Stan Veuger on Helping Businesses Survive in the Post-Coronavirus Economy

Emergency loans to small and medium-sized U.S. businesses can help the economy endure the pandemic and stage a strong rebound.

American Enterprise Institute's Stan Veuger joined the Macro Musings podcast to discuss his co-authored proposal to save American businesses and American jobs as well as his thoughts on how Europe is handling the crisis. David and Stan discuss the Federal Reserve’s ability to support targeted business loans, how the crisis has been panning out in Europe, and the timeline to global recovery.

Read the full episode transcript:

David Beckworth: Our guest today is Stan Veuger. Stan is a resident scholar at the American Enterprise Institute where he specializes in political economy and public finance. Stan joins us today to discuss his co-authored proposal to save American businesses and American jobs as well as his thoughts on how Europe is handling the crisis. Stan, welcome to the show.

Stan Veuger: Hi David. Thank you for having me on. I'm very excited. I'm a fan of your work.

Beckworth: Oh thank you. Well, thanks for coming on the show because you've written a really fascinating piece with Steven Hamilton at George Washington University, a very practice rubber meets the road approach to saving businesses and jobs as we work our way through this crisis, and I want to a little bit more about you for our listeners. Tell us what you do, and what your job is like, and how it's prepared you for this moment?

Veuger: For sure. So, I'm an economist at a think tank. The think tank is the American Enterprise Institute. So, what I do is a mix of academic work and then your more typical think tank activities, so that includes some blogging, radio and TV interviews, briefing policy makers, basically the whole spectrum of activities that is associated with people at think tanks. It's based in DC, so pretty close to a lot of federal policy making.

Veuger: And then I occasionally teach as well. The past few years I've taught half a public finance class at Harvard. In the spring, I do two weeks of teaching at Tilburg University in the Netherlands, though I imagine this year that will happen from my basement here.

Beckworth: Oh wow. So, you're still going to attempt to teach your class in Europe?

Veuger: I think so. Yeah. I mean, otherwise will have to do it for me.

Beckworth: Yeah, fair enough. Fair enough.

Veuger: But so yeah, so that's the type of activities, and now where my fields in graduate school were public sector economics and international economics, and so I think both are relevant to ... A very directly relevant to policy making especially to public finance I think in the moment we're in. Obviously because of the fact that I've been at a think tank ever since I finished my PhD as opposed to an economics department, it's my day job to think a little more about policy.

Veuger: And so, I think that's been helpful in jumping in that, and we have this pandemic that I think none of us was particularly prepared for or none of us had really thought about that much I think until maybe a few weeks ago in terms of the policy response. Beyond the usual, there are negative externalities from infectious diseases.

Beckworth: Yeah.

Veuger: So, that level of analysis I think is where many of us started.

Beckworth: Yes. This is a situation that I never would have imagined in my life to have occurred or let alone prepared for in terms of thinking of models maybe or recessions. This is very different, a different beast, and I'm wondering how do you view it? Is it going to be worse than the Great Recession or just different? And do we have the tools in place to deal with it?

Current Crisis vs. the Great Recession

Veuger: Well, I'm a little concerned that the initial hit is going to be as deep, if not deeper than the original hit in the Great Recession.

Beckworth: Okay.

Veuger: I think in the recent experience with the Great Recession will hopefully become somewhat handy. I think we're seeing people willing to consider much more aggressive action especially elected officials who think 10 years ago were very hesitant to innovate and to take dramatic actions that they were different from what you normally do throughout a regular business cycle, which I guess we will never have again. But people are very worried about deficit spending, looser fiscal policy about innovating monetary policy.

Beckworth: Yeah.

Veuger: And I think the fact tat I think ... So, on balanced people looking back now think that we were too hesitant and too restrictive and the measures we took in '08, '09, '10, '11 I think helps a little bit right now in that. I think there's a realization that we should try to step in immediately, that a lot of the trouble you can get into is driven by debt overhang, and by long, lingering unemployment, and that we need to from day one try to keep those problems from arising again.

Beckworth: Yeah. Well, along those lines are you surprised how quickly everyone, I mean Republicans and Democrats, had jumped on board as being aggressive as possible. We see talk now of direct cash transfers to households, huge deficits, kind of an all hands on deck, a war footing of sorts to fight this pandemic. Are you surprised how quickly everyone has converged to that point?

Veuger: Yes. So, I was getting really concerned a week ago when nothing was really happening. We had known that this was going to come at least for a few weeks and I don't think ... Well, I guess that's still true today, but I don't think we produced a single additional mask or ventilator. Even the bill that passed the house just this past Friday was very narrowly focused on putting some money to the states, and then some paid leave and paid for testing. No macro level response at all, but that's really changed over the past week.

Veuger: I think what helped a lot in addition to the recent experience with the financial crisis and the Great Recession is just that people's lived experiences are entirely different, right? Obviously, a lot of policy makers, a lot of economists live in cities or in areas where restaurants are closed, bars are closed, lots of universities and other sort of white collar work environments have shifted to online work, and I think that really helped people realize how dramatic the situation is. And I think it also helps people accept a little faster how big the initial shock to economic activity will turn out to be once we get some data.

