Comparing Countries' Responses to the Economic Aspects of the Crisis

Kenneth Thomas

April 20, 2020

The global COVID-19 pandemic has created an associated economic crisis as many businesses have been forced to close because of lack of demand (travel, for example) or social distancing (too many to list). With predictions of a possible 32% unemployment rate in the United States, how does the response to the economic crisis here compare with those of other countries?

Both the United States and our major European allies have passed economic stimulus laws that exceed 10% of gross domestic product. The $2.2 trillion CARES Act package signed March 27 was 10.1% of 2019 GDP of $21.7 trillion. Spain passed an even larger package, equaling 20% of its GDP.

We can think of the CARES Act as having three main components. First, there are individual safety-net supports, including the $1,200 payments most individual adults will received, more money into the SNAP (formerly named Food Stamp) program, and greatly expanded unemployment insurance. Second, there are $350 billion in forgivable loans for small business, which become grants if the companies don’t lay off their employees (the “Paycheck Protection Plan”). Third, there is a $500 billion bailout fund for large companies. This is poorly designed, most importantly because it doesn’t require companies to maintain staff. Over 20 million people have filed for unemployment benefits in the last four weeks alone.

Besides the catastrophic loss of wages, the biggest problem with allowing bailed-out companies to lay off staff is that such a large percentage of the U.S. workforce gets its health insurance through work, meaning that when they lose their jobs, they also lose their health insurance. As Saez and Zucman point out, people can continue their employer’s insurance under COBRA, but it is extremely expensive since there is no employer contribution. This comes precisely at a time when they may really need it, given the length and ruinous expense of treatment incurred for people with severe cases of COVID-19.

By contrast, in all western European countries (as well as Canada, Japan, South Korea, Taiwan, etc.) health insurance is universal. Even in a country with a public/private system like Germany, when you lose your insurance due to job loss, you transition seamlessly to a public health insurance plan with no loss of coverage.

European responses have focused much more on a wage-support approach like the small business program in the United States, except applied economy-wide. The U.K. government has been described as the “payer of last resort,” as it stands to guarantee 80% of workers’ wages indefinitely. For both employees and the self-employed, this would be capped at £ 2,500 (approximately $3,125) per month. Given that the United Kingdom has the National Health Service, a true socialized medicine system completely divorced from employment status, layoffs were never going to mean a loss of health care access for workers in Great Britain and Northern Ireland. But by guaranteeing employment, the United Kingdom will have higher levels of job security than U.S. workers will, with jobs to go back to when the crisis ends. Indeed, the problem in the United States is not simply health insurance, but the fact that each of the 50 states has different rules for unemployment insurance, with inter-state variation both in the generosity and length of payments in the different programs.

An important difference between wage support in Europe and for small business in the United States is that the European plans are open-ended, whereas the U.S. plan must be renewed with Congressional legislation every time it runs out of money. This opens the possibility of deadlocks if attempts are made to attach unrelated provisions to an extension bill, something that happens frequently in Congress. And this is no longer a prediction, because the $350 billion ran out on April 16.

Absent federal leadership, we also expect “the economic war among the states” to resume, with each state offering subsidies trying to attract investment, in some cases through job piracy. From our experience during the Great Recession (when there were far more desperate politicians chasing far fewer deals), we can expect to see another surge in expensive megadeals.

Facing high unemployment and relatively few opportunities to attract large numbers of jobs, states will bid more for those opportunities than they would in more prosperous times. States will be tempted to engage in job piracy in many multi-state metropolitan areas, such as New York, Charlotte, and Memphis.

We need to remind states about the first-ever binding anti-piracy agreement, the 2019 accord between Kansas and Missouri, where research by the Hall Family Foundation had documented that the two states wasted $335 million over 10 years moving companies short distances but across the state line within Greater Kansas City.

It is imperative that we support the anti-piracy legislation pending in 13 states this year, sponsored by Chicago-based Progressive Public Affairs, which has amassed lead sponsors from both parties (nine states have Democratic sponsors, while four have Republican sponsors). And we will need to keep the pressure on states to ensure that companies which receive government support fulfill their job and other commitments.

Given the predominance of wage support in European countries, most of this funding will not be subject to EU subsidy (“state aid”) rules. That’s because the money will be available economy-wide in the Member States, not favoring one company over another. In technical terms, this use of the funds is “non-selective,” and therefore not state aid at all, as our contacts at the European Commission have explained. Nevertheless, due to the large amounts of money at stake, each Member State will be responsible to ensure that recipients maintain employment in order to qualify for government paying their wage bills.

Some EU spending will qualify as state aid, such as the Danish’s government’s plan to partially compensate organizers of conferences and other events that were canceled due to the coronavirus pandemic. That is, it is selective, for being available to one industry. To spell out such distinctions, the European Commission published on March 19th its “Temporary Framework” notifying Member States about likely scenarios and whether or not it was likely to approve subsidies the Member States might propose. (Note that the Commission has exclusive power to approve, modify, or deny proposed state aid projects or programs by the 27 Member States, subject to court review.) As I have shown previously, the European Union has shown itself much better than the United States at controlling economic development subsidies.

As we can see, there are major drawbacks to the U.S. response to the economic crisis. By letting people become unemployed rather than making an open-ended wage guarantee, workers lose their health insurance and have no assurance of a job to go back to when the health crisis ends. High unemployment will also pressure state and local governments to return to worst practices in economic development. There is still time to change course, but it will take constant and high levels of political pressure to make it happen.

Cross-posted with Middle Class Political Economist.

See also:

Primer: European Union State Aid Rules and Procedure

International Lessons for Interstate Progress: Introduction to EU State Aid

International Lessons for Interstate Progress: Regional Aid

International Lessons for Interstate Progress: Procedures