Paul L. Caron

Friday, March 20, 2020

Weekly SSRN Tax Article Review And Roundup: Layser Reviews Evaluating Economic And Financial Policy Responses To The Coronavirus

This week, Michelle Layser (Illinois) reviews Hiba Hafiz (Boston College), Shu-Yi Oei (Boston College), Diane Ring (Boston College), & Natalya Shnitser (Boston College), Regulating in Pandemic: Evaluating Economic and Financial Policy Responses to the Coronavirus Crisis, Boston College Law School Legal Studies Research Paper No. 527 (March 2020).

Layser (2018)

News about the COVID-19 coronavirus pandemic has been breaking by the hour, and for people like me who can’t look away from it, the whole situation is positively overwhelming. Fortunately, a team of researchers at Boston College Law School have already pulled together an excellent working paper that provides an analytical framework to bring the key issues into focus. Their paper, which will be “continually updated to reflect current developments,” is a must read for tax and fiscal policy researchers and lawmakers.

The paper begins by describing a trifecta of policy objectives that are relevant to fight the pandemic. The first objective is to provide a social safety net and social insurance for unemployed workers. Unemployment claims are skyrocketing as supply chains are disrupted and businesses are ordered to shut their doors for the purpose of social distancing. The authors identify several choice-of-delivery questions. Should assistance be delivered directly via cash infusions like universal basic income? Should benefits be tied to work? Should aid be provided to individuals or to businesses (to help avoid layoffs)? A central goal of the paper is to explore how these questions might be answered without undermining the other two objectives.

The second objective is to mitigate systemic risk that may lead to financial contagion. Financial markets have been rapidly deteriorating over the last couple of weeks, with dramatic swings “driven by a contagion of fear and uncertainty.” In the 2008 financial crisis, financial institutions themselves posed a threat to the economy—but COVID-19 is different in that it “is likely to present systemic risk challenges to non-financial firms and economic sectors.” The authors note that these challenges may be more widespread than what we saw in 2008, and “domino effects are likely to occur in and across industries,” which “may well have feedback effects on the financial sector.”

The third objective—which will be unsurprising to anyone reading this from their couch at home—is to encourage critical spatial behaviors necessary to contain the virus. The current public health strategy is “to maintain ‘social distancing’ to avoid infecting others, ‘flatten the curve’ to avoid a medical facilities crunch, and generally minimize COVID-19 spread.” The authors note that social distancing measures have become increasingly draconian, resulting in “school, university and restaurant closures, cancellation of sporting events,” teleworking arrangements, and city-wide state-wide shelter-in-place orders.

These three objectives often conflict. Social distancing policies “risk causing large financial losses to big and small businesses (like the travel, airline, cruise, restaurant, entertainment, and sports industries).” Social distancing increases systemic risk and may trigger an economic recession or “widespread financial meltdown.” Jobs and wages will be lost, presenting the need for a safety net. But social insurance measures that boost pay to workers may lead “to the kinds of undesirable ‘socially-intimate’ consumption that is especially harmful in the current context.” The same is true of assistance directed at sectors that present systemic risk—such policies would need to be carefully targeted (such as to “online spending or continued access to daily necessities”), or else they will conflict with the spatial objectives.

The authors proceed to identify and analyze several challenges faced by lawmakers: the need to rethink how industry sectors are defined; conflicts between various public and private actors; the need to choose among various policy instruments; the need to coordinate across fields despite the lack of a central planner; how to fund relief during a period of large federal deficits; and the need to revisit our traditional approach to economic stimulus in light of the unprecedented need to incorporate spatio-behavioral constraints.

The authors conclude by using their framework to analyze the tax and non-tax provisions included in the Families First Coronavirus Response Act (H.R. 6201). They argue that the new legislation responds to all three goals, but the balance among them is not be equal. Specifically, “the benefit to employees may not be as robust as the benefits to the employers—suggesting a prioritization of the market concerns or moral hazards concerns over both social insurance and spatial and behavioral goals.”

This paper is not uplifting. However, it provides an essential overview of the policy challenges presented by COVID-19, and it sets forth a useful framework to aid the evaluation of federal, state, and local policy responses as they are introduced. I recommend this article to pretty much anyone who is as obsessed with the coronavirus situation as I am, but also to tax scholars interested in fiscal policy, choice-of-instruments, inequality, or geography. Happy reading, everyone, and stay safe!

Here’s the rest of this week’s SSRN Tax Roundup:

For complete TaxProf Blog coverage of the coronavirus, see here.

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