Covid-19: Economic Policy Response

Question 1: Which of the following would have the greatest impact in mitigating the economic effects of the coronavirus economic crisis?

Question 2: Which of the following would have the second greatest impact in mitigating the economic effects of the coronavirus economic crisis in the UK?

Question 3: Which would be the maximal public debt you would be willing to tolerate if used effectively (as in your answers to 1 and 2 above) to support an economic recovery?

CfM Survey: The Economic Policy Response to the COVID-19 Crisis

Summary

The COVID-19 virus has claimed tens of thousands of lives worldwide and is still spreading rapidly. The fallout of social distancing and lockdowns is already tangible with the world economy heading towards negative growth. The CfM’s panel of experts supports a broad portfolio of policy responses and a “whatever it takes approach” to minimize the economic damage. A large majority of panellists advocate credit and transfers in support of business survival. Many panellists supported making unemployment payments more generous and streamlined. The panel was unanimous that public debt concerns should be put to the side until the crisis is resolved.

Background

The March 2020 CFM survey surveyed its panel of top UK economists on policy options to respond to the COVID-19 economic crisis. Respondents were first asked for their (two) most preferred policies. They were then asked to state the highest level of public debt they would be comfortable with if funds were used effectively to support the economy. 

The COVID-19 Economic Crisis

The COVID-19 pandemic and its economic fallout hardly require an introduction. To date, it is estimated that COVID-19—also known as the coronavirus—has infected nearly half a million people worldwide and claimed nearly 20,000 lives (see the Financial Times’ graphical coverage for updates). The virus is still spreading at an exponential rate and has a death rate of around 1%, so the eventual global death toll is certain to multiply by orders of magnitude this year. Countries have taken a variety of measures to contain the spread of the virus, including full lockdowns; partial lockdowns; and testing, contact tracing and case isolation.

The economic damage is already tangible with China’s manufacturing index and fixed investment both declining by 30% so far this year relative to December 2019. European manufacturing indices fell by similar amounts in March. Stock markets have plummeted with the FTSE 100 index losing close to a third of its value in the past month. The European Central Bank (ECB) predicts that Eurozone GDP could decline by as much as 4% this year. With large sectors of the global economy entirely shuttered this spring, this may prove optimistic. Unemployment claims in the US are predicted to be greater than a million this week alone. The policy responses have been rapid in all major economies, with governments providing both monetary and fiscal support to the economy.

A number of policy proposals have been suggested and rolled out. A number of economists have proposed direct cash transfers (see Jason Furman’s VoxEU chapter).  Early reporting suggests that a transfer of this sort will be part of the Trump administration’s fiscal package. The Trump administration has also expressed interest in including a payroll tax cut. Others have proposed aid to firms affected by social distancing and lockdown policies. These include direct transfers (e.g. Saez and Zucman) and low-interest credit to businesses. The UK Treasury’s £350 billion fiscal package announced this week included both types of support (£330 billion in credit and £20 billion in direct support). The German government has also put in place a fiscal package including more flexible unemployment insurance (Kurzarbeitergeld) and cheap credit for businesses. Finally, the Federal Reserve, ECB, and Bank of England all announced unlimited quantitative easing including purchases of government bonds, commercial paper, and mortgage-backed securities in the US case. VoxEU’s ebook on the COVID economic crisis details these and other policy options.

Related to this debate, the first two questions in the latest CFM survey asked panellists for policies that would best dampen the immediate impact of the economic crisis. They were asked to put aside the obvious need to respond to the health crisis itself and focus on the economic fallout from social distancing measures enacted. This also contrasts with policies that might be useful as lockdowns are removed and health concerns subside.

Question 1: Which of the following would have the greatest impact in mitigating the economic effects of the coronavirus economic crisis ?

and

Question 2: Which of the following would have the second greatest impact in mitigating the economic effects of the coronavirus economic crisis in the UK?

Twenty-nine panellists responded to these questions. Responses were varied and many participants argued that numerous tools should be employed. Support for businesses—along the lines of the measures proposed by the Chancellor last week—drew large support. More than three quarters of respondents mentioned either credit support or direct transfers to firms, or both, among their two preferred policy tools. Respondents supporting credit rather than transfers argued that the former would incur lower fiscal costs. Sir Charles Bean and Ricardo Reis, both of the London School of Economics (LSE), concur on the need to avoid permanent damage to the supply side of the economy. Sir Bean, this would mean “the government acting as an ‘insurer of last resort’” in a manner which “encourages firms to continue to retain and pay their workers (possibly at a reduced rate) during the period of disruption.” He also noted that loans, as opposed to transfers, “minimise the cost to the exchequer,” whilst Reis links this to the “post-quarantine times” for which loans “preserve fiscal space.”

Respondents supporting transfers over credit focussed on the unusual nature of the shock and the potentially irreparable damage to small businesses and parts of the retail sector. Jagjit Chadha of the National Institute for Economic and Social Research (NIESR) describes the coronavirus as a shock to firms which is “outside of their control or their direct responsibility.” He argues that firms have “no moral hazard question to answer” in requesting insurance from the government. Michael McMahon (University of Oxford) points to the “uncertainty as to how long [the periods of isolation] will last” as an argument against loans, which he views as “too much of a future burden for small firms to maintain employment if they face (nearly) complete shutdown.”

