A Tale of Two Rescue Plans
The United States suffers record unemployment while Europe fares better in battling the coronavirus shutdown.
It has been several weeks since Robert Shindler, an accountant based in Bradenton, Florida, who represents hundreds of small U.S. businesses, began trying to puzzle his way through the bureaucratic maze set up by Washington to dispense more than $2 trillion in rescue aid to mitigate the coronavirus shutdown. And Shindler says he’s as angry now—and most of his clients are as cashless—as when he started applying for federal-sponsored loans at the beginning of April.
“I’m seething,” Shindler said in a phone interview. Echoing the complaints of many other applicants, he said a blizzard of obscure rules, changes, exceptions, and a general lack of cooperation from major banks left most of his clients empty-pocketed. And he’s certain things won’t be all that much better after President Donald Trump signs the new $484 billion replenishment fund on Friday—though it is more targeted to small businesses—with a huge queue of loan applicants already waiting.
“In the first 30 seconds, the money will be gone,” he said.
More than a month into the economic lockdown, it is becoming clear that even as they have allocated a record amount of rescue money, Congress and the Trump administration have done little more than stick their fingers in a fast-crumbling dike. U.S. jobless claims soared by another 4.4 million this week, tallying a total of 26.5 million unemployed—the highest figures ever recorded—and economists warn that despite the federal program and unprecedented credit easing by the U.S. Federal Reserve, many of these businesses and jobs will never come back. U.S. unemployment is now at the highest levels since the Great Depression.
“It has been a disastrous program,” said Joseph Stiglitz, a Nobel-winning economist at Columbia University. “The money is not going to where it’s needed most. The most vulnerable are not getting the money. The second point is that it was designed to encourage businesses to keep their workers, but no one trusted the Trump administration on debt forgiveness.” (Under the so-called Paycheck Protection Program, businesses were to be forgiven their government loans if they retained their workers.)
Other economists agree, saying it would have been far more effective and efficient for the U.S. government to have directly reimbursed businesses for maintaining their workforce during the shutdown, as was done in Europe, perhaps by using a simple tax code provision that allowed businesses to deduct payroll for furloughed workers from future tax returns.
“I would have much preferred paying firms to keep their workers on the payroll—both for business continuity and for reducing uncertainty about re-employment on the part of furloughed workers—but clearly that is not the system the U.S. went for,” the Harvard University economist Dani Rodrik, who is the president-elect of the International Economic Association, said in an email. “To compensate, unemployment insurance is currently generous by U.S. standards.”
To be sure, backed by all those government trillions and Fed support, many U.S. banks are now more accommodating in forgiving interest and principal payments. But Shindler said one of the biggest problems he faced with PPP was that “every bank had a different theory on how to run it. Every day for five days in a row, they changed the application. Everything that was simple became ridiculous. If [a company’s] articles of incorporation didn’t exactly match the writing on the check they would reject it. You have to understand how desperate this is. We’re approaching April 30. People now will have to make a choice between the mortgage and the food. There’s no more money coming in.”
By contrast, a number of other developed economies, especially in Northern Europe, seem to be responding far better to the short-term economic challenges than the United States. And that is especially true when it comes to offering aid to millions of workers thrown out of their jobs because of the pandemic, the lockdowns, and a halt to many activities, from plane travel to dining in restaurants. Instead of a modest one-off state payment to help families through the crisis or trying to induce banks to help with loans or providing more unemployment insurance for laid-off workers, as has been done in the United States, nearly all European countries are reimbursing workers’ incomes directly through their employers at levels from about 60 to 90 percent of wages.
The differing responses in Europe and the United States to the unprecedented economic disruption from the pandemic highlight the role that different economic philosophies play during times of crisis. If the no-holds-barred U.S. economic liberalism was already discredited after the 2008 financial crisis, to European eyes it looks even less appealing now.
“It’s the comeback of the state in economic affairs—it began with the financial crisis but so much more now,” said Jonathan Hackenbroich, who researches geoeconomics at the European Council on Foreign Relations. “It does put the laissez-faire model in the United States under pressure. Longer term, we shall see—but right now, you can see the advantages of a more statist model.”