Beckworth: Yeah. This is going to be just a once in a lifetime event. Again, it's a complete stopping of our economy, something I've never seen before, and I wonder if there's going to be a V-shaped kind of recovery or V-shaped nature to this? So, we hit the brakes, we fall down really far, but we bounce up proportionally on the other side or is there a possibility that some kind of hysteresis kicks in because this is such a big drop? Any thoughts along those lines?

Veuger: Yeah. So, that's where I think policy really comes into play because I agree with you that it's extremely likely we'll have this massive drop off, but I think with the wrong policy response it's very easy to turn that into sort of a midterm, long-term problem-

Beckworth: Okay.

Veuger: opposed to something more V-shaped. Yeah. So, I think the initial shock is huge, but obviously there are big chunks of the economy that are not doing anything, and then people will say, "Well, look, the restaurants will be there, we'll still but able to buy the ingredients, the parking garage is still sitting there." But that's obviously now how the individual entrepreneur and individual worker will operate.

Beckworth: Right.

Veuger: People have bills to pay, and people have savings that they will have to draw down pretty rapidly if entire industries close down for even two months, which I think at this point is kind of a good case scenario. I don't think anyone is really counting on ... Has gone back to normal in mid May. So, I think it's pretty easy for such a big shock to turn into a long-term one, right?

Veuger: We're going to see mass lay offs unless we take dramatic action very soon, and those firm worker linkages aren't just only going to be restored the moment things slowly go back to normal. So, I agree with you that the shock is tremendous and certainly different than anything we've seen. Also, there's intentionality to it that obviously didn't exist for example, in the Great Recession, right? We're going out of our way to not engage in certain activities.

Veuger: So, I think that makes it different, but I think that whether we have a sharp recovery or a much more drawn out process is really going to depend on the policy measures we take now, and by now I mean really in the next few weeks or even the next few days.

Beckworth: Yeah. And that's a nice segue into your proposal, Steven Hamilton, and I think like many people, our focus has been sharpened very much by the growing awareness of how severe this is. I'm going to switch to that now and the title of your proposal, your plan is how to help American businesses endure and job survive. I want to read the first two paragraphs and then we'll go into the kind of step by step points that you suggest for policy. So, this is what you say, you and Steven.

Beckworth: You say, "The scale of the crisis facing small and medium sized businesses in America is unprecedented. Consumer demand is collapsing to protect the health of all Americans. State and local governments across the US have forced the immediate closure of hundreds of thousands of American businesses. These closures will cost millions of Americans their jobs and livelihoods. The basis of our plan is straightforward. If every small and medium sized business in America was supported by the federal government to retain their workforce through the crisis, much of its economic impact would disappear. The government should provide immediate funding for emergency loans to any small and medium sized business in America." And then you go through the criteria on how these loans would work.

Beckworth: So, walk us through the outline of this proposal.

Helping U.S. Businesses Endure and U.S. Jobs Survive

Veuger: Yeah. So, the basic idea is simple. We want the federal government to step in and fill the revenue plug for these firms that are suddenly basically stopped functioning or that are going through massive revenue losses. The idea is to do that through loans, the loans that are conditional upon those firms maintaining their payroll, right? And so, that way we think we can both keep these otherwise entirely viable firms afloat, and we can channel lots of financial support to the workers at those firms, which are the workers that actually need money right now.

We want the federal government to step in and fill the revenue plug for these firms that are suddenly basically stopped functioning or that are going through massive revenue losses. The idea is to do that through loans, the loans that are conditional upon those firms maintaining their payroll

Veuger: And so, the idea is to try and target households that are particularly vulnerable. I don't know. Right now, what do I need? I need a pair of sweatpants and a hoodie, and then I sit in my basement. It's hard for me to spend more money. You want to target the people who have currently lost their jobs especially because no one is going to be hiring, certainly not in the industries they're coming from, but probably also not in other ones.

Veuger: And $1000 a month is nice as a check you receive without doing anything for it, but obviously it's not going to cut it for people who are entirely unemployed. And so, the idea is to use their employers to channel money to them, and at the same time maintain those worker business linkages, keep the entrepreneurs in a position to continue running their businesses, and not create the sort of loss of firms, specifically human capital and debt overhang that you would otherwise get. Obviously, this is very drastic, right?

Beckworth: Right.

Veuger:  We're basically saying, "Okay. You'll get these loans that cover your full revenue losses or at least a large percentage of your revenue losses." But the hope is that if we can get the public health threat under control relatively soon, this only needs to go for a few months, and then after that we can really bounce back quickly because all of our pre-existing businesses and industries are in place to start producing goods and services again. Alternatively of course, if the crisis persists for much longer, this will at least give people a safety net to deal with the original shock as it becomes clearer that the public health situation does not improve rapidly. It should allow people time to think about what to do next as well.

Beckworth: Right. Now, do you propose, if I understand correctly, that the Federal Reserve would be a big part of this response, that somehow they would finance these businesses on the ground, keep them effectively running, keep their payrolls going even if they're not doing regular activity. Is that right?

Veuger: Yes. So, the idea is to have them to use the regular financial industry, right? Use people's regular lenders to provide these loans, but have some sort of federal government backing.

