With the stock market plummeting and hysteria around COVID-19 (commonly known as the coronavirus) escalating, it is time to get serious about the economic policy response. Policymakers and the public will need help in distinguishing between smart responses and those that are just ideological opportunism, such as calls for cuts in taxes and regulations, for example.

Simply put, smart responses must be tailored to the type of recession the outbreak could cause if policymakers didn’t act.

The three key elements of a potential COVID-19 recession are:

  • If it comes it will come fast,
  • It will hit lower-wage workers first and hardest, and
  • It will impose even faster and larger costs on state and local governments than recessions normally do.

Each one of these should be targeted directly.

Any economic relief package should come online quickly, it should be even more targeted to help lower-wage workers than usual, and it should rapidly boost state and local government capacity on both the public health and economic fronts. Below I sketch out why these characteristics of the COVID-19 slowdown are likely, and what a tailored response to each would be.

First, if the COVID-19 outbreak slows the economy, it could happen very rapidly. This is quite different, for example, than the onset of the Great Recession. That recession was caused by the bursting of the home price bubble, which essentially began in mid-2006. From that point on the recession was near-inevitable, but it took literally years to gather steam. As the Great Recession loomed, the key characteristics policymakers should have demanded of any proposed stimulus package should have been: effective, large and sustained. Fiscal policymakers decisively failed on the last point, and dwindling fiscal support hampered recovery for years.

A COVID-19 driven recession would be quite different in that it would hit quickly. The spread of the disease has been quite rapid in each country it has affected. Further, the public health response to maintain “social distancing” to thwart its spread tends to take effect rapidly as well. Even before the reported cases in the U.S. have reached large numbers the news are full of cascading cancellations of business and entertainment gatherings. We are almost certainly already feeling the economic effects of the COVID-19 slowdown—it just has not appeared in economic statistics yet (since these statistics tend to appear with a small lag).

Second, the sectors that will be first hit by “social distancing” measures disproportionately employ low-wage workers. Traditionally, manufacturing and construction–two comparatively high-paid industries—have been the first to dip in recessions. Lower-wage workers are hit as the initial demand shock propagates, but their sectors tend not to be ground zero of the slowdown. Again, COVID-19 will be different. The sectors that will be directly affected by “social distancing”—restaurants, retail (excluding online), and personal services, for example—are sectors with lower wages than average. Crucially, workers in these sectors also have low rates of paid sick leave. Between low-pay and lack of access to sick leave and health insurance coverage, these workers on the economic front lines of COVID-19 will need lots of help quickly.

Third, many of the public health interventions that will be undertaken in the coming weeks will be done by state and local governments. These governments should be encouraged as strongly as possible to spare no expense in undertaking any public health intervention that will help.

Further, state and local government spending predictably becomes a powerful anti-stimulus whenever the overall economy is hit by a negative shock. Negative economic shocks reduce income and spending, which in turn reduces income and sales tax revenues collected by state and local governments. Because these governments have to balance operating budgets, this decline in tax collections tends to spur spending cutbacks, which powerfully drag on economic growth. This dynamic was a key reason why recovery from the Great Recession took so long.

Given these characteristics of a potential COVID-19 economic shock, what should be done to muffle its damage?

The first two characteristics of a potential COVID-19 slowdown—that it could come fast and come straight for low-wage workers first—suggest one potential response: rapid direct payments to individuals.

In February 2008, the administration of George W. Bush signed the Economic Stimulus Act of 2008, which sent out checks of $600 for individual tax-filers and $1,200 for joint tax filers (and another $300 per child) to blunt the oncoming recession. The first checks were mailed within 6 weeks of the bill’s passage. They were largely “refundable” (i.e., those with even very small amounts of income tax liability received them).

We could use this model but do even better this time. For one, to have a similar stimulus relative to the size of the economy, the checks would have to be larger. Jason Furman, chief economic adviser in the Obama administration, has recommended they be $1,000 for each individual and $500 per child. This seems like a good number to start. The payments should be 100% refundable—they should not be reduced at all for workers and families without income tax liability. They could be increased for lower-income households by starting at $2,000 per individual and $1,000 per child and phase out as incomes rise.

Besides needing money to tide them over when they can’t work, low-wage workers could also use protection against being let go by employers when they can’t show up to work due to their sickness (or the sickness of family members).

In the long-run, this shines a bright light on how paid sick leave should be a basic mandated labor standard, and policymakers should pass the Healthy Families Act in coming weeks. Besides giving workers the chance to earn sick leave in normal times, this bill also provides for 14 days of paid leave immediately in the current emergency. Employers could be given temporary tax credits to help them finance the initial emergency allotment of sick leave (or to finance any other temporary cutback of workers’ hours). Workers in likely-affected industries also tend to have lower rates of health insurance coverage than average. It would be a public health disaster if many people did not get tested or treated for fear of costs. To address this, Medicare should be used to pick-up all COVID-19 related costs for the foreseeable future.

A quick way to transfer resources to state governments is to pay states’ share of Medicaid for the next year. This was done as part of the Recovery Act in 2009, and it is possibly the single most-effective component of the Act (when combining scale and per-dollar impact). This infusion of resources can happen quickly—Congress could announce it this week and it would instantly provide a vast increase in resources available to state governments. This would allow these governments to make all the public health investments they need during the outbreak, and would also erect a firewall against the typical anti-stimulus that state and local spending imposes in response to negative economic shocks.

Stimulus proposals should take into account the specifics of the economic shock they’re responding to. In coming days and weeks, many proposals will be floated that have nothing to do with the specifics of the shock coming our way. Income tax cuts, or further business tax cuts, or slight pro-business tweaks to the 2017 tax cut will likely be offered up. This is ideological opportunism that nobody should take seriously.

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