A substantial portion (one third) of panellists supported making unemployment benefits more generous, streamlined, or comprehensive. Further, this was a policy response in which respondents expressed higher degrees of confidence. They point to the potential scarring effect on labour markets of the deep recession we are likely to face. Respondents expressed concern that changes in the structure of labour markets—the gig economy and zero hours contracts—make existing social insurance arrangements insufficient. Francesca Monti, of King’s College London, uses this as an argument for the expansion and streamlining of unemployment insurance “to help self-employed workers, gig workers and the unemployed, so that they can keep afloat and make good of their financial commitments, even as their revenues dry up.” Morten Ravn of University College London (UCL) does not foresee “any negative impact on incentives” of extending unemployment benefits and “income support to low income households who lose their jobs or have problems paying rent, mortgages, etc.” For the well-off, however, he sees “less reason right now for providing transfers.”

Generally, there was consensus among panellists that a variety of measures—or “all the above”—should be employed. Tim Besley (LSE) emphasises the need for a “portfolio of fiscal measures” including “tax/transfer schemes, grants to businesses (particular those aimed at retaining workers) and credit support”—similar to what has been announced thus far–as well as “constant review” of the scale and scope of such measures. Panicos Demetriades suggests a “three-month holiday on mortgage payments and credit card debts backed by regulatory forbearance,” as well as allowing “withdrawals from pension funds without tax penalties while the crisis lasts” to “smooth consumption”. A number of panellists expressed support for partial (80%) wage subsidies along the line that the Treasury announced last week.[1] Angus Armstrong (NIESR) argues that it is “exactly the right move both economically and morally, which should not be ignored.”

Debt sustainability

UK government debt was above 80% of GDP at the onset of the crisis. The government’s fiscal package combined with the slowdown of the UK economy may bring public debt to over 100% of GDP. The panellists were also given an opportunity to opine about public debt levels:

Question 3: Which would be the maximal public debt you would be willing to tolerate if used effectively (as in your answers to 1 and 2 above) to support an economic recovery?

There was a wide range of responses to this question ranging from 100% to more than 140% of GDP. A third of respondents argued that fiscal concerns should be put aside and that the government should do “whatever it takes” to address current economic circumstances. The share of panellists putting no bound on the debt they’d be willing to incur is even larger, at nearly 60%, when weighing responses by confidence levels. Even those supporting lower desired debt levels expressed little concern about debt sustainability in current circumstances. The low real interest rate environment was a common argument for putting public debt concerns to the side. As Roger Farmer (University of Warwick) puts it: “In the current low interest rate climate, there should be no limit on the size of a temporary fiscal expansion.” Sir Charles Bean likens the coronavirus crisis to a “war”, in the sense of it being a “classic shock that warrants a temporary period of (possibly much) higher borrowing.” He argues that debt levels should be “put onto a gently declining path in order to create more fiscal headroom for when the next adverse shock comes along—as it inevitably will.”

References and Further Readings

Arnold, Martin. “ECB to Launch €750bn Bond-Buying Programme.” Financial Times, Nikkei, Inc., 19 Mar. 2020, www.ft.com/content/711c5df2-695e-11ea-800d-da70cff6e4d3.

Baldwin, Richard. “It’s Not Exponential: An Economist’s View of the Epidemiological Curve.” VoxEU, 12 Mar. 2020.

Baldwin, Richard and Beatrice Weder di Mauro eds., Mitigating the COVID Economic Crisis: Act Fast and Do Whatever It Takes, Centre for Economic Policy Research and VoxEU, 2020.

Bernard, Steven, et al. “Coronavirus Tracked: the Latest Figures as the Pandemic Spreads.” Financial Times, Nikkei, Inc., 24 Mar. 2020, www.ft.com/coronavirus-latest.

Brunnermeier, Markus, et al. “Throwing a COVID-19 Liquidity Life-Line.” Markus K. Brunnermeier, Princeton University, 17 Mar. 2020, scholar.princeton.edu/sites/default/files/markus/files/covid_liquiditylifeline.pdf.

Coronavirus Disease 2019 (COVID-19): Situation Report - 58. World Health Organization, 18 Mar. 2020, www.who.int/docs/default-source/coronaviruse/situation-reports/20200318-....

“Coronavirus: Chancellor Unveils £350bn Lifeline for Economy.” BBC News, British Broadcasting Corporation, 17 Mar. 2020, www.bbc.com/news/business-51935467.

Cowen, Tyler. “Policy Brief: Plans for Economic Mitigation from the Coronavirus.” Economics for Inclusive Prosperity, Mar. 2020, econfip.org/policy-brief/plans-for-economic-mitigation-from-the-coronavirus/.

Dupor, Bill. Possible Fiscal Policies for Rare, Unanticipated, and Severe Viral Outbreaks. Federal Reserve Bank of St. Louis, 17 Mar. 2020, research.stlouisfed.org/publications/economic-synopses/2020/03/17/possible-fiscal-policies-for-rare-unanticipated-and-severe-viral-outbreaks.

Furman, Jason. “Protecting People Now, Helping the Economy Rebound Later.” In:  Mitigating the COVID Economic Crisis: Act Fast and Do Whatever It Takes, Richard Baldwin and Beatrice Weder di Mauro eds., Centre for Economic Policy Research and VoxEU, 2020.

Garicano, Luis. “The COVID-19 Bazooka for Jobs in Europe.” VOX, CEPR Policy Portal, Centre for Economic Policy Research, 20 Mar. 2020, voxeu.org/article/covid-19-bazooka-jobs-europe.