Beckworth: Okay.

Veuger: And so, one way to do it is you could have the Federal Reserve buy out the loans, right? Once they've been originated. We're not super vetted to do this mechanism, and I think there are many others that you could consider.

Beckworth: So, this would be loans going to small and medium sized businesses, and your local bank, maybe your local credit union, your local financial intermediary, whatever it is gets backstop by the Federal Reserve, correct?

Veuger: Yeah. That's right.

Beckworth: Okay. And could you make loans also available to just households if they need it?

Veuger: You could do that. I think the case here is I think businesses have more frequently have pre-existing lines of credit that they-

Beckworth: Okay.

Veuger: ...use to tapping. I also think that this is a little more targeted than if we were to provide these loans to households because it will only be attractive to firms that lose revenue because the backstop that we have on the firm side is that if you participate in this program, your 2020 net income is not allowed to exceed a certain percentage that we're not specific about of your net income last year or in previous years, right? So, if you can operate as usual, it's not attractive to enroll in the program because your capped in your net income whereas if you enroll in the program, you obviously have the benefit of potentially forgivable loans, but your net income is capped.

Veuger: For households, I don't really know how we would go about it because I mean obviously, you can lend money to people, but that way you ... The lending part is in a sense not the helpful part because that way you just create debt overhang whereas here in this program, so if you maintain your full payroll, ultimately the loans will be forgiven.

Beckworth: Yeah. Maybe the direct cash transfers that the president is talking about is a better way to deal with the household.

Veuger: That's right. Exactly. Exactly.

Beckworth: But with the businesses, you do this type of lending. But I like your idea because it uses the existing infrastructure on the ground already. So, one of the challenges of funding to small and medium sized businesses, how do you get it to them? And it would be almost impossible for the federal government, even the Federal Reserve itself to get enough people, buildings, infrastructure in place to do this. So, just use the existing banks and financial firms we have out there because they're already on the front lines, they're already engaged and just use them.

Beckworth: So, I think in any of these responses we think through, they're also great ideas, but we got to think through infrastructure constraints. So, even like the helicopter money or the direct cash transfer the president is talking about, I just read an article today that there's a trade-off between getting everyone the money, accurately and getting it timely. So, you want to get the money as soon as you can to the household, so that people who are beginning to lose their jobs can still pay bills and feed themselves.

Beckworth: But if you rush the money out too quickly the IRS simply can't handle this new heavy load, there might be a lot of errors. Someone might not get a check or maybe someone gets two checks. And so, you got to deal with infrastructure constraints and I think you guys wrestle with that in your plan.

Veuger: That's right. And so, there's a few somewhat comparable plans out there. One of them is by Saizen Pichetti. I don't think that they have an implementation program as such. Senator Collins from Maine has a plan as well, and so she does not go through the Federal Reserve route as such, but she also relies on the existing financial industry infrastructure that we have.

Veuger: And so, I do think you need to do that. It's hard to think how else you would get money to them. So, in her case, the loans would be forgiven after a certain period of time. They would follow the model of sort of normal small business administration loans. In our proposal, we talk about tax credits, right? So, that would give the IRS I guess oversight authority and make sure the conditionality is met, and it would also give people a little more time to get their house in order.

Veuger: So, you have different way to implement this, but I do think what you're saying is correct. You can't just try to mount up a whole new administrative agency-

Beckworth: Right.

Veuger: do this and it's hard I think for the Federal Reserve bank or for treasury to ... I mean, it's hard to even picture how they would do it. Would businesses start sending them applications?

Beckworth: Right, no.

Veuger: How many people would they have to hire?

Beckworth: It's a Herculean task. Right.

Veuger: Yeah, exactly.

Beckworth: Yeah. And even in normal times it would be a Herculean task, but even more so today when most of the government employees are at home, they're not together. I mean, you can't easily hire and increase your payroll by bringing more people on board quickly just because it's hard to do that in this environment. So, you've got to use existing infrastructure in place, so that's I think a compelling point for your plan.

Beckworth: Stan, as we're sitting here talking about this though, I am a little taken back. Just kind of stepping back how much you and I, we both come from more free market leaning institutions, but how we're all in on this, right? And if you had this conversation I mean a month ago with this, we might think very differently because again it's hard to have seen this coming and the scope of it, but in your experience, I guess what I want to ask this question is have you found that the political differences have faded?

Beckworth: I mean, we touched on this earlier, but people who normally would be against doing something like this, this much intervention, are they much more open now? I mean, do you find anyone still holding back, resisting out of principles or concerns?

Veuger: I think that among economists, I think that everyone is reasonably on the same page, that pretty dramatic action is needed. I think there the divide is more about between people who think that what we need to do is prop up aggregate demand and almost exclusively focus on that versus people, and I guess that includes Steven and me, who are more worried too about keeping the supply side intact. But I do want to emphasize that divide is not one that lines up with your typical collectivist/free market-

Beckworth: Right.

Veuger: ...spectrum, I don't think. I think both approaches have support across the political ideological spectrum. I think the change in approach I think has support for example from my colleague Michael String, who has been on your show at least to some extent, but also from Claudia who's obviously on the left whereas this approach, I think, and Susan Collins is obviously center-right senator, but I think Bernie Sanders has tweeted a couple hours ago sort of thoughts along the same lines.

