Policies for a Coronavirus Shut-down Recovery
As states begin to reopen and policymakers begin to shift their focus from solely fighting COVID-19 to also fighting the economic and social harms that resulted from shutting down the economy, not all policy solutions are equally valuable.
Below are five key policies to ensure that Kentucky can emerge from COVID-19 as strong as possible. Over the next few weeks, we will expand upon some of these recommendations.
1. Do the same with less, but if need be, do less with less.
The COVID-19 economic shut down will lead to significant budget holes. Already, General Fund tax receipts in April fell nearly $433 million below collections from 2019. Research by Pegasus Institute Associate Fellow Steven Gordon found that Kentucky may have to exhaust its rainy day fund but would still wind up hundreds of millions of dollars in the red.
These budget problems permeate from the state level down to localities of all sizes. Kentucky’s three largest cities are projected to be some of the hardest hit in the nation based on a Brookings Institute study. Counties and smaller cities can likewise expect significant budget shortfalls.
Nearly every peer-reviewed empirical study on taxes and economic growth has found that tax increases harm economic growth. Given the unique nature of this recession, raising taxes to fill these budget shortfalls would be particularly be harmful.
The U.S. unemployment rate hit 14.7% in April, the highest rate since the Great Depression, and analysts have projected that those in the middle class will be in a particularly vulnerable position moving forward. In Kentucky, 32% of the workforce has filed for unemployment since the shutdown began. Now is not the time to further burden Kentuckians with tax increases.
2. Insulate public safety, particularly law enforcement, from budget cuts.
The impact of law enforcement on crime is well documented, more officers means less crime. Recessions can have a profound impact on police force numbers and, by extension, on policing if steps are not taken to ensure they are insulated from budget cuts.
During an economic downturn like this, law enforcement matter because of the substantial impact crime can have on poverty. Increased crime in a neighborhood drives out business, limits economic opportunity, and can further economically depress an area.
Before COVID-19, law enforcement agencies in Kentucky already struggled with recruitment and retention problems. Twenty-three of the state’s smaller counties had 0.0 local, full-time law enforcement officers per 1,000 residents. While the state’s two largest police agencies, the Louisville Metro Police Department and the Kentucky State Police, saw double-digit reductions in force size over the last 5 years.
While budgeting to do the same or less with less, policymakers at the state and local level should insulate law enforcement from budget cuts.
3. Reduce barriers to entry in the marketplace.
With such a large percentage of the workforce forced out of work for a prolonged period, some of those jobs and employers will never come back. This means high-skilled laborers may be looking to strike out on their own.
Policymakers should reduce the barriers for these individuals to enter the marketplace – barriers like occupational licenses. Approximately 19.4% Kentucky’s workforce —about 400,000 people – perform a job that requires and occupational license. These government mandates cost Kentucky an estimated 20,000 jobs.
We have put forward a proposal to reform Kentucky’s Occupational License process. This would help ensure that those who can and want to work are able to without arbitrary government intrusion.
4. Reduce the cost of labor to ease employee rehiring.
Due to state-prompted shut downs and significant reductions in consumer demand, it is unlikely that the US labor market will bounce back immediately after COVID-19. Many department stores and mall anchors have filed for bankruptcy. Some companies are even looking to speed up transitions to robotic employees.
One way to help reduce the cost of human labor is a payroll tax holiday. We have previously opposed a payroll tax holiday as a part of a COVID-19 stimulus plan as it did not make much sense as part of a targeted attempt to inject spending into the market. However, it might offer strategic benefits as part of a medium-term recovery plan. While the measure would impose significant costs on the Social Security and Medicare Trust Funds, it would automatically reduce the cost of hiring back employees or hiring new employees by 7.65%, while temporarily boosting employee pay by the same 7.65%.
In an April 19 Wall St. Journal op-ed, economist Arthur Laffer and Steve Forbes make a powerful case for such a holiday. This remedy is not without its costs, but it is worth considering.
Ultimately, we cannot consume what we do not produce, so only getting folks in Kentucky and around the country back to work will allow the economy to recover.
5. Ensure adequate PPE for employees and customers.
Most of these policy proposals will be ineffective if people do not feel safe returning to work or to their regular consumption habits. One of the ways to help people feel comfortable participating in a reopened economy is to ensure that employees and consumers have adequate access to masks, gloves, and other personal protective equipment.
Insufficient PPE has disrupted the meat supply chain in several states. Here in Kentucky, Agriculture Commissioner Ryan Quarrels and United Food and Commercial Workers Local 227 Union have both reached out to Governor Beshear about inadequate PPE supplies at local meat packing plants. As of May 5, they still had not heard back. Making sure that employees have access to PPE will give them confidence to return to work and prevent further economic disruptions.
Governments should not simply hoard PPE for essential operations because without adequate access, consumers will likely not return to normal shopping and travel practices until there is a proven treatment or vaccine for COVID-19.
Policymakers must balance the needs of suppliers and consumers here.
Overall, policymakers must balance economic realities with the essential functions of government, while allowing the market to do what the market does best – ensuring the optimal disbursement of goods and services.
A substantial portion of economic and social damage has already been done, and bad policies upon reopening can further exacerbate that. Good policies can limit the impact of that damage.