The Wrong and Right Ways to Pursue Recovery from the Pandemic

The Wrong and Right Ways to Pursue Recovery from the Pandemic
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When it comes to a once-in-a-century pandemic and the recession caused by lockdown efforts, not all policy responses are created equal. And unfortunately, while some good ideas have been put forward for transitioning to economic recovery mode, many bad ones have gained traction as well.

First and foremost, policymakers must be aware that attempting to enforce a lockdown while simultaneously pursuing economic recovery is quixotic. While lockdowns are in place, the priority from an economic perspective is to keep businesses and workers afloat through the provision of relief from taxes and regulations as well as other forms of aid like bridge loans. Only when the course of the pandemic permits lockdowns to phase out should the policy priority shift to new growth.

One popular idea for spurring economic growth is a massive new infrastructure package. Back at the end of March, President Trump called for a “VERY BIG & BOLD” $2 trillion infrastructure package, a proposal that Democrats have been receptive to.

Yet the cost-effectiveness of a massive infrastructure spend is questionable in the best of circumstances. Federally-directed infrastructure spending is often out of touch with the needs of the state, local and private owners of that infrastructure, and tends to be inefficiently directed.

And these are far from the best of circumstances. Infrastructure projects often take months of planning before they can get off the ground — defeating the purpose of targeted, “stimulus” infrastructure packages. By the time that the projects being touted as economic salvation are ready to begin, the time period for effectively stimulating the economy may be long past. Smart infrastructure policy should focus on the longer term by removing government roadblocks to private investment and more efficient use of public dollars.

Another idea that is beginning to take hold is the concept of a $4,000 “tourism tax credit” for travel expenses inside the United States. While it’s easy to see the appeal of the proposal, a tax credit can only temporarily ease the financial concerns Americans have about traveling — not the worries about catching and spreading the virus.

Here again, governments should be taking a hard look at long-standing barriers to growth — the heavy ticket, rental, occupation, “amusement,” and meals taxes that have plagued the hospitality sector for many years. Reducing these burdens could help the tourism industry become more financially resilient to future ups and downs, and more attractive to consumers over time.

A potential payroll tax cut has also been an idea batted around since the crisis’s inception. The logic of the idea is straightforward — cutting the employee-side payroll tax returns more money to Americans’ pockets, while reducing the employer-side tax makes a business’s labor force more affordable during lean times.

This calculus can make sense, especially with continuing the current payroll tax credit for employers who retain workers. Providing a payroll tax credit for businesses to make their facilities safer for workers and customers could help as well (especially, see above, tourist establishments). And after all, consumer demand has fallen precipitously due to social distancing and layoffs, giving businesses little incentive to expand their workforces.

Such a workforce expansion is likelier over the intermediate horizon with steps such as making the best pro-growth parts of the Tax Cuts and Jobs Act, such as full expensing of capital investments, permanent. Until these important measures can be taken, the primary impediment to greater consumer activity — fears of the pandemic — remains. Those fears are a warning that payroll tax relief and credits have their place, but can’t take the place of other measures to ramp up growth.

Given the pandemic headwinds that any attempts at “stimulus” will run into, a phased approach makes the most sense. Federal unemployment subsidies should be phased out in concert with the end of lockdowns and hibernating businesses getting up and running. Several plans in Congress would transition supplemental federal unemployment bonuses to a form of hiring bonus for returning workers to ease that transition off unemployment.

Reopening an economy after months of lockdowns is uncharted territory, and formulating a policy response may prove more difficult because of that. Yet there are some ideas we should be able to cross off — and add to— the list even at this point.

 

Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government. 


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