Beckworth: Right.

Veuger: Obviously, he's very committed to charismo. And so, I think the divides that you would have seen a decade ago have dissipated at least within the community of economists. On the more among elected officials, I mentioned Bernie, he is very open to something that is not just writing to checks to people, but providing support to businesses, which surprised me a little bit because among the elected officials are more sort of quasi-political policy types.

Veuger: At first, I think we did see some pushback against the idea of not just writing checks to people, but I think that's slowly dissipating on the left. On the right, we have I think seen a willingness to spend a ton of money in ways that were inconceivable 10 years ago. Some of that obviously is that Republicans have control of the White House, and I think that usually makes it more attractive to people to spend money, but it's still pretty stunning.

Beckworth: Right.

Veuger: The things you've seen from someone like Mitt Romney, who ran for president on his makers and takers divide.

Beckworth: Right.

Veuger: It kind of feels like it's hundreds of years ago, and he's been very open to this, so has Senator Cotton, the White House itself of course has talked a trillion dollar package. And so, I think really across the board you see a willingness to engage an aggressive action, and again I think that goes back to the experience of the financial crisis, but also just people's day-to-day lived experience of how pervasive the effects already are.

Beckworth: Yeah. And I think again what you're doing is great because it is looking closely at the supply side story, and maybe it's easier for many economists, many lay people, politicians to fall back on a more demand story just because we know we understand that, it's easier, it's firsthand. People want to spend, they need their money.

Veuger: That's right. And so, I do think that's ... It's been more dominant I think ... Sorry, I-

Beckworth: No. Go ahead.

Veuger: I was listening to all these people. I think you're right. That narrative is more common among the more policy oriented, more politics oriented-

Beckworth: But is it easier to understand I think.

Veuger: Yeah, it is.

Beckworth: I mean, it's hard for many people who don't run businesses or maybe engaged to think through all the concrete steps, all the problems that can emerge. So, it's good I think to compliment ... Both perspectives I think complement each other. In fact, here's the way that I would frame it. I mean, this is obviously a big, big supply shot to the global economy, but the way I like to look at this is we still want to stabilize household incomes and business incomes because they have committed themselves to a number of financial contracts.

Beckworth: And even though we're going to be poor in real terms, there's no need to add to the pain by forcing businesses to go under, by forcing households to go under. You keep them able to make their dollar obligations that they've signed, and in the process you minimize the spillover effects. And so, I think what I see you doing is you're preserving the supply side all right. From a different angle, you're preserving business income, and I think what the direct cash transfers are doing are preserving household incomes, and you need both.

Veuger: For sure. To be clear, obviously a lot of the money that would go into a program like this would end up being paid out as wages.

Beckworth: Oh good point.

Veuger: Right? So, this plan also does offer relief there, and in a sense it's targeted at the more vulnerable households because these are the people who would otherwise be losing their jobs-

Beckworth: That's a good point.

Veuger: ...or see their hours reduced. So, I think we try to be explicit when we write about this that we do think it's very important to provide relief to the households as well exactly for the reasons that you're pointing out, but a lot of that would come directly from this program. And I do think you have to target to some extent because there's no way to get enough money to the people who really needed it if you provide the same sums to every person or every household.

Beckworth: Yeah. Absolutely. This has to be a multi-fronted approach. You've got to again, approach this like a war. This is something very serious, so all hands on deck. And I encourage-

Veuger: Yeah. So, one additional plan is obviously on the financial systems side, and I imagine you have thoughts with the feds have done so far, but I think that keeping sort of the credit side of the economy somewhat function is sort of the third-

Beckworth: Absolutely.

Veuger: ...economic plan I would say.

Beckworth: Yeah, I know. So, your proposal is looking narrowly or I won't say narrowly. It's focused in on the supply side in terms of businesses, non-financial firm businesses that the direct cash transfers for the household, but yeah you still got to also maintain that financial sector, and the Fed is doing that, although I have some suggestions for them. I'll throw them out since you bring it up.

Beckworth: The Fed is beginning to open up its alphabet soup of liquidity facilities again, as you know. Commercial paper facility, primary dealer facility, and before we know it money market facility might be a big thing because the president had mentioned that. And these all in the fog of war might be what is needed, but it would be nice if there was kind of a one stop shopping facility. And the standing repo facility, which has been talked about coming into this, it could have been up and running, it could have been designed to take a lot of collateral, a lot of counterparties.

Beckworth: George Selgin at the Cato Institute is a great proposal to make it kind of a one unit, one facility that could have provided all the liquidity needs of many different firms and using the many different assets. But that's neither here nor there. We're in the fog of war right now, so the Fed is are doing what's appropriate given what it can do.

Beckworth: But that, you're right. This is a multi-front approach or multi-front war. We need to be aggressive on all fronts. Now, I encourage our listeners to check out Stan and Steven's proposal. We'll provide a link to it. Any other closing thoughts on this before we switch over to Europe?

