Countering the Coming Coronavirus Recession

David Stewart:   0:01
Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. Before we begin, I'd like to give an update on our recording process amid the coronavirus pandemic. As we practiced social distancing to limit the spread of the virus, we'll be assembling the Tax Notes Talk podcast remotely. I'm currently recording from my basement and our interview will be conducted over the phone, so sound quality will be a little more variable than usual. Thank you for your patience, and I hope you stay healthy. This week: coronavirus recession. With shuttered schools and mandatory lockdowns, the U.S. and much of the world is grappling with the coronavirus and trying to limit its spread. What short and long-term effects will this have on the economy, and how are policymakers responding? Joining me now by phone is Tax Analysts Chief Economist and Contributing Editor Martin Sullivan. Marty, welcome to the podcast.

Martin Sullivan:   0:54
Thanks for having me, David. How are you today?

David Stewart:   0:56
Doing well. Keeping healthy. So here in the U.S. and around the world we've been asked to do social distancing, which is basically bringing all non-essential activity to a halt. Are we now in a recession from that?  

Martin Sullivan:   1:10
Well, the data is not in yet, but I don't think we need data to understand with all the stores closed and all of the revenue not coming in to retailers and restaurants that we're going to have a severe slowdown. The projections right now for jobless claim numbers will be over 3 million when they come out later this week. And I was just looking at some data this morning. You have about 10 million people in the United States working in restaurants, about another 10 million working in the retail sector. Just those 20 million people, if even one quarter of them get laid off, that's 5 million. And that's an increase in the unemployment rate of three or four percentage points. That's what we can see right now on the horizon. So, yes, I'm afraid we are right about to enter a recession.

David Stewart:   1:55
Once you find yourself in a recession, what's the best way to get back out?

Martin Sullivan:   1:59
Let me answer that in two parts. The first I want to give the textbook answer, which is partially the right answer, which is what we want to do is the government to act fast, which it is doing now. We want it to have big stimulus, and since we're talking about $2 trillion, that's big in anybody's playbook. And then three, what we want is to direct those monies two people who are going to spend and that's low-income people and people who are unemployed. And that also is what the government's fiscal plan is doing right now. So on all those counts, we seem to be doing pretty well.  

Martin Sullivan:   2:33
The second part of the answer is that this recession is different from other recessions because it's health related, and so we need a different type of response on the supply side. And obviously to any extent we can help snuff out this virus and the illness that comes with it, that is beneficial to the economy. So we want spending and smart thinking on anti-virus measures as a first priority. And then after that, we're looking to help the victims, whether they be from health or from financial circumstances, to target the benefits to them and to small businesses.

David Stewart:   3:10
Let's flush out that question of getting the money into the people's hands who need it. How do you get money to the people that need it right now?

Martin Sullivan:   3:17
We've gone through a little evolution over the last few weeks. First, we were talking about payroll tax relief. And then we were talking about sending checks directly to Americans and also about providing extra unemployment benefits. Now the payroll tax relief is falling off the table because you're not going to get enough money to people fast enough, and it's not so well targeted. The checks to individuals, which will probably be administered through the IRS, will go to anybody who is filing a tax return. Big question about if you don't file a tax return, how are we going to get the money to you? The other delivery mechanism is to extend unemployment benefits, and that's especially good from the humanitarian side and from the economic stimulus side, because that's going to the people who most need it, people who have just lost their jobs. So there's a variety of mechanisms out there for providing those direct funds. And then, if you want to talk about it, indirectly providing funds by helping employers provide benefits to their employees.

David Stewart:   4:17
What sort of measures can you use indirectly like that?

Martin Sullivan:   4:20
Well, as you probably have heard, there's a lot of discussion about lending to large businesses. So hopefully they will maintain their employment and not just hopefully, the provisions of these loans may be conditional upon maintaining employment levels. As for small businesses, there are similar provisions, perhaps with not the conditions that you maintain employment. But with the hope that the businesses are getting this lending of these loans, they will maintain employment. And then also, this is very important for us tax people, is there's a lot of discussion about -- it's not clear if it's in the final bill yet -- but there's a lot of discussion about tax deferral, the postponement of tax payments for a year or two, and this will give businesses extra liquidity again with the hope that they will maintain their payrolls.

David Stewart:   5:05
Now, every recession seems to have its own challenges, and this one at least seems unique within my lifetime. What are the unique features of this recession, and the challenges that it faces in answering it?

Martin Sullivan:   5:17
Well, the most outstandingly unique feature of this recession is in prior recessions, the easy objective to follow was we want to stimulate. We want you to go out and spend. We want you to go back to normal. We want you to do all those economic activities that you normally do as soon as possible and proceed with confidence. Because this is a health-related recession, and in particular having to do with transmittable disease, health policy pushes us in exactly the opposite direction. We want you to stay home. We want you to not do things that you normally do, not go out to work, not go out to shop. And so this is a fundamental dilemma that we're facing now, where on the one hand, economic policy we want to stimulate, but as far as health policy is concerned, we want you to isolate. And so this is causing,I think, us to really rethink the way we do macroeconomic policy in this recession.

