The coronavirus threatens the world’s economic life. Social distancing measures, essential to fight the epidemic, are sharply reducing demand in sectors such as transportation, restaurants, hotels, and entertainment. Other industries will have difficulties producing due to supply disruptions (employees unable to come to work; outbreaks closing down firms). This direct output loss is expected to be short, probably a few months. Although the government cannot undo this direct output loss, it can alleviate economic hardship during the epidemic and prevent the direct output loss from causing lasting damage to the economy. 

Absent government actions, the direct output loss will create large losses for businesses and may lead to mass layoffs. Many businesses and workers do not have enough liquidity to weather dramatic shortfalls in demand. The risk is to see many businesses liquidate, severely affecting workers’ families. The death of a business has long-term costs: the links between entrepreneurs, workers, and customers are destroyed and often need to be rebuilt from scratch; laid off workers need to find new jobs1.  Keeping businesses alive through this crisis and making sure workers continue to receive their paychecks is essential—even for businesses and workers that have to remain idle due to social distancing. 

Providing liquidity—in the form of interest-free loans, for example—can help businesses and laid off workers weather the storm, but this policy is insufficient. Loans do not compensate businesses and workers for their losses; loans just allow them to smooth costs over a longer time horizon. In the case of the coronavirus crisis, however, it makes sense for the government to compensate businesses and workers for their losses so that each business can re-emerge almost intact after the hibernation due to social distancing ends. 

In the context of this pandemic, we need a new form of social insurance, one that directly targets and works through businesses. The most direct way to provide this insurance is to have the government act as a buyer of last resort. If the government fully replaces the demand that evaporates, each business can keep paying its workers and maintain its capital stock, as if it was operating under business as usual. To see how the notion of a buyer of last resort works, take the case of the airline industry. If demand drops by 80%, the government would compensate this missing demand, in effect buying 80% of plane tickets and maintaining sales constant. This would allow airlines to keep paying their workers and maintain their planes and equipment without risking bankruptcy. 

The reason why such a policy would work in the case of the coronavirus pandemic is twofold. First, it is clear what is driving the shock: a health crisis that has nothing to do with any business’s decision and will be temporary. Second, different industries are affected differently. 

That’s in contrast to normal recessions, where the drop in demand is widely spread and has no clear timeline. 

How much would such a buyer-of-last report program cost? An economy-wide fall in the demand for goods and services of 40% over 3 months leads to a 10% drop in annual GDP. The government can fully compensate private losses by transferring 10 points of GDP to the private sector, financed via an increase in public debt. The direct output loss from social distancing measures would be put on the government’s tab, i.e., socialized. The distributional consequences of this policy would be controlled by the tax system. Governments can decide later how to adjust taxes to repay the extra debt; with progressive income and wealth taxes, for instance, the cost would be borne by the wealthiest.

A buyer-of-last resort policy cannot be implemented perfectly, but governments can come close. For the self-employed and workers such as Uber drivers, the government would replace lost earnings; this would be similar to unemployment insurance. For large businesses, government compensation would be conditional on businesses not laying off any workers. It is better for businesses to keep their workers even if they are temporarily idle so that business can resume quickly—without having the rehire new workers—once demand picks up. For government sectors such as education, when schools close, teachers should continue to be paid, and so on. 

Current proposals to deal with the economic consequences of the pandemic do not go far enough or are not well targeted to the ailing sectors. Business loans help businesses but do not compensate them for their losses. Postponing tax payments helps with liquidity but is not well targeted, since it also benefits individuals and businesses not directly affected by the pandemic. Direct payments to individuals (such as $1,000 checks to each household) help alleviate temporary economic hardship but this policy is poorly targeted as well: it’s too little for those who lose their jobs, and is it not needed for those who don’t. During social distancing, the goal should not be to increase aggregate demand, since people can no longer spend on many goods and services. Unemployment insurance and paid sick leave policies come closest to helping laid off workers and those unable to work, but they do not help businesses.

A buyer-of-last resort program would work if it was very limited in time, so that the cost remains manageable and business decisions are not affected. It would not fully offset the economic cost of the coronavirus. No matter what governments do, there will be real output losses. Even if airlines workers are paid, the plane rides won’t happen. For some sectors such as the food sector, supply chains distortions will happen no matter what, due, e.g., to quarantine measures. But a buyer-of-last-resort program would alleviate the hardship of workers and businesses. It would maintain the cash flow for families and businesses, so that the coronavirus shock has no secondary impacts on demand—such as laid-off workers cutting down on consumption—and a quick rebound can take place once demand comes back. Business activity is on hold today, but with an intravenous cash flow, it can be kept alive until the health crisis is over.