Veuger: Well, I do think it's important that obviously we can't everything to work perfectly, but I do really think it's important that the federal government starts taking some action because we really haven't seen much yet. So, on the economic front, obviously the Federal Reserve has done things, but Congress so far has really not passed anything. A couple of weeks ago, I think they appropriated $8 billion dollars for some emergency healthcare spending, but that's really the very lowest hanging fruit.

Beckworth: Right.

Veuger: Then the house has passed a bill that's kind of narrow last week, but that's really all that's happened. And so, the economic policy response so far has just been-

Beckworth: All talk?

Veuger: ...super limited. Yeah. Look, we're going to have such massive job losses so quickly, and we're not prepared for that at all.

Beckworth: Right.

Veuger: Then in addition of course, all of this is going to be futile I think or ultimately not affordable, not sustainable unless we get the public health threat under control, and we've made basically no progress there either, right? We're still not testing enough people, even the announcements from the administration that were made two weeks ago turned out to just be wild overestimates of where we would be now in terms of testing. I don't think we've produced a single additional ventilator since January.

Beckworth: Oh really?

Veuger: We're running out of facial masks, all of those things. People keep saying, "Oh during World War Two, we produced so many B-52s or whatever planes." Sure, I buy it, but for now we're not producing any of those things, and we're quite some time into this and things are not going to get any easier once more people start needing intensive care or once more people start dying. So, I think the sense of urgency is very important as well.

Beckworth: So, we're not bending the curve as well as we could be?

Veuger: No, for sure. I don't know. I do my part. I'm just staying at home and I-

Beckworth: You're doing your part.

Veuger: Netflix.

Beckworth: You're very patriotic there watching Netflix, doing podcasts with people like me. Yes.

Veuger: That's right.

Beckworth: No, but I hear you. So, I mean part of bending the curve is social distancing, finding ways for people to stay at home, and then also upping the production of all the needed medical equipment. So, if there's one thing I could say about that, this is a rich American tradition. We were slow to enter World War Two, we were slow to do a lot of things in a timely fashion and maybe it's just a nature of who we are, our government system, I don't know.

Beckworth: But hopefully, again this urgency is becoming more and more apparent each day, people's focus has been sharpened and laser-like on the fact that big, aggressive actions are needed. Okay. So, that's the US front and it's a very busy one, and we'll come back to this I'm sure in future shows, but let's switch our focus over to Europe. I know we have a bunch of listeners over there as well, and if anything, I think they are far worse off than we are. They definitely are the center of the pandemic right now as the WHO has told us.

Beckworth: So, maybe give us an overview. What's over there? I mean, you're from the Netherlands, so you probably have really vested interest in following what's going on over there, but kind of paint a big picture for us. What's happening over there and how are the governments over there handling this crisis?

COVID-19’s Impact in Europe

Veuger: Well, I would say roughly speaking and a good part of continental Europe is almost in complete lockdown right now. So, that's true for Italy, it's true for Spain, it's true for France, it's true for Belgium, it's becoming truer for the Netherlands. There are border controls now even within the Schengen Area, which is the sort of no passport, no border checks part of the European Union.

Veuger: In some parts of Italy, we've seen some very dramatic scenes in hospitals. The caseload has just gone way beyond capacity. I'm a little worried that Spain is next on that front. In my hometown in the Netherlands, about a third of intensive care patients now are Coronavirus patients, so that's really ... Those numbers are escalating day after day.

Veuger: And so, the situation is pretty dramatic. Governments have stepped in a little more proactively in the last few days in previous days, including on the economic policy side. So, we've seen very dramatic packages in the Netherlands and in Denmark as well where the government is effectively paying for the wages of employees at the most targeted firms, a slightly different model what we have proposed, but in a similar vein. In Spain and in France, you have a lot of emergency support for households and firms, and dramatic expansions of stay back loans.

We've seen very dramatic packages in the Netherlands and in Denmark as well where the government is effectively paying for the wages of employees at the most targeted firms, a slightly different model what we have proposed, but in a similar vein.

Veuger: And so, the situation is not great, but the response is pretty dramatic at this point. Of course, the situation is an intense flux, and there are things happening constantly.

Beckworth: Right.

Veuger: Germany closed its borders to all countries a couple of hours ago. They have closed most of their borders in previous days. I think one big push that the commission, but also Angela Merkel is making it to keep trade flows going.

Beckworth: Okay.

Veuger: I think they came under pressure briefly a few days ago because obviously companies are not wowed about sharing medical equipment. But I think in other industries, it's holding up okay. But yeah, obviously the way I think about it is that the outbreak is just maybe a couple of weeks ahead of us, and so I think you see what's going to happen inevitably and at least in parts of the US, which is that all bars, and restaurants, and stores that are deemed non-essential are shut down, no people on the streets, no flights, very limited travel, Uber shuts down, all those things.

Veuger: And then very aggressive economic policy response packages that would have been hard to imagine even two weeks ago.

Beckworth: Well, Stan, it's a great overview of what's going on there. Maybe I shouldn't say it's great, but it's a fascinating overview of what's going on there.

Beckworth: I have several follow-up questions and I'll start with maybe the least important ones and work up to the more serious ones, but I've wondered since Europeans tend to live in higher density areas than most Americans, if that plays into the fact that Europe the center of the pandemic now and maybe that has implications for us. Any thoughts?