Gopinath, Gita. “Limiting the Economic Fallout of the Coronavirus with Large Targeted Policies.” IMF Blog, International Monetary Fund, 18 Mar. 2020, blogs.imf.org/2020/03/09/limiting-the-economic-fallout-of-the-coronavirus-with-large-targeted-policies/.

Mankiw, Greg. “Thoughts on the Pandemic.” Greg Mankiw's Blog, 13 Mar. 2020, gregmankiw.blogspot.com/2020/03/thoughts-on-pandemic.html.

“A Protective Shield for Employees and Companies.” Federal Ministry for Economic Affairs and Energy, Federal Government of Germany, 13 Mar. 2020, www.bmwi.de/Redaktion/EN/Downloads/a/a-protective-shield-for-employees-a....

@R2Rsquared. “** Package of fiscal policies for the quarantine times | Follows my earlier thread emphasizing the impact of #covid19 crisis on the productive capacity of the economy. Focusing policy on making the loss of potential output smaller and more transitory. [1/16].” Twitter, 15 Mar. 2020, 8.11 p.m., twitter.com/R2Rsquared/status/1239162228336664577.

Saez, Emmanuel, and Gabriel Zucman. “Keeping Business Alive: The Government Will Pay .” Gabriel Zucman, 16 Mar. 2020, gabriel-zucman.eu/files/coronavirus2.pdf.

Sevastopulo, Demetri. “Trump Administration Looks at Sending Money Directly to Americans.” Financial Times, Nikkei, Inc., 17 Mar. 2020, www.ft.com/content/1b0d27a0-6857-11ea-800d-da70cff6e4d3?shareType=nongift.

 

[1] The survey was issued prior to the wage subsidy policy announcement.

 