The New York University economist Paul Romer, another Nobel winner, told Foreign Policy that even though Americans have traditionally taken pride in their more “flexible” labor system and free market approach, the ongoing crisis should finally deliver a death blow to the lingering Reaganite notion, which still infects both political parties, that government is usually the problem and almost never the solution.
“There are many signs that we’ve let the capacity of our government deteriorate,” Romer said. “That is part of what is surfacing right now: our lack of administrative capacity for execution. One could also argue that the U.S. has been inconsistent in the sense that if we really believed in the flexibility of the labor market, we would have done more to separate health insurance from employment. One of the big costs right now of this separation is that it’s the worst possible time to have so many people deprived of health insurance.”
Some economists like Stiglitz argue that the United States was less prepared for the pandemic than other advanced economies because in 2019, more than 27 million Americans still did not have health insurance, while in other countries within the Organization for Economic Cooperation and Development almost everyone is insured through a public or private scheme. With so many workers now divorced from their employers and therefore health care, that number of U.S. uninsured is expected to swell dramatically even as the number of coronavirus infections in the United States approaches 900,000, with more than 50,000 deaths recorded. “The COVID-19 pandemic found a perfect foothold in this land of poor health, inequality and income insecurity,” Stiglitz writes in a forthcoming paper for the Roosevelt Institute.
The Paycheck Protection Program (PPP) and other aspects of the rescue package have failed in many respects thus far, conveying most of the money to bigger businesses through major banks, including some that don’t need it, and giving many others short shrift before running out of funds in just two weeks. An Associated Press investigation found that, since the program opened on April 3, at least 94 companies that disclosed receiving aid were publicly traded, some with market values well over $100 million, and a new survey by Goldman Sachs revealed that only 29 percent of small businesses that applied for a PPP loan received money. The new measure passed by the House on Thursday adds $310 billion to the PPP program and allocates more to smaller banks and another $60 billion for a separate small-business emergency loan and grant program. It also provides $75 billion for hospitals and health care providers, and $25 billion for a new coronavirus testing program.
Some European countries have taken an entirely different approach to unemployment and government health care, and Germany is a case in point. A decade ago, at the time of the financial crisis, the country put into place a program, called Kurzarbeit, meant to allow companies to keep workers on reduced hours, with their reduced paychecks underwritten by the state. It was hugely successful at the time, keeping German unemployment steady even as other European countries saw joblessness soar after the crisis.
With a successful program already in place, Germany had little difficulty in responding to the labor market shocks unleashed this spring by the coronavirus. Thousands of German companies, compared with just a trickle before the pandemic, applied to the government to take part in the program, which now offers families with dependents about 67 percent of their former salary and other short-time workers a little more than 60 percent. Since the pandemic began, Germany has fine-tuned the program to offer more benefits and make sure more companies qualify.
“The European model, where you have free markets but with a huge state framework … you can definitely say this crisis shows the benefits of that approach,” Hackenbroich said. “Kurzarbeit is a specifically German concept that’s been very successful.”
Many other countries in Europe thought so. French President Emmanuel Macron explicitly copied the German model for France’s work support scheme. Denmark has eagerly taken on private sector salaries if companies avoid layoffs. The Netherlands went even farther, underwriting up to 90 percent of wages to avoid permanent layoffs. The United Kingdom just extended its own work support program—which covers monthly earnings up to about $3,000—through June to make it easier for companies to retain employees for the anticipated post-crisis recovery.
“The success of the German Kurzarbeit scheme during the financial crisis has led to it being widely copied,” said Oxford Economics in a study this week on the European response to the pandemic. “We expect adoption of similar schemes will limit the hit to employment and ensure firms can quickly start production once restrictions are lifted.”