Veuger: Well, I think ... So, I mean obviously China has enormous mega cities that are extremely dense, and it seems like many of them have been spared. So, I really don't think that density is the issue here.

Beckworth: Okay.

Veuger: I think the delayed response and the lack of social distancing is a problem. I think Italy is a particularly old society, and so given that a lot of the ... Most in your case, a lot of the deaths appeared to be concentrated among older people. I think that leads just to an overload of the healthcare system a little more quickly than it would happen in other places.

Beckworth: Okay. So, maybe it's demographics more than density?

Veuger: Yeah. I think it's demographics and just the measures that people have taken, right? South Korea has enormous, hyper dense cities as well.

Beckworth: That's a good point.

Veuger: And they have been able to keep the threat under control. So, I wouldn't look at density as an explanatory factor.

Beckworth: Okay.

Veuger: I think just the policy response and people's own commitment to social distancing I think is what really explains the difference.

Beckworth: Okay. Well, let me ask another question. So, I read just yesterday I believe that the Europeans are now more open. Germans in particular are more open to issuing a joint European bond or something equivalent to a treasury security, but for Europe backed by all the regional governments, and there's been talk of this for a long time. Why doesn't Europe have its own safe asset? I mean, you do have German bonds, you do have Swiss bonds, but you don't have a European-wide one yet.

Beckworth: So, tell us about that. Is this really going to happen? Are we breaking through and making some progress on this front?

The Possibility of a Joint European Bond

Veuger: I mean, the answer is to why it hasn't happened so far is very straightforward, which is that voters in what we usually call modern Europe or whatever ... They're in crisis. There was often this core…

Beckworth: Right, right.

Veuger: It's a little unfair maybe, but it's just that voters there are worried about redistribution within the union, and they think, "Look, we could have these shared fiscal responsibilities." But ultimately, it's going to drive up interest payments relative to what we pay now, and we're going to end up paying for spending in Southern Europe indirectly.

Veuger: I think the explanation is super straightforward.

Beckworth: Yeah.

Veuger: It's mostly that political pressure. That's of course separate from whether it would be a good idea on your typical welfare function maximization basis, and there I think the question is different. We've of course seen that the ... And there the question is different in particular because for the countries that are within the Eurozone, right? The countries that cannot set their own monetary policy, which includes a really big chunk of the European Union at this point especially now that the United Kingdom has left.

Veuger: I think there, there's certainly something to be said for a more shared approach. Again, it's totally different, but I think that the current crisis actually offers a nice opportunity to experiment with it. That's a very optimistic approach I think to the crisis, but obviously every European Union member state is going to have to engage in dramatic fiscal expansion and new spending, and for some countries that will be fine, and markets will accept that this is a temporary thing. But I think there is concern that interest rates on Italian and Spanish debt will spike in a way that's extremely unhelpful because on the current rules, it will probably force them into some sort of austerity program, and that's obviously the opposite ... That's really not called for now because it's just a one-time response to a crisis and they need to be able to deal with that.

Veuger: So, one thing you could envision and one thing that I would like to see is an experiment with Euro Bonds where there is a joint liability vehicle that's issued to raise funding, explicitly designated for dealing with this crisis, right? That way, at least we will hopefully be able to get over this crisis without triggering another sovereign debt crisis like we had after the financial crisis. So, I think that will be a good way to deploy these Euro Bonds, we can then also evaluate the experience and see how comfortable governments in different member states are with it a couple of years down the road, and then decide whether we want to make this an ongoing process.

One thing that I would like to see is an experiment with Euro Bonds where there is a joint liability vehicle that's issued to raise funding, explicitly designated for dealing with this crisis.

Veuger: But I think that kind of one-time experience would be very valuable and it would hopefully keep the recession in Europe from becoming one that's super drawn out through those debt channels.

Beckworth: So, if there's a silver lining in this, one of them might be that this has opened the door, the Corona virus crisis has opened the door in Europe to at least experiment with a joint European Bond, and right now it could be used to justify based on what's going on in the pandemic. But once you open that door, it may be hard to close it in the future or at least you might open it more in the future and it becomes something more regularly issued.

Veuger: Yeah. I think that's the fear for a lot of voters especially in the northern countries, right?

Beckworth: Yeah.

Veuger: Not just because ... So, I guess depending on how the branding works, right? It would be not just these transfers to southern Europe through the interest rate channel, but also just the idea that there is now a separate source of financing for Europe-wide activities in addition to direct contributions to the European Union institutions. I think that would worry some politicians and voters, right?

Veuger: If we have this new mechanism to raise money, what is going to keep the union from using it not just for emergency Coronavirus policies, but also for your agricultural subsidies-

Beckworth: Right.

Veuger: ...and your structural subsidies and those kinds of outlets.

Beckworth: In terms of the financing cost though, given the whole safe asset shortage problem that was going on well before this crisis emerged and you look at the yields on German bonds, on Swiss bonds, it seems to me at least that for the foreseeable future that a European Bond could be issued with really low interest rates. Now, maybe it would be a very different story on the other side of this pandemic with huge budget deficits run up, but if the trend from before the crisis continues, it seems like Europe could actually issue bonds and simple satiate part of this demand for safe assets.

