Covid loans?

The excellent Richard Meade makes the case for Covid loans instead of wage subsidies. You can read the journal article on it, or his column over at The Conversation. 

Richard and I independently came up with the idea way back in March/April. I'd included it in our first comprehensive pandemic response policy paper, 26 March, with a bit more detail in a second short policy piece on 27 March. and he emailed me his two-pager on it about a week later. He'd not seen my version of it beforehand; his was better worked-up than mine was. Richard cites our version in his journal article. 

I'd liked it as a complement to the wage subsidy programme. We'd pitched a slightly different version of the wage subsidy scheme, based on Germany's short-time work scheme (see our short piece of 27 March), but given the time pressure it's impossible to fault the government for putting out the system it did put up. They made it work incredibly quickly, and the officials who got it through deserve medals. It avoided a pile of scarring. 

At the time, we all expected far worse employment outcomes, even with the wage subsidy programme. You can't just turn off tourism for what looked likely to be at least a year without having a pile of problems right? 

I'd figured that opening the student loans scheme to non-students, for borrowing up to a capped amount, with penalty interest applying ex post to any amount of borrowing that was above realised income losses, would likely work. 

There would be huge admin cost in trying to expand the student loans scheme; I'd thought this way of backloading a lot of the administration would make it more feasible. Easy approvals up front, but knowledge that penalty interest (recouped through the tax system, just like student loans) applies if you borrow more than your income loss would discipline. And it would mean that a lot of the admin would come at the end of the tax year, rather than while the bureaus were up to their eyeballs in trying to sort through the wage subsidy scheme. What those folks got done late March - just amazing. 

The big advantage in relying on something like extensions of the student loan scheme is that it automatically targets assistance to where it is needed, if you apply penalty interest for borrowing above realised income losses, and because it lets the government deliver more assistance in a hurry for any amount of cost it is willing to front in providing that assistance. If the government gives out a dollar as a grant, that costs a dollar plus the deadweight cost of taxation. If the government gives out a dollar as a loan, it gets some of that back. And that means it can loan out rather more than a dollar for the same expected one-dollar cost. 

Richard has it up as a substitute for the wage subsidy scheme. And I expect that's where policy has to turn over the longer haul: credit support rather than wage subsidies if we get more lockdowns, but government-funded Covid leave (now in place!) so workers and firms don't bear the costs of workers staying home while waiting on test results. 

Here's Richard:

Furthermore, since any firms and households borrowing against their own future incomes will ultimately be repaying their debt, COVID loans represent an asset on government balance sheets.

This offsets the extra liabilities governments take on by borrowing to finance these loans — something wage subsidies do not do. This increases the affordability of a loans-based approach from a government perspective (even allowing for defaults and subsidies implicit in student loan schemes).

Using illustrative data for New Zealand, my paper shows COVID loans are 14% cheaper than wage subsidies (and small business loans) in terms of their impact on net government debt.

More importantly, they are almost 2.5 times as effective in terms of the level of support they offer. And since 67% of the cost of COVID loans ultimately falls to those who make use of them (allowing for defaults and implicit subsidies), they place less of a burden on future taxpayers than deficit-funded wage subsidies.

The point of the wage subsidy scheme was to make sure firms could have a rapid reboot after lockdown. Making it the go-to in any outbreaks risks providing too much support in places like tourism where resources should shift to other uses. 

Hopefully this will all soon be irrelevant. But it is fun looking back through the email correspondence on it from back then.