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How the experts responded

Question 1

Participant Answer Confidence level Comment
Wendy Carlin's picture Wendy Carlin University College London Government transfers to and bailouts of businesses Confident
I interpret this to include the government's announced retention pay scheme - paying 80% of an employee's previous wage up to a cap. This preserves the employment relationship and is likely to permit a rapid return to normal levels of activity once the pandemic is over.
Jagjit Chadha's picture Jagjit Chadha National Institute of Economic and Social Research Government transfers to and bailouts of businesses Very confident
Firms have been subject to a shock that is outside of their control or their direct responsibility. There is no moral hazard question to answer and the state has a responsibility to provide insurance in this case. The shock ought to be time limited so we can match the insurance to a particular duration. Keeping firms afloat will best guarantee a return to normality eventually.
Benjamin Moll's picture Benjamin Moll London School of Economics Government credit support for businesses Very confident
Martin Ellison's picture Martin Ellison University of Oxford Broad cash transfers and/or tax cuts Very confident
The coronavirus is a huge shock to demand and supply that is persistent but likely temporary. The policy response therefore needs to focus on sustaining the economic system until the effects of the shock dissipate. It is critical that we retain the organisational capital of firms and the skills of workers, which are best guaranteed by direct cash injections to firms to guarantee their cash flow and direct cash payments to cover the salaries of workers temporarily laid off due to the virus. This is not about stimulating demand (with leisure facilities closed there’s very little for people to spend money on) but about maintaining the supply base of the economy. We have already seen productivity growth in the UK slowing since the Great Recession; productivity will collapse if government support is not forthcoming.
Francesca Monti's picture Francesca Monti Kings College London Government transfers to and bailouts of businesses Confident
The government should step in to address the liquidity shortages that will affect businesses as their revenues drop in the face of this shock. These transfers should be conditional on continuing to pay wages to all employees and contractors.
Ethan Ilzetzki's picture Ethan Ilzetzki London School of Economics Government transfers to and bailouts of businesses Very confident
Perfectly managed, the economic crisis could be short lived with the economy roaring back to its original condition after the health crisis is contained. Poorly managed, this short episode could have scarring effects on the economy that could last years. The latter would occur because of mass unemployment and business failure due to temporary closures of large portions of the economy. Some combination of transfers to (smaller) businesses and credit to (larger) businesses is the most direct way to keep them alive. I would make the transfers conditional on retaining staff at pre-crisis levels, which would also contain the damage to labour markets. Unlike in regular recessions, broad-based fiscal policy (tax cuts or transfers) or monetary policy (QE) won't be effective. Parts of the economy are shut down, so that consumption isn't possible or discouraged for health reasons. A visit to your local supermarket will illustrate that there is no lack of consumer spending in other parts of the economy. The multiplier effect of broad based policies will be very limited at this point and more targeted policies are necessary for this very unusual recession we are approaching. UK government debt was above 80% of GDP at the onset of the crisis. The government’s fiscal package combined with the slowdown of the UK economy may bring public debt to over 100% of GDP. The third question asks you about deficit concerns arising from the size of the fiscal responses currently considered.
Angus Armstrong's picture Angus Armstrong National Institute of Economic and Social Research None of the above, other, or no opinion Very confident
Govt's plan to underwrite 80% of wages is exactly the right move both economically and morally, which should not be ignored. It greatly lessons incentives on firms to fire staff when demand has come to a sudden stop and for households to engage in precuationary saving or try to return to work earlier than safe to do so. The private sector will not be spending so no problem with govt deficit. The tricky bits will be (a) delivering the payments, (b) not discouraging job moves, and (c) when to unwind scheme. But the right move.
Thorsten Beck's picture Thorsten Beck Cass Business School Government credit support for businesses Very confident
Support for businesses (possibly best done through credit guarantees), ideally at low or zero interest rates, allows firms to continue paying their employees and fulfil their other financial commitments, as revenues fall towards zero in many sectors. Such credit (guarantees) should have a grace period of six months (to be extended if necessary) and a reasonably long maturity. This allows economic activity to be frozen (mostly for health reasons) while preserving the plumbing of the modern market economy.
Wouter Den Haan's picture Wouter Den Haan London School of Economics Government credit support for businesses Not confident
To avoid long-term negative consequences, t is essential that we keep the economy's business network intact. To ensure this the first step is to offer credit support to survive a period of revenue reductions. However, when the revenues will be low for a sustained period, then more direct support/transfers will be necessary since the built up debt will not be sustainable.
David Miles's picture David Miles Imperial College None of the above, other, or no opinion Confident
The government should temporarily pay a high proportion of the wages of those who are unable to work because their employers cannot produce but on condition they are not laid off.
Tim Besley's picture Tim Besley London School of Economics None of the above, other, or no opinion Confident
I don't think that it makes a lot of sense to try ranking the impact of different measures at present. It is essential to have a portfolio of fiscal measures of the kind that we have already seen announced -- through tax/transfer schemes, grants to businesses (particular those aimed at retaining workers) and credit support which all make sense. There is much scope to learn as policies are rolled out and to try hard to plug obvious gaps in coverage as they emerge. And the scale/scope of measures should be kept under constant review. If needs be, these fiscal measures need to be supported by monetary actions such as QE.
David Cobham's picture David Cobham Heriot Watt University None of the above, other, or no opinion Very confident
The policy measure announced by the UK government since this survey was put together - paying 80% of employees' wages up to the limit of £2500 per month - looks right to me. It could be subsumed under 'broad cash transfers' but it seems better to enter it as a separate item. It needs to be supplemented now by some comparable scheme to help the self-employed (whose activities have been so much encouraged - directly and indirectly - by government policies in the last decade in particular).
Simon Wren-Lewis's picture Simon Wren-Lewis University of Oxford Government credit support for businesses Confident
As long as it is combined with the state paying most of each firm's wage bill.
Roger Farmer's picture Roger Farmer University of Warwick None of the above, other, or no opinion Extremely confident
All of the above. Cash transfers are essential to keep families afloat. Support for SMEs is essential to ensure that jobs do not disappear. Cash transfers to businesses will be more effective than low interest loans. These should financed by money creation. This is a temporary helicopter drop that will, and should, cause a once and for all price increase. As long as it is temporary and does not lead to a permanent money financed deficit, it will not lead to inflation. The second important element, so far missing in all countries policy responses, is QE through direct support of an index fund over a broad index of stocks. The Treasury should issue debt and use it to buy shares in an index fund of stocks. They should then announce a policy to support the price of that fund by unlimited purchases if necessary. This policy will pay for itself once the crisis is resolved and the market returns to its pre crisis value.
Chryssi Giannitsarou's picture Chryssi Giannitsarou University of Cambridge, Faculty of Economics Broad cash transfers and/or tax cuts Confident
Sir Charles Bean's picture Sir Charles Bean London School of Economics Government credit support for businesses Confident