Veuger: Yeah, I totally agree with you. And when I expressed those concerns earlier, I was 80% voicing the concerns of voters in norther Europe and maybe 20% expressing my own concerns. I agree with you that generally speaking that seems like it would've been the likely scenario over the past few years, and they would be the likely scenario for the next few years as well. And so, I'm certainly not saying that those political concerns are necessarily justified.

Beckworth: Okay. Fair enough.

Veuger: Yeah.

Beckworth: All right. Another question related to the European Union, and the Eurozone I guess more particularly, we know in the US case going into the crisis, the US economy was doing relatively well, relatively healthy, and President Trump makes this point, I think it's a fair one, that it's great to come into a crisis with all four cylinders running. Your engine is hot, you're in great health, you're doing well.

Beckworth: But in Europe, what was the condition coming into this crisis and does it matter?

Health of European Economy Going into the Crisis

Veuger: Well, the European economy was doing okay, obviously better than it had since the financial crisis, but it wasn't doing as well as the US economy, right? So, there were still a number of countries with high rates of unemployment, there were a few countries that just were more constrained in their fiscal policies either because of European rules or because of skepticism from markets. The EU was struggling with the UK's departure from the European Union and that's sucked up a lot of policy energy and probably also had started harming growth a little bit already especially in the UK.

Veuger: Some of it probably also in the countries that are most directly connected with it economically. In addition, there was a new migration crisis that started developing on the southern and southeastern border of the union, and so there were a number of problems. I think one thing that the EU made a lot of progress on since the crisis was on the banking supervision side, where there's a little more European oversight, at least some notion or preparation to deal with financial institutions that go under and that are large.

Veuger: And then finally, I think the EU made some progress on setting up sort of emergency intervention systems in a situation like the current one, like the European stability mechanism, and those associated funds in Luxembourg that allow for raising large amounts of funds relatively quickly to intervene in emergencies. But obviously, many of those institutions are more set up a bit on the fly and they haven't been tested thoroughly. So, it's very different situation I think from the US where you obviously have an OCC that's been around for a long time, and a Federal Reserve that just enjoys much more political leeway I think than the ECB and those other institutions do in Europe.

Beckworth: Okay. Now, I came across another proposal similar to yours in preparing for the show, but for the ECB, and it’s called “Throwing a COVID-19 Liquidity Life-line”, and the authors are Markus Brunnermeier, Ricardo Rice, Jean-Pierre Langdeau, Marco Pagano, and I apologize if I've pronounced those names incorrectly, but they came up with something very similar to what you guys had proposed, you and Steven proposed for the US. But the ECB extends some financing some loans to businesses in the Eurozone area, and do so as a way to kind of keep things going, keep these businesses afloat through the crisis.

Beckworth: They meet payrolls, they meet their obligations. Is that something the ECB is talking about doing or can it even do it?

Veuger: I mean, I don't really see how the ... I mean, as you know, first of all the mandate is less broad than that of the Federal Reserve, but it's a little farther removed from the day-to-day banking system in the individual member states-

Beckworth: Okay.

Veuger: ...just because for smaller ... For non sort of Europe-wide banks, all the supervision is in principle done by the member states of central banks and other institutions. I also don't really see how that would fly politically. I mean, it was really a very heavy lift for the ECB I think to do what they did during the fallout from the financial crisis. I mean, they were lagging behind the Federal Reserve I think quite significantly, and yet they got tremendous pushback especially from Germany.

Veuger: And so, it seems implausible that it will happen and that's why I think you need to go more explicitly through the fiscal route with-

Beckworth: Okay.

Veuger: ...some sort of join debt instrument like Euro Bonds or something through the ESN.

Beckworth: So, make it more explicitly, more transparent than kind of a backdoor approach to the ECB?

Veuger: I think it's hard. I don't think the ECB gets the kind of discretion from the rest of the political system that the Fed gets when it really comes down to it, and so I think that would make it more complicated.

Beckworth: Well, I've heard it said that the ECB is a more independent central bank than the Fed. Is that fair?

Veuger: I think it's more independent in the sense that it's harder for politicians to tell it how to set interest rates.

Beckworth: Okay.

Veuger: But I don't think it has the same political credibility that the Fed has.

Beckworth: Okay.

Veuger: So, it really depends on how you think of independence, right? If you think of independence the way sort of the road map style independent, whatever conservative central banker papers look like, right? Where independence is basically defined as are you willing to raise unemployment rates? I think in that sense, the ECB is more independent.

Veuger: But in the sense of are you able to do whatever you want outside of your core monetary policy responsibilities? I think the Federal Reserve is more independent.

Beckworth: Okay.

Veuger: But how do you see those things?

Beckworth: Well, I had Joe Gagnon on the show from the Peterson Institute for international economics and he made the case that it's independent, and it actually has in its constitution or the laws written for it, the ability to do things that the Fed can't do. So, he alleges it can do helicopter drops, which is really a backdoor way of doing fiscal policy, and it'd probably be the sum of all fears for Germans. Like, "Oh we knew it. We knew they were going to do this."