David Stewart:   6:09
Now, with everything grinding to a halt so fast, what are these concerns I'm hearing about liquidity?

Martin Sullivan:   6:14
In the prior recession, in the 2007-2009 financial crisis, the root cause of that economic collapse was in the financial markets. And so here in this situation, the root cause is health related and the secondary effect is problems in the financial markets and problems with financing.

Martin Sullivan:   6:34
And you could break this into three parts. One is, as in the prior recessions, we need to pump liquidity into financial markets, into financial institutions to prevent a breakdown of the financial system. That doesn't matter to everyday folks, but it's certainly matters to the financial markets. The other two things is we have finance for small businesses being immediately a problem, because if you're a restaurant owner, nobody's coming in your door. You have no cash coming in, but you still have to pay bills, and hopefully you're still paying payroll. So the need for bridge financing for liquidity is immediate and severe because small businesses don't have access to credit markets. And then finally, large businesses also have financing problems, but the nature of that is different. They do have access to financial markets. They are sophisticated players. But nevertheless, because everybody is pulling back in the dash for cash, they also are needing extended credit facilities. So the liquidity problems are central to this recession.

David Stewart:   7:36
Now, how do you best address a liquidity crunch in a time like this?

Martin Sullivan:   7:42
Well, one thing that's different about this recession from prior recessions is that the Federal Reserve has limited capabilities in what it can do. And specifically what we're talking about here is because interest rates are already so close to zero, they really can't lower them much anymore. So what can be done is on the Federal Reserve side, there is a massive injection of liquidity from the central bank. They're lending to money market funds. They're extending terms of credit to banks. And now there is a facility which is going to provide direct lending to businesses. So this is just an incredible injection of cash on the tax side. On the fiscal side, we have, as we're speaking right now, the Congress is about to approve lending facilities provided by the Treasury Department to large and small businesses. And then thirdly and I think this is an intriguing idea. It's an interesting delivery mechanism that instead of having a government send you money or making you a loan, why don't we have you not send the government those tax payments that are due? And that's what you're seeing with these postponements of cash payments. Some of it's already in the works because Treasury has the administrative authority to do that. And some of it right now is being negotiated in this bill, which is just about to be released.  

David Stewart:   9:01
So you've brought up this bill. Now, I should mention for the audience that we're recording this on Wednesday morning, the 25th of March. So we know that there has been an agreement reached, but we don't quite have the details on it yet. So based on what we do know, Marty, how good of a response is this to the current crisis?

Martin Sullivan:   9:21
I think Congress and the administration deserves credit for acting boldly and quickly and targeting relief to the sectors that need it most. That is, people most in need, the healthcare sector, and those liquidity strapped businesses. Now, is everything in this bill pretty? No. But in general, if you take a step back and blur your eyes. If you had to ask me three weeks ago, what do I hope they would do? They're basically doing it. So, I'd give them at least a B+ on this bill.  

David Stewart:   9:48
So I guess with a $2 trillion program coming, should we be concerned about the deficit at all going forward?  

Martin Sullivan:   9:55
Well, we should always be concerned about the deficit. But if there's ever a time not be concerned about it, it is right now. You see, this is a crisis. This is the time to borrow. This is the time to pull out all stops. The other thing to note is that interest rates are extremely low right now, and so the financial costs to the government of doing this are less than they would have been let's say, 20 years ago, when we had a recession at the turn of the century. No time be worrying about the deficit. And in fact, if you didn't have a strong economic policy response, the deficit might grow even larger because of the weakened economy.

David Stewart:   10:33
Well, Marty, this has been great. I thank you for joining me, and I hope you stay healthy.

Martin Sullivan:   10:36
You too, Dave. Take care. Thanks for having me.

David Stewart:   10:38
And now coming attractions. Each week we preview commentary that'll be appearing in the Tax Notes magazines. Joining me from her home is Content and Acquisitions Manager Faye McCray. Faye, what will you have for us?

Faye McCray:   10:51
Thank you, Dave. In Tax Notes Federal, practitioners from KPMG examine a new approach to transfer pricing enforcement. Eric Lopata argues that a NOL carryback provision in the COVID-19 relief legislation will not have the intended stimulus effect. In Tax Notes State, the advisory board members address tax issues related to the digital economy. Gary Fujita, Michelle DeLappe and Gregg Barton compare the Oregon and Washington gross receipt taxes. In Tax Notes International, Matias Milet and Roger Smith discuss a technical interpretation on the application of anti-hybrid rules in the Canada-U.S. tax treaty. Eduardo Brandt discusses Mexico's new entity classification rules. And on the Opinions page, Joseph Thorndike writes that Americans may emerge from the coronavirus pandemic with more of an acceptance of the taxes used to pay for governmental spending. And Roxanne Bland looks at the increased use of telemedicine during the COVID-19 pandemic.

David Stewart:   11:46
You can read all that and a lot more in the March 30 editions of Tax Notes Federal, State, and International. That's it for this week. You can follow me online at @TaxStew, that's S-T-E-W. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And, as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.