The objective of policy should be to ensure that the unavoidable sharp (but temporary) disruption to both supply and demand resulting from the necessary actions to address the health crisis do not also result in permanent damage to the future supply capacity of the economy. Essentially that means the government acting as an 'insurer of last resort' to provide a bridge across the period of disruption so that viable businesses do not go bankrupt in the meantime. If the period of disruption is relatively short, that can be achieved through measures to ensure that loans are freely available on reasonable terms. Because these are loans, rather than transfers, they minimise the cost to the exchequer. If, however, the period of disruption is relatively long, then such a strategy will be inadequate as it will leave businesses (especially SMEs and those with relatively high fixed costs) with excessive levels of debt, so transfers/subsidies really need to be part of the package too, and more so the longer the disruption persists. In addition, measures - whether loans or transfers - need to be structured in a fashion that encourages firms to continue to retain and pay their workers (possibly at a reduced rate) during the period of disruption.
Ricardo Reis's picture Ricardo Reis London School of Economics Government credit support for businesses Extremely confident
First priority is to stop a cascade of defaults and layoffs to prevent the amplification of the crisis and a permanent impact on productive capacity. Credit as opposed to transfers/bailouts are preferred because (i) they preserve fiscal space, which will be needed very soon for the post-quarantine times and (ii) are better targeted to the problem, which is to cover costs and payments. (https://t.co/C28KajKxz1?amp=1)
Nicholas Oulton's picture Nicholas Oulton London School of Economics Making unemployment benefits more generous, streamlined, or comprehensive Very confident
This crisis is quite unlike an ordinary recession caused by a demand shock. There the response is to boost aggregate demand by fiscal and monetary policy. Ideally, though this is never achieved in practice, the policy is so well designed that we never see a decline in output and employment. But with the Covid-19 crisis a decline in GDP is inevitable since large parts of the economy are shut down either by high sickness rates amongst workers or by social distancing by consumers leading to closures of pubs restaurants, cinemas, theatres, etc. Since a hit to GDP is inevitable, the real issue is how to share the burden fairly and protect the vulnerable. It is also necessary to prevent unnecessary losses of GDP and employment in the rest of the economy, i.e. second round effects: Demand could fall in the rest of the economy if mass redundancies are allowed to occur in the most affected sectors. Given this analysis, the best response of those offered in the question is “”Making unemployment benefits more generous, etc”. But I hope it would be possible to do better than this. The government should in effect take on a large part of the employment costs of workers in the most affected sectors, on condition that workers are not made redundant but kept on the books. Bailouts of businesses may be needed too but should also come with strings. “Broad cash transfers and/or tax cuts” may have a role in preventing secondary effects but should not be the main focus, unless the first best policy is for some reason infeasible.
Michael Wickens's picture Michael Wickens Cardiff Business School & University of York Government credit support for businesses Very confident
As this is both a demand and supply shock both credit support for business and broad transfers to employed and unemployed are required.
Linda Yueh's picture Linda Yueh London Business School Broad cash transfers and/or tax cuts Extremely confident
Costas Milas's picture Costas Milas University of Liverpool Broad cash transfers and/or tax cuts Confident
Government spending. This is likely to be more effective than tax cuts in stimulating the economy in the short run. Co-ordination is important, as echoed by the head of the IMF, because countries trade with each other. If one does “enough” to restore its supply chain and demand but others don’t, we will all still be stuck with the problems in supply and demand that are driving the economy down. For instance, governments can support those who have lost their jobs or are quarantined. This is arguably more pressing in the UK, where unemployment benefits are much lower as a percentage of previous income than in the OECD average. Indeed, unemployment benefits account for 34% of previous income in the UK for the first 2 months as opposed to 64% for the OECD average (https://data.oecd.org/benwage/benefits-in-unemployment-share-of-previous-income.htm). Another good move would be to increase wages for those on the front line, such as nurses, whose starting salaries took a hit in real terms after the last financial crisis (https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/819464/NHSPRB_2019_Report_Web_Accessible__1_.pdf).
Tony Yates's picture Tony Yates University of Birmingham Government transfers to and bailouts of businesses Confident
I think we should and probably will end up doing most of these as the seriousness of the crisis changes the political imperatives in the govt.
Paul De Grauwe's picture Paul De Grauwe London School of Economics Government credit support for businesses Very confident
Michael McMahon's picture Michael McMahon University of Oxford Government transfers to and bailouts of businesses Very confident
I think the first key to the economic recovery will be having businesses in place to re-hire staff and resume some sort of normal business and especially service provision. It would be possible to make these conditional on businesses maintaining employment levels or paying staff somewhat while the economy is frozen during the isolation periods. I think that the uncertainty as to how long such isolation will last makes the provision of even favourable credit too much of a future burden for small firms to maintain employment if they face (nearly) complete shut down such as bars, hotels, and restaurants. And credit doesn't help the self-employed and people in the gig economy much either for similar reasons. These people also need to be able to continue to provide food and pay rent/mortgage while their earning opportunities are low or zero. As such, direct transfers to businesses are necessary.
Panicos Demetriades's picture Panicos Demetriades University of Leicester Broad cash transfers and/or tax cuts Extremely confident
The crisis is severe and is becoming widespread. Time is of the essence. The policy response has to be swift. Targeted responses that involve conditionality and a lot of paperwork cannot be definition be quick. A broad based tax cut can benefit the employed but will not benefit the unemployed. A cash transfer would benefit everyone. A three month holiday on mortgage payments and credit card debts backed by regulatory forbearance will benefit the indebted and can protect those who are temporarily laid off. Another way to support households is to allow withdrawals from pension funds without tax penalties while the crisis lasts. This will have no immediate fiscal impact but can allow households to smooth consumption.
Morten Ravn's picture Morten Ravn University College London Government credit support for businesses Very confident
I think it is important to aim at minimizing the extent to firms do not destroy otherwise productive jobs. So government should cover (high share of) labor costs and possible lost revenues of firms to make sure that jobs are retained as far as possible. This can be even be done on an insurance basis. This is extra important for SMEs which will be less able to come through the crisis without laying off employees and without closing down business than larger firms. This will also help fighting the health crisis by facilitiating closure and social distancing policies.This is a double-dividend property that other policies do not have. In addition it will put the economy in a stronger position to recover after the crisis.
Elias Papaioannou's picture Elias Papaioannou London Business School Broad cash transfers and/or tax cuts Very confident
- cash transfers to employees or alternatively to firms, with a scheme that they cover some modest percentage (10%-30% depending on sectors) - the government covers social security, health, and even pension contributions for the next 4 months, reducing firms' de facto burden - initiate infrastructure spending (US and Germany); though such government spending comes with delays it may help on expectations - major non-targetted corporate tax cuts unlikely to spur demand, but consider delaying tax payments - consider lowering tax rates for low-income and lower-middle-income households for the current and subsequent year
Lucio Sarno's picture Lucio Sarno Cass Business School Government credit support for businesses Confident

