This article is part ofa series in which leading commentators and policymakers give their views on alleviating the devastating global slowdown
The writer is a former president of the European Central Bank
The coronavirus pandemic is a human tragedy of potentially biblical proportions. Many today are living in fear of their lives or mourning their loved ones. The actions being taken by governments to prevent our health systems from being overwhelmed are brave and necessary. They must be supported.
But those actions also come with a huge and unavoidable economic cost. While many face a loss of life, a great many more face a loss of livelihood. Day by day, the economic news is worsening.Companies face a loss of income across the whole economy. A great many are already downsizing and laying off workers. A deep recession is inevitable.
The challenge we face is how to act with sufficient strength and speed to prevent the recession from morphing into a prolonged depression, made deeper by aplethora of defaults leaving irreversible damage. It is already clear that the answer must involve a significant increase in public debt. The loss of income incurred by the private sector and any debt raised to fill the gap must eventually be absorbed, wholly or in part, on to government balance sheets. Much higher public debt levels will become a permanent feature of our economies and will be accompanied by private debt cancellation.
It is the proper role of the state to deploy its balance sheet to protect citizens and the economy against shocks that the private sector is not responsible for and cannot absorb. States have always done so in the face of national emergencies. Wars the most relevant precedent were financed by increases in public debt. During the first world war, in Italy and Germany between 6 and 15 per cent of war spending in real terms was financed from taxes. In Austria-Hungary, Russia and France, none of thecontinuing costs of the war were paid out of taxes. Everywhere, the tax base was eroded by war damage and conscription. Today, it is by the pandemics human distress and the shutdown.
The key question is not whether but how the state should put its balance sheet to good use. The priority must not only be providing basic income for those who lose their jobs. We must protect people from losing their jobs in the first place. If we do not, we will emerge from this crisis with permanently lower employment and capacity, as families andcompanies struggle to repair their balance sheets and rebuild net assets.
Employment and unemployment subsidies and the postponement of taxes are important steps that have already been introduced by many governments. But protecting employment and productive capacity at a time of dramatic income loss requires immediate liquidity support. This is essential for allbusinesses to cover their operating expenses during the crisis, be they large corporations or even more so small and medium-sized enterprises and self-employed entrepreneurs. Several governments have already introduced welcome measures to channel liquidity to struggling businesses. But a more comprehensive approach is needed.
While different European countries havevarying financial and industrial structures, the only effective way to reach immediately into every crack of the economy is to fully mobilise their entire financial systems: bond markets, mostly for large corporates, banking systems and in some countries even the postal system for everybody else. And it has to be done immediately, avoiding bureaucratic delays. Banks in particular extend across the entire economy and can create money instantly by allowing overdrafts or opening credit facilities.
Banks must rapidly lend funds at zero cost tocompanies prepared to save jobs. Since in this way they are becoming a vehicle for public policy, the capital they need to perform this task must be provided by the government in the form of state guarantees on all additional overdrafts or loans. Neither regulation nor collateral rules should stand in the way of creating all the space needed in bank balance sheets for this purpose. Furthermore, the cost of these guarantees should not be based on the credit risk of thecompany that receives them, but should be zero regardless of the cost of funding of the government that issues them.
Companies, however, will not draw on liquidity support simply because credit is cheap. In some cases, for examplebusinesses with an order backlog, their losses may be recoverable and then they will repay debt. In other sectors, this will probably not be the case.
Suchcompanies may still be able to absorb this crisis for a short period of time and raise debt to keep their staff in work. But their accumulated losses risk impairing their ability to invest afterwards. And, were the virus outbreak and associated lockdowns to last, they could realistically remain in business only if the debt raised to keep people employed during that time were eventually cancelled.
Either governments compensate borrowers for their expenses, or those borrowers will fail and the guarantee will be made good by the government. If moral hazard can be contained, the former is better for the economy. The second route is likely to be less costly for the budget. Both cases will lead to governments absorbing a large share of the income loss caused by the shutdown, if jobs and capacity are to be protected.
Public debt levels will have increased. But the alternative a permanent destruction of productive capacity and therefore of the fiscal base would be much more damaging to the economy and eventually to government credit. We must also remember that given the present andprobable future levels of interest rates, such an increase in government debt will not add to its servicing costs.
In some respects, Europe is well equipped to deal with this extraordinary shock. It has a granular financial structure able to channel funds to every part of the economy that needs it. It has a strong public sector able to co-ordinate a rapid policy response. Speed is absolutely essential for effectiveness.
