVID-19 treatment for patients who are already hospitalized by pushing regulatory approval to state and local health authorities. The patients with the greatest mortality risk should also be granted a “Right To Try” experimental therapies under the supervision of medical professionals.

As of this writing, President Trump has yet to declare COVID-19 a national emergency, although he is expected to do so eventually. Once a national emergency is declared, the Secretary of Health and Human Services should then declare a public health emergency and invoke his waiver authority under section 1135 of the Social Security Act (1135 Waivers). The Secretary will then be able to waive or modify Medicare, Medicaid, and Children’s Health Insurance Program (CHIP) requirements to ensure emergency medical services are effectively delivered, and providers are adequately reimbursed. For example, federal licensing requirements for medical worker reimbursement through Medicare and Medicaid could be waived to provide states with maximum flexibility in the event of medical worker shortages.

An emergency declaration will also allow the Emergency Medical Treatment and Labor Act (EMTALA) to be formally suspended. The EMTALA requires Medicare-participating hospitals to take action when an individual requests care through an emergency department. The experience of Italy, however, suggests hospitals near a COVID-19 outbreak may become quickly overwhelmed. Suspending the EMTALA will enable hospitals to better prioritize incoming cases based on severity.

Adopt a Price Level Target

Treasury yields reached unprecedented lows this week as investors around the world searched for a safe place to park their assets. As a result, U.S. borrowing costs are not merely low, but effectively negative. We should take this as an excuse to dramatically expand public investment in things like science, infrastructure, and anything else with a positive rate of return.

In the near term, however, nominal interest rates have moved closer to the effective “Zero Lower Bound,” which is a major cause for concern. Near-zero interest rates mean that there is limited scope for conventional monetary policy in the event of a recession, and in itself signals that the market forecasts slower growth and low inflation for years to come. Finding a way to boost inflation expectations is therefore of paramount importance. Higher inflation expectations will raise nominal interest rates on longer maturity bonds, and help stabilize aggregate demand.

The Federal Reserve made the right decision to cut the federal funds rate last week, and is now reportedly discussing a new round of asset purchases, also known as Quantitative Easing (QE). While not useless, the tepid market reaction thus far suggests that these measures are likely to be woefully insufficient.

In order to restore market confidence, the Federal Reserve should consider moving from its 2 percent inflation target to a “level target.” A level target, whether applied to price inflation or an alternative variable like nominal GDP, would force the Fed to make up for past mistakes. If inflation came in below 2 percent this year, for example, then the market would automatically expect the Fed to let inflation run higher in future years until the price level was back to its long-run trend.

Level targets provide a superior anchor for price stability, and would help boost yields that have fallen on recession fears. They also outperform inflation targeting when an economy is being buffeted by both demand and supply shocks, which is the case today. Former Federal Reserve chairman, Ben Bernanke, has argued that the Fed should adopt a “Temporary Price Level Target” in the event of a severe recession. Of course, it would be even better to make such a change before the next recession — a window of opportunity that is fast closing.

Strengthen Automatic Stabilizers

Recession fears have strengthened calls for an economic stimulus package. Yet not all stimulus packages are created equal. The White House has hinted at a payroll tax cut, for instance, despite the evidence that they are poorly targeted.

More importantly, fiscal stimulus works best when it scales automatically with the depth of a downturn. This requires targeting federal dollars to states with fast-rising unemployment rates, and directly into the hands of the most vulnerable whenever possible. Sick leave, and fully funded UI reserves, would go a long way in this respect.

Better yet, however, would be grants to states that are tied to an objective measure, like the change in a state’s employment to population ratio relative to a historical benchmark. If a state’s unemployment rate rises sharply, deficit-financed federal dollars should flow in immediately, without a drawn-out congressional debate. As long the money is quickly dispersed, falling demand would be offset. This is roughly how a proposal called the ELEVATE Act would work, with the proviso that the money must be spent overwhelmingly on subsidized employment for the disemployed.

There are many potential ways to strengthen automatic stabilizers, from boosting SNAP benefits to having the IRS send everyone a refund check. And while some are more practical than others, any of these options would be better than nothing.

At the same time, COVID-19 presents a unique set of challenges beyond aggregate demand management. Large events are being cancelled, schools are shut down, hospitals will become overwhelmed, and at some point mandatory quarantines may go into effect. In a normal recession, getting spending flowing is all that matters. But when combined with an epidemic, local officials will be in a far better position to triage resources than the federal government. Therefore, as soon as possible, Congress should authorize windfall levels of federal aid to states to be put towards compensating affected organizations and bolstering local health systems, with few if any strings attached.

Conclusion

We are not powerless to affect the course of COVID-19 in the weeks and months ahead. As individuals, we can limit the virus’s spread by following the recommendations of public health experts. And as a country, there are many tools at our disposal to limit the virus’s economic impact, accelerate the diffusion of treatments, and provide maximal support and flexibility to the hospitals and medical workers on the front lines.

Nonetheless, the strength of our national response to COVID-19 critically depends on what Congress and the White House does next:

First, Congress must stay in session to ensure follow-on legislation can be drafted and voted on, by proxy if necessary.

Second, Disaster Unemployment Insurance funding should be used to provide emergency sick leave for workers forced into self-quarantine.

Third, a public health emergency should be declared to enable the HHS Secretary to waive or modify regulations and reimbursements within Medicaid and Medicare, in line with the needs of local health authorities. Approval of new treatments should also be expedited, and made immediately available for patients at risk of dying.

Forth, the Federal Reserve should announce a shift to NGDP or price level targeting, if only temporarily, to reduce the risk of a recession and calm financial markets.

Fifth, fiscal stimulus should be provided to the most vulnerable through direct transfers, and as grants to be dispersed by states.

This set of national policy responses to COVID-19 is by no means exhaustive, but it would at least constitute a robust first step. Ultimately, national policy is in a backseat role relative to the efforts of the state and local governments, health care workers, and private individuals. But that is all the more reason for Congress and the administration to use the powers they do have, from appropriations to regulatory waivers, to ensure those on the ground have the resources and autonomy they need to act.