Question 2

Participant Answer Confidence level Comment
Wendy Carlin's picture Wendy Carlin University College London Making unemployment benefits more generous, streamlined, or comprehensive Confident
Given the support for employees (and their employers) in the Question 1, this will help fill the income gap for those with more precarious employment, allowing people to pay their bills and buy essentials.
Jagjit Chadha's picture Jagjit Chadha National Institute of Economic and Social Research Government credit support for businesses Very confident
Businesses will need help with cash flow and with working capital at this time. I would include the self-employed as part of the business group in this case. And we should be thinking of how to support them as well at this time.
Benjamin Moll's picture Benjamin Moll London School of Economics Making unemployment benefits more generous, streamlined, or comprehensive Very confident
Francesca Monti's picture Francesca Monti Kings College London Making unemployment benefits more generous, streamlined, or comprehensive Confident
The measures should be addressed to help self-employed workers, gig workers and the unemployed, so that they can keep afloat and make good of their financial commitments, even as their revenues dry up.
Martin Ellison's picture Martin Ellison University of Oxford Government transfers to and bailouts of businesses Very confident
In effect, we need to pause economic time until the virus passes. Extending credit to firms and workers helps to some extent but is likely to cause problems in the future when they have to cope with severe debt overhangs. Better that the whole society takes the hit now by making cash transfers funded by increasing public debt. Interest rates are very low by historical standards so debt servicing costs are minimal, and markets still appear willing to lend to the UK government. The UK budget deficit rose in excess of 20% of GDP in both World War I and II, leading to large spikes in debt, but which we were able to pay down in subsequent years through a combination of GDP growth, inflation and (some) primary surpluses. I would hence like to see much larger scale interventions than have been agreed so far. What’s the point of having a nation state with an ability to borrow large amounts of money cheaply if we don’t use that ability when there is a crisis of this type?
Ethan Ilzetzki's picture Ethan Ilzetzki London School of Economics Making unemployment benefits more generous, streamlined, or comprehensive Very confident
Support to businesses won't help the large number of freelance workers, those in the gig economy, and workers on zero hour contracts. In addition to supporting businesses small and large, it is crucial to support workers directly. This isn't the time to worry about moral hazard problems in unemployment insurance and temporary benefits that are very easy to access should be put in place. The wage replacement policies announced this week are a step in the right direction.
Angus Armstrong's picture Angus Armstrong National Institute of Economic and Social Research Government credit support for businesses Confident
Businesses face a sudden-stop in demand and so some support is necessary. While credit support is fastest and simplest, the design is crucial. For medium and large size companies they can repay or if there is a problem after say 6 months the credit is converted into equity. This will avoid a credit overhang and making the shadow of the crisis longer than necessary. The equity could be held by the British Business Bank, overnight transforming it into a decent size institution with a different mandate creating more diversity in the financial ecosystem. It may even herald the start of state equity stakes and reduce the dependence of debt finance.
Thorsten Beck's picture Thorsten Beck Cass Business School Government transfers to and bailouts of businesses Very confident
The question refers to economic growth, not to economic equity or fairness. In this sense, supporting businesses to recover from the Corona-recession as quickly as possible will be critical. While providing credit (guarantees) might them help through the recession, losses will still be there and firms might have to thin an equity buffer (to be able to roll over or attract new debt funding) to continue functioning. Recapitalisation of firms in certain industries (such as transportation) might be therefore necessary. Obviously, this should come with strings. While nationalisation might not be the best way to go, recapitalising in the form of preferred shares and restrictions on executive pay and dividend payments might work. In some industries (e.g., rail services) this might also be a good moment to restructure ownership and management of service provision.
Wouter Den Haan's picture Wouter Den Haan London School of Economics Government transfers to and bailouts of businesses Not confident
To avoid long-term negative consequences, t is essential that we keep the economy's business network intact. To ensure this the first step is to offer credit support to survive a period of revenue reductions. However, when the revenues will be low for a sustained period, then more direct support/transfers will be necessary since the built up debt will not be sustainable.
David Miles's picture David Miles Imperial College Financial asset purchases including QE Confident