 

1 This point on direct losses and indirect losses through feedback effects is well explained in Gourinchas, PierreOlivier “Flattening the Pandemic and Recession Curves”, March 13, 2020.
 

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About Gabriel Zucman

Gabriel Zucman, born in Paris in 1986, is associate professor of economics at the University of California, Berkeley.

He is the author of articles published in peer-reviewed journals such as the Quarterly Journal of Economics, the American Economic Review, the Journal of Public Economics, and of three books. His research focuses on the accumulation, distribution, and taxation of global wealth and has renewed the analysis of the macro-distributional implications of globalization.

In a series of papers and in his book The Hidden Wealth of Nations, he has developed new methods to measure the wealth held in tax havens. This research finds that 8% of the world’s household financial wealth is held in tax havens, with large variation across countries—from a few percents in Scandinavia to 50% in Russia. Data leaked from offshore financial institutions (such as the “Panama Papers”) reveal that offshore wealth is very concentrated, with about 50% of it belonging to the top 0.01% wealthiest households.

A second strand of research combines theory and empirics to quantify the redistributive effects of international tax competition. The findings suggest that 40% of multinational corporate profits are shifted to tax havens globally and as much as 60% for US multinationals. This profit shifting has large redistributive implications across countries and social groups. Granular results of this research, available at MissingProfits.world, make it possible to assess the effect of alternative tax policies, such as a global tax coordination or unilateral changes to the taxation of multinational companies (e.g., the use of apportionment formulas).

With Facundo Alvaredo, Lucas Chancel, Thomas Piketty, and Emmanuel Saez, Gabriel Zucman co-directs the World Inequality Database (WID.world), an extensive database on the historical evolution of income and wealth inequality. He has pioneered the creation of distributional national accounts, statistics that decompose macroeconomic growth by social group, and which are made available on WID.world for a growing number of countries. With Emmanuel Saez, he has constructed long-run series on the distribution of US wealth which have received attention in the US public debate. He has studied inequality in China, Russia, at the global level, and the long-run accumulation of capital in rich countries as far back as 1700.

From his 2008 master thesis devoted to the French wealth tax to recent studies of Denmark and the United States, he has analyzed the economic effect of wealth taxation (on capital accumulation, mobility, inequality, tax avoidance, and tax evasion). This body of work sheds light on current debates about the desirability and practicality of taxing wealth.

The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay (WW Norton, 2019), jointly written with Emmanuel Saez, presents a comprehensive analysis of the progressivity of the US tax system taking into account all taxes at all levels of government, from the creation of the income tax in 1913 to the year following President Trump’s tax reform in 2018. For the first time in 2018 the ultra-wealthy have paid lower tax rates (all taxes included) than other groups of the population. The book proposes to reinvent progressive taxation around three pillars: a progressive wealth tax, a new way to tax multinational companies, and a new national income tax.

Gabriel Zucman received his PhD in 2013 from the Paris School of Economics and taught at the London School of Economics before joining the Berkeley faculty in 2015.

In 2019, he was awarded the Bernácer Prize and a Sloan Research Fellowship. He received the Excellence Award in Global Economic Affairs from the Kiel Institute for the World Economy in 2017, and the Best Young French Economist Prize awarded by Le Monde and le Cercle des Économistes in 2018. He contributes regularly to global policy debates.

All the results of his research, data, and programs are available online at gabriel-zucman.eu and on:

About Emmanuel Saez

Emmanuel Saez is a Professor of Economics and Director of the Center for Equitable Growth at the University of California Berkeley. He received his PhD in Economics from MIT in 1999. His research focuses on inequality and tax policy. Jointly with Thomas Piketty, he created the top income share series that show a dramatic increase in US inequality since 1980. The data have been widely discussed in the public debate. His most recent book "The Triumph of Injustice", joint with his colleague Gabriel Zucman, narrates the demise of US progressive taxation and how to reinvent it in the 21st century. He received numerous academic awards including the John Bates Clark medal of the American Economic Association in 2009, a MacArthur "Genius" Fellowship in 2010, and an Honorary degree from Harvard University in 2019.
 

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