Faced with unforeseen circumstances, a change of mindset is as necessary in thiscrisis as it would be in times of war. The shock we are facing is not cyclical. The loss of income is not the fault of any of those who suffer from it. The cost of hesitation may be irreversible. The memory of the sufferings of Europeans in the 1920s is enough of a cautionary tale.
The speed of the deterioration of private balance sheets caused by an economic shutdown that is both inevitable and desirable must be met by equal speed in deploying government balance sheets, mobilising banks and, as Europeans, supporting each other in the pursuit of what is evidently a common cause.
- Two Years of Duques Colombia: Deepening Neoliberalism, Increased Violence and a Public Health Crisis - NewsClick - August 13th, 2020
- Why Kamala Harris VP pick could cost Biden the election - Fox Business - August 13th, 2020
- Magic Reports Second Quarter and First Half 2020 Financial Results with Record-Breaking Operating Income of $9.8 million, reflecting a 22% Year Over... - August 13th, 2020
- Why We Should Turn to Earned Income Tax Credit to Aid Those Struggling Through Pandemic - The National Interest - August 8th, 2020
- Millions of America's working poor may lose out on key anti-poverty tax credit because of the pandemic - The Conversation US - August 7th, 2020
- Could $50 a Week Empower High School Students to Set and Meet Education Goals? This New Orleans School Aims to Find Out - redlakenationnews.com - August 7th, 2020
- Heres How We Remake the Economy - Common Dreams - August 5th, 2020
- VOICE OF THE PEOPLE July 31, 2020 - TheChronicleHerald.ca - July 31st, 2020
- Health unit calls for universal basic income - The North Bay Nugget - July 30th, 2020
- Job guarantee program could bolster economy more than ... - July 27th, 2020
- The Gray Market: Why the Entire Art World Should Back Canadian Arts Workers Push for Universal Basic Income (and Other Insights) - artnet News - July 26th, 2020
- Extra $600 unemployment benefits set to expire this weekend - WKOW - July 25th, 2020
- Why Now is the Time to ACT on KUB - SACE - Clean Energy News - July 25th, 2020
- What is Basic Income? | Guaranteed Universal Basic Income - July 25th, 2020
- ECLAC calls for urgent regional cooperation beyond the pandemic to foster more integration and avert a food crisis - Dominican Today - July 25th, 2020
- 'A recovery that puts people first': A group of young Australians is demanding a government job guarantee to fight both soaring unemployment and... - July 24th, 2020
- Analysis: Behind the legal maneuvering in the Reclaim Idaho initiative - Idaho EdNews - July 24th, 2020
- In the wake of Covid-19, time to consider basic income: Senate report - Investment Executive - July 21st, 2020
- COVID-19 on P.E.I.: What's happening Tuesday, July 14 - CBC.ca - July 21st, 2020
- COVID-19 on P.E.I.: What's happening Monday, July 13 - CBC.ca - July 20th, 2020
- Lift Every Voice: The Urgency of Universal Civic Duty Voting - Brookings Institution - July 20th, 2020
- Largest cities in Colombia reverse reopening as coronavirus threatens to collapse healthcare - Colombia Reports - July 17th, 2020
- GST: The increase Australia doesn't have to have Monash Lens - Monash Lens - July 15th, 2020
- Bogot returns to strict quarantine based on rotating localities as of July 13 - The City Paper Bogot - July 11th, 2020
- Why a Universal Basic Income is the solution to inequity - Women's Agenda - June 22nd, 2020
- Crypto Experts Reveal Thoughts: How Will Bitcoin Perform After the COVID-19 Crisis Has Passed? - PRNewswire - June 22nd, 2020
- Interviews: Punks on Politics: Checking in with Mel Gagarin - Punknews.org - June 22nd, 2020
- COVID-19: UN agencies warn against rising hunger in Latin America and the Caribbean - UN News - June 22nd, 2020
- Universal Basic Income: Andrew Yang Was Pushing for It Long Before Coronavirus Pandemic - PopCulture.com - May 9th, 2020
- Coronavirus is a crisis for the developing world, but here's why it needn't be a catastrophe - The Guardian - May 9th, 2020
- Starvation in the time of Corona: momentum for the Universal Basic Dividend - DiEM25 - May 9th, 2020
- Adam Schiff Says Trump's Cult of the President Has Infected the Republican Party - Mother Jones - May 9th, 2020
- Common Arguments Against Basic Income Don't apply to the Emergency BI - Basic Income News - March 31st, 2020
- How a Basic Income And Jobs Guarantee Can Save The Economy From Coronavirus - The National Interest - March 31st, 2020
- I've lived through plenty of social shocks this time we must learn the lessons - The Guardian - March 31st, 2020