Governments will be running huge fiscal deficits. There may be temporary indigestion in bond markets buying a vast amounts of new government debt. The central bank should be willing to buy large amounts of government debt to alleviate this. This is NOT helicopter drops and NOT printing money in the form of non-interest bearing notes to fund spending - reserves are interest bearing, or will become so when central banks put rates back into positive territory and that happens when things start to return to normal.
Tim Besley's picture Tim Besley London School of Economics None of the above, other, or no opinion Confident
Same answer as to question 1.
David Cobham's picture David Cobham Heriot Watt University Making unemployment benefits more generous, streamlined, or comprehensive Very confident
This provides the key safety net when, or for whom, the other measures mentioned above fail.
Simon Wren-Lewis's picture Simon Wren-Lewis University of Oxford None of the above, other, or no opinion Very confident
Need in addition to first choice raising sick pay levels, support for self-employed and raising welfare payments of most kinds.
Roger Farmer's picture Roger Farmer University of Warwick Financial asset purchases including QE Extremely confident
There has been a great deal of interest in NGDP targeting. The arguments of the proponents of this policy are often misunderstood. Real GDP will fall; perhaps by a lot. Nominal GDP should not be allowed to fall. The best way to achieve that goal is by direct intervention in the asset markets. Scott Sumner has advocated central bank intervention in the NGDP futures market. But that market is thin or non existent. A better alternative is to intervene directly in the stock market. The Treasury should first define the assets it is prepared to buy. This should be a very broad value weighted index fund over all publicly traded stocks. Second, it should purchase a sizable chunk of assets, financed by issuing gilts. Third, it should stand ready to buy or sell that fund to support its price at a preannounced value and adjust that price to target a price path for NGDP.
Chryssi Giannitsarou's picture Chryssi Giannitsarou University of Cambridge, Faculty of Economics Government transfers to and bailouts of businesses Confident
Sir Charles Bean's picture Sir Charles Bean London School of Economics Government transfers to and bailouts of businesses Confident
Ricardo Reis's picture Ricardo Reis London School of Economics Making unemployment benefits more generous, streamlined, or comprehensive Extremely confident
The social safety net has to be there for these crisis times. Moreover, if it proves to fail, the uncertainty that follows will cause a paradox-of-thrift slump (https://ideas.repec.org/p/cpr/ceprdp/9454.html)
Nicholas Oulton's picture Nicholas Oulton London School of Economics Government transfers to and bailouts of businesses Very confident
See my comment on Question 1.
Michael Wickens's picture Michael Wickens Cardiff Business School & University of York Broad cash transfers and/or tax cuts Very confident
see answer to question 1
Linda Yueh's picture Linda Yueh London Business School Government credit support for businesses Very confident
Costas Milas's picture Costas Milas University of Liverpool Government credit support for businesses Confident
Tony Yates's picture Tony Yates University of Birmingham Government transfers to and bailouts of businesses Confident
Paul De Grauwe's picture Paul De Grauwe London School of Economics Making unemployment benefits more generous, streamlined, or comprehensive Confident
Michael McMahon's picture Michael McMahon University of Oxford Broad cash transfers and/or tax cuts Very confident
My answer is first support for business and then (but almost equally important) the support for households through direct transfers. Tax cuts do not help households in the traditional sense since they will mostly benefit those earning and miss those who lose their job and the multiplier will be small if people cannot spend as usual.
John VanReenen's picture John VanReenen London School of Economics Making unemployment benefits more generous, streamlined, or comprehensive Confident
Panicos Demetriades's picture Panicos Demetriades University of Leicester Government credit support for businesses Extremely confident
Many businesses that were solvent before the crisis need to be able to access liquidity quickly. This can be achieved through the banking system.
Morten Ravn's picture Morten Ravn University College London None of the above, other, or no opinion Very confident
I think unemployment benefits can be extended in duration without any negative impact on incentives. It would also be a good idea to provide income support to low income households who lose their jobs or have problems paying rent, mortgages, etc.. It would seem a great idea to stop student loan repayments. I see less reason right now for providing transfers to better off households.
Elias Papaioannou's picture Elias Papaioannou London Business School Making unemployment benefits more generous, streamlined, or comprehensive Confident
- while the focus should be in keeping employment, it is unlikely that firms will not proceed to layoffs - it is needed, for both economic and moral reasons, to assist the unemployed - at the minimum unemployment benefits should be streamlined; coverage should be expanded and replacement rates should approach 90% as it is evident that neither the employees nor employers were responsible.
Lucio Sarno's picture Lucio Sarno Cass Business School Broad cash transfers and/or tax cuts Very confident