Compared with the unprecedented rise in unemployment in the United States, countries like Germany seem to be faring extremely well, though the latest official data—an unemployment rate of about 5.1 percent—predates the economic dislocation from the crisis. To get an idea of the difference between German and U.S. labor market convulsions, one top German economist warned that unemployment could “skyrocket” to 5.9 percent this year due to the economic paralysis. The U.S. unemployment rate is already approaching 20 percent.
Also in the United States, individual and business balance sheets are in the process of being destroyed for good—which is something that even the Fed, with its record lending and debt-underwriting, can hardly prevent. For millions of Americans who are but a paycheck or two from becoming insolvent, those balance sheets will not recover.
“The Fed can lend money but it doesn’t give away money. … These are not liquidity issues. They’re solvency issues,” said Stiglitz, who fears that with the deficit climbing to upwards of 15 percent of GDP, Congress will be reluctant to add more funds to the rescue. As a result, he says, there is no longer any possibility of a sharp V-shaped recovery—in which conditions quickly return to economic health as before—but what economists call a more drawn-out U- or W-shaped recovery or, in the worst case, one shaped like an “L”—which means, in effect, a longer-term depression.
The saddest aspect of the U.S. response to the crisis, added Stiglitz, is what might have been. “We’ve estimated the cost of just giving money to workers directly. It’s a fraction of what we’re now spending.”
Europe, of course, is hardly out of the woods; added debt will weigh on the European Union for a long time as well. As useful as the programs are to limit unemployment in the short term, they’re not cheap. Germany estimates that the expanded program will cost at least 10 billion euros ($11 billion). France’s work support program has swelled in cost to 24 billion euros ($26 billion). Economists figure Britain’s generous salary support scheme could cost some 78 billion pounds ($96 billion). (For many countries, such as Denmark and Germany, the additional costs of short-work measures are modest because they’d be paying out full unemployment compensation if workers were laid off.)
And the very success of mitigation measures in the richer, northern countries is also sowing divisions inside the European Union over how to respond more broadly to the toll of the crisis. European leaders met again virtually Thursday to discuss further rescue efforts. One of the few ideas that has not been controversial at all is a 100 billion euro ($108 billion) European fund to support national salary support schemes as Kurzarbeit finds new adepts all over the continent.
Yet beyond that, and hundreds of billions of euros in loan guarantees, European leaders have been unable to agree on how big a rescue package they need or how to go about it.
Heavily indebted countries with rapidly growing unemployment, such as Spain and Italy, are pressing for more ambitious pan-European solutions, whether jointly issued debt to help those countries access credit or a massive 1.5 trillion euro ($1.63 trillion) fund proposed by the Spanish prime minister. Spanish unemployment was at 14 percent before the virus outbreak and is expected to top 20 percent this year.
But countries such as Germany and the Netherlands, where short-term measures have minimized the labor market pain, have so far resisted calls by Southern European countries to issue so-called “coronabonds,” fearing the short-term emergency will end up sucking them into a de facto fiscal union with more profligate countries. The divides over how to deal with the fallout of the virus are exacerbating political divisions within Europe and could stoke more anti-European sentiment in peripheral countries that feel Brussels is hanging them out to dry.
The United States, meanwhile, will suffer its own unique reckoning unless new remedies are considered, some economists say. As an alternative approach for the United States, Stiglitz recommended a European-style paycheck guarantee program, such as the one proposed by Democratic Rep. Pramila Jayapal, or a Paycheck Security Act, another proposal by independent Sen. Bernie Sanders and Democratic Sens. Mark Warner, Doug Jones, and Richard Blumenthal. Under such proposals, the government would make up for any firm’s shortfall in revenues, provided that it retain its employees. But as yet there is little congressional support for these partisan plans.
“We are testing our economic system in ways that it has never been tested before,” Stiglitz writes in his forthcoming paper on the crisis. “Before the 2008 crisis, most economists didn’t focus much on credit interlinkages, and how the collapse of one bank could lead to a bankruptcy cascade. Today, with so many firms in so many industries being so badly affected, there is a potential of a more systemic collapse or credit gridlock.”
Michael Hirsh is a senior correspondent and deputy news editor at Foreign Policy. Twitter: @michaelphirsh