Beckworth: They're going to reallocate resources via different inflation rates maybe in different countries, and different real exchange rates as a consequence. So, on one hand you can make a case that he does at least. Legally, they can do more things, but I do think ... I agree with your point. It's still a very political organization. You still have representatives from all these different countries who are sitting on the board of the executive committee, and it's not like they're on an island somewhere making these decisions as academics. It definitely operates in a political environment.

Beckworth: It's just that it's more independent in terms of it doesn't report to Congress directly on that dimension. But you think it would be a hard sell politically for the ECB to do anything really drastic like extend loans to businesses or do helicopter drops?

Veuger: Yes, for sure. I mean, who knows how bad the situation will get in a couple of weeks.

Beckworth: Right, right. We'll get back together in a month and see how things have changed.

Veuger: Right.

Beckworth: Because a month ago, we wouldn't be having the conversation we're having now.

Veuger: Yeah. And especially relative to the Federal Reserve I think.

Beckworth: All right, Stan. We're getting near the end of the show here and I'm just wondering if you have a baseline forecast for how long this whole process will take up? I know there's a lot of uncertainty, but in your mind do you have some framework maybe by July or August? That's what the President said that the worse would be over in the US by then. Do we just simply not know enough?

Veuger: I don't think we know enough. I don't think we know enough about the mortality of the virus, I don't think we know enough about the morbidity, I don't think we know enough about how it responds to warmer temperatures, and so I think it's very difficult to forecast. Now, the way we've written our plan, the idea is obviously that businesses and households just need cash to get through a few difficult months.

Veuger: If that turns out to be wrong, if this problem is going to persist for another year, then I think the optimal policy changes as well because at that point, people need to ... Then we're just going to have fewer restaurants for a while, and fewer dry cleaners, and we don't need as much commercial real estate. Instead, people will need to ... We'll need more people who work in delivery. We probably need to shift even more to a services industry because it's hard to do manufacturing when you can't get close to people, right?

Veuger: So, in a sense, we would need more employment in all kinds of services and we would need to automate much more of our production of goods, right? So, at that point you don't want to keep people at their current employers because suddenly that firm specific human capital is just not as valuable anymore, and instead we need to start thinking about a more structural transformation. So, yeah. I don't know. I just find it difficult to tell. I don't think we have great information on how the public health threat will evolve because the countries in a sense have gone through most of the process now.

Veuger: They are not entirely back to operating the way they used to operate. And so, I assume ultimately we'll have a lot of vaccine of some kind, but a year is very different from three months I think in just letting everyone basically get their-

Beckworth: Sit at home. Yeah, right.

Veuger: From the government. Yeah.

Beckworth: Well, let me try to paint an optimistic picture in closing and you can shoot it down, okay? So, I think on one hand-

Veuger: To be clear, I love the idea of an optimistic picture.

Beckworth: No, no, no. I know, I know, but I'm trying to create a baseline in my own mind. I'm not sure I can. And so, here are the things I'm weighing on. On one hand, I don't think we can do what China has done. I mean, China is an authoritarian state. Once they got their act together, which took some time, they took very concerted efforts. They would separate people from their families, sometimes forcibly put them in these quarantine areas, and they can probably do things that we can't.

Beckworth: They also had some infrastructure in place from SARS and other previous crises that allowed them to do it right. So, if you look at their number of cases and you trust their data, they've kind of hit the peak of their curve, and if anything their level is out. So, I don't think we have the ability given who we are as a country, our freedom loving instinct to really do the same kind of lockdown as them, and that's a strike against us, which in my mind means a longer process.

Beckworth: On the other hand, I think of two positives that we have going for us. Number one, we get to free ride up all the other people suffering and all the research that's been done, on all the learning that's been done in China, South Korea, in Europe, all the labs that are working 24/7, and that is beneficial to us. We're kind of like the last part of the storm here and we get to see what others have done before us. Secondly, America wherewithal, we have an amazing economy, we have cutting edge innovators, researchers here working, and I've got to believe it's the American spirit here that we'll step up to the plate and deliver a home run for us when we're in a midst of a war, when times are hard.

Beckworth: This is when we are at our best. And I think those two things that what we've learned from previous countries and our ability to step up when times get tough may shorten the horizon, but that has to be offset against the first one that it may be extended given our inability to really do a lockdown.

Veuger: No. So, I certainly agree on the second point, and something you've seen people say is, "Look, this is all a consequence of ... We shouldn't have free trade and we shouldn't have immigration, and we shouldn't have high density cities." And all of those combined just mean, "Okay, really? You think we'd be better off if we had a couple of more weeks to respond that we'd be 40% poorer?"

Beckworth: Right, right.

Veuger: It's insane. So, yeah.

Beckworth: Yeah, no. I think we got a rough journey ahead. Start over sound engineer. Yes. I think we have a rough road ahead of us, but we'll make it through. And thanks to people like you and Steven, and hopefully we'll have good policies put in place to help carry us through the storm. Well, with that our time is up. Stan Veuger has been our guest today. Stan, thank you so much for coming on the show.

Veuger: David, thank you for having me on.

Photo by David Zaitz

About Macro Musings

Hosted by Senior Research Fellow David Beckworth, the Macro Musings podcast pulls back the curtain on the important macroeconomic issues of the past, present, and future.