Question 3

Participant Answer Confidence level Comment
Wendy Carlin's picture Wendy Carlin University College London >140% of GDP Confident
This is a situation for which the use of the public debt as a shock absorber is appropriate, and the interest burden will be limited by the very low interest rate on public debt. If stringent measures to control the spread of the virus are implemented (a big 'if' as of now), then combined with a coherent package of measures to 'hold' economic relationships in place, the recession will be V-shaped and longer term economic damage will be limited.
Jagjit Chadha's picture Jagjit Chadha National Institute of Economic and Social Research >140% of GDP Confident
The UK relies heavily on overseas financing of the current account deficit so monetary-fiscal operations must be within a stable framework. But at such low global real interest rates there is a considerable room for offsetting this crisis and ensuring that it does not scar the economy for a generation. Wartime debt levels have risen to these levels and were managed with a long periods of post-war adjustment.
Benjamin Moll's picture Benjamin Moll London School of Economics 140% of GDP (e.g. if fiscal support were trippled) Not confident
Francesca Monti's picture Francesca Monti Kings College London 120% of GDP (e.g. if fiscal support were doubled) Not confident
There are various examples of G20 countries running these levels of debt. With reasonable growth rates in the future, and assuming that the government could continue to borrow at low rates, a 120% debt-to-GDP ratio could still be sustainable.
Ethan Ilzetzki's picture Ethan Ilzetzki London School of Economics 140% of GDP (e.g. if fiscal support were trippled) Not confident
This is a grave and (hopefully) one-off emergency and the UK government should do what it takes to support NHS and the economy over the upcoming months. With 10-year bond yields at 0.6% the public is currently paying the government to borrow from it and I'm not concerned about the UK government's borrowing capacity--at the moment. My answer would be different for emerging market economies that might have to take fiscal space into account. The only reason I didn't choose >140% is my concern about the opportunity cost. There will be social needs and possibly even greater crises in the future (we didn't anticipate this one, did we?) and I do think there may be an eventual day of reckoning on public debt. 60% of GDP is enough for the government to replace all incomes nearly to the end of the year, so should be more than enough for all the measures necessary.
Angus Armstrong's picture Angus Armstrong National Institute of Economic and Social Research >140% of GDP Very confident
Everything is contingent on the disease, but protection of citizens is the first job of the state. Failure to do so would lead to anarchy and so I do not think an upper bound can be guessed without a clear statement of the upper bound on the disease which we are yet to know (e.g., some epidemiologists expect secondary waves of infection).
Thorsten Beck's picture Thorsten Beck Cass Business School 140% of GDP (e.g. if fiscal support were trippled) Confident
This question gets us back to the fiscal policy debate of the 2010s in the UK, where government ignored the advice of national and international "experts" in their mis-guided austerity drive. I do not think that there is a magic fixed debt threshold above which public debt in the UK with its own currency and flexible exchange rate becomes unsustainable. To the contrary, a big fiscal recovery package now can stimulate the economy and help reduce debt/GDP in long-run. It might also help reduce the shock to be expected from the UK exiting from the Single Market and Customs Union at the end of this or (more likely) next year.
Wouter Den Haan's picture Wouter Den Haan London School of Economics >140% of GDP Not confident
whatever it takes
David Miles's picture David Miles Imperial College 140% of GDP (e.g. if fiscal support were trippled) Not confident
Who knows what may be needed. The UK ended the Napoleonic wars and the first and second world wars with vastly higher debt to GDP than 140% of GDP . That debt came down fairly smoothly.
Tim Besley's picture Tim Besley London School of Economics No opinion Confident
David Cobham's picture David Cobham Heriot Watt University 120% of GDP (e.g. if fiscal support were doubled) Confident
There needs to be room for further fiscal expansion if required, but a limit of 120% would help to ensure the possibility of an eventual return to normal levels (a return not to be hurried for the wrong reasons as it was after 2008).
Simon Wren-Lewis's picture Simon Wren-Lewis University of Oxford >140% of GDP Extremely confident
This should not be an issue.
Roger Farmer's picture Roger Farmer University of Warwick >140% of GDP Extremely confident
In the current low interest rate climate, there should be no limit on the size of a temporary fiscal expansion as long as it is financed by money creation. This is NOT an argument in support of modern monetary theory. The stipulation that this would be a temporary measure, designed to preserve employment relationships, is critical. Inflation is caused by growth in nominal demand, fueled by ever increasing nominal debt. Now is NOT the time to be concerned about nominal debt.
Chryssi Giannitsarou's picture Chryssi Giannitsarou University of Cambridge, Faculty of Economics 100% of GDP: Current policy Not confident
Sir Charles Bean's picture Sir Charles Bean London School of Economics 120% of GDP (e.g. if fiscal support were doubled) Confident
We should not be overly concerned about incurring high public debt to deal with the crisis caused by the virus. Like a war (or the financial crisis), this is the classic shock that warrants a temporary period of (possibly much) higher borrowing. The reaaly important thing is that after the crisis has past, the debt/GDP ratio is put onto a gently declining path in order to create more fiscal headroom for when the next adverse shock comes along - as it inevitably will.
Ricardo Reis's picture Ricardo Reis London School of Economics 140% of GDP (e.g. if fiscal support were trippled) Not confident
Very hard to guess what real interest rates will be like once this crisis is over, and so how sustainable it will be. Importantly, it depends on how long we will been on lockdown.
Nicholas Oulton's picture Nicholas Oulton London School of Economics 120% of GDP (e.g. if fiscal support were doubled) Confident
Assuming the virus dies out during this year the effect on the debt level need not be that great. Suppose GDP falls by say 7% after 2 quarters (a bigger hit than in 2008-2009). Then a rise in public debt from 80% to 120% of GDP is a generous allowance. Under this scenario a fairly rapid recovery after a V-shaped recession is possible. However if the virus returns, possibly in more virulent form as did Spanish flu, then I might have to rethink this.
Michael Wickens's picture Michael Wickens Cardiff Business School & University of York 100% of GDP: Current policy Confident
For a short time and if tax revenues return after the epidemic then it doesn't really matter about debt levels. This is an occasion where the current generation can borrow on future generations as they will shortly be the generation that also pays off debt.
Linda Yueh's picture Linda Yueh London Business School No opinion Confident
Costas Milas's picture Costas Milas University of Liverpool No opinion Confident
I wouldn't be comfortable to specify a 'debt ceiling'. The main point here is to make sure that enough is done to save lives, support the most vulnerable and those that will lose their jobs, for instance. The hope is that the shock will only be temporary so that debt will not have to climb wildly...
Andrew Mountford's picture Andrew Mountford Royal Holloway >140% of GDP Extremely confident
Tony Yates's picture Tony Yates University of Birmingham >140% of GDP Not confident
With real rates so low, I don't think worries about the debt burden should or will constrain aid and stimulus to counter the effects of the virus crisis. What will constrain it is politics and the administrative unpreparedness of the tax and benefit system to do it quickly and error free.
Paul De Grauwe's picture Paul De Grauwe London School of Economics No opinion Confident
There is not scientific basis for any of these numbers
Michael McMahon's picture Michael McMahon University of Oxford >140% of GDP Confident
This is a whatever it takes moment and the first use of fiscal funds has to be on supporting the health sector. The recession is desirable from a public health perspective. But then the options listed above are needed for the economic support during the epidemic crisis and subsequent support for the recovery. It will be very costly but it is necessary.
Panicos Demetriades's picture Panicos Demetriades University of Leicester >140% of GDP Extremely confident
This is no time for fiscal rules! These are extraordinary times and extraordinary measures are needed to fight this unprecedented war.
Morten Ravn's picture Morten Ravn University College London No opinion Very confident
At this point, there do not seem to be reason to worry about public debt, it's more important to avoid that the economy comes to a stand still. The government still has the option to cancel Brexit which would help coping with the shock.
Elias Papaioannou's picture Elias Papaioannou London Business School 140% of GDP (e.g. if fiscal support were trippled) Confident
the interest costs for governments are quite long, both for short-term and long-dated bonds although yields may increase if governments massively expand their purcahses and implement tax cuts, such investments are likely yielding a higher return. Moreover in a period of plummeting trust to governments, corporations, democracy, and free-market institutions and rising populism, it is vital to show to people that their government is here to support them central banks QE policies can also help in this regard
Lucio Sarno's picture Lucio Sarno Cass Business School 100% of GDP: Current policy Confident