- Coronavirus: Iain Duncan Smith says dont bring in universal basic income during pandemic as it would be disincentive to work - The Independent - March 26th, 2020
- Solidarity Economicsfor the Coronavirus Crisis and Beyond - The American Prospect - March 26th, 2020
- Lockdown to fight coronavirus is going to hit most Indian workers very hard - Livemint - March 26th, 2020
- Beware of a lopsided lockdown - The Hindu - March 26th, 2020
- Life, Liberty, and Basic Income | Opinion - Harvard Crimson - February 29th, 2020
- Find ways to improve the revenue of farmers: Congress - The Hindu - January 30th, 2020
- Eliminating Child Poverty With a Government Check - The New York Times - January 30th, 2020
- Andrew Yang Expects 'Many' of His Supporters to Back Sanders in Iowa: We 'Have a Lot of Overlap' - Newsweek - January 30th, 2020
- Trump to let states overhaul Medicaid for the poor, seeking to change Obamacare without legislation - Washington Examiner - January 30th, 2020
- P.E.I. groups say basic Income should not replace addictions, other supports - The Journal Pioneer - January 27th, 2020
- 5 Psychological Forces That Turn People into Political Hacks | Aaron Pomerantz - Foundation for Economic Education - January 13th, 2020
- WAYNE YOUNG: Island voices must be heard - The Guardian - December 15th, 2019
- The Guardian view on Finlands new PM: a different type of leadership - The Guardian - December 15th, 2019
- Basic Income as 40 Acres and a Mule - Basic Income News - October 16th, 2019
- 'Most Americans Don't Want To Work for the Federal Government' Says Andrew Yang, Trashing Federal Jobs Guarantee - Reason - October 16th, 2019
- Democratic debate highlights: best and most substantive answers of the night - Vox.com - October 16th, 2019
- Sanders: 'Damn right we will' have a job for every American | TheHill - The Hill - October 16th, 2019
- Assembly Elections 2019: Why is the Congress evasive about NYAY scheme this poll season? - Moneycontrol.com - October 16th, 2019
- Letter to the Editor: Universal basic income is inevitable as we head toward a fully automated society - The Post - October 16th, 2019
- Democrats focus on some Midwestern issues at Westerville debate, a departure from past three forums - cleveland.com - October 16th, 2019
- New book reviews the Namibian Basic Income pilot - Basic Income News - October 1st, 2019
- Quick notes from Basic Income Guarantee Panel - falicon.com - January 28th, 2019
- 'Hartz reforms': how a benefits shakeup changed Germany ... - January 28th, 2019
- Basic income could end food insecurity - Upstream - January 3rd, 2019
- Basic Income Guarantee - Your Right to Economic Security ... - November 8th, 2018
- The Ethics and Economics of the Basic Income Guarantee ... - September 18th, 2018
- Is a Basic Income Guarantee the Right Choice for Ontario? - June 27th, 2018
- Basic Income Now | It's time for dignity for all - March 17th, 2018
- 'Me too' and the basic income guarantee | Basic Income News - February 6th, 2018
- Food shopping at dollar stores | Brantford Expositor - Brantford Expositor - August 24th, 2017
- How Cities Can Rebuild the Social Safety Net - CityLab - August 24th, 2017
- After lifting minimum wage, NDP government prepares to consult public about reducing poverty - Straight.com - August 16th, 2017
- Universal Basic Infrastructure to help decrease India's poverty - Economic Times - August 14th, 2017
- New Zealand Fabians host Basic Income panel - Basic Income News - August 13th, 2017
- Hashtag Trending Battery-free phone, Apple's China backlash - IT World Canada - August 10th, 2017
- Universal basic income proponent to speak in Boise - Idaho Press-Tribune - August 7th, 2017
- Let's talk about a supplemental income - The Hindu - August 7th, 2017
- Is a Well-Paying Job the next Entitlement Program? - Big Think (blog) - August 5th, 2017
- DON PRIDMORE: Be careful what you wish for... - The Guardian - August 1st, 2017
- EDITORIAL: Island needs dollars, not data, to cope with poverty - The Guardian - July 29th, 2017
- Renfrew County dietitian recognized by board of health for provincial award - www.insideottawavalley.com/ - July 27th, 2017
- More Calgarians struggle to feed their families over the summer months - CBC.ca - July 26th, 2017
- NEW ORLEANS, LA, US: Local basic income group begins to hold monthly meetings - Basic Income News - July 25th, 2017
- Value in using tax system for basic income: Report - The Sudbury Star - July 21st, 2017
- Does Basic Income Solve Anything? Grasp the Arguments for and ... - Futurism - July 21st, 2017