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COVID-19 Threatens Deep Economic Suffering and Worsening Inequality. The Right Policies Could Help.


By Scott Barsotti

One thing that is clear from the coronavirus crisis is that public health and economic health are closely intertwined. In regards to the combined health care challenges and economic pains caused by the pandemic, economist and University Professor Lowell Taylor thinks the federal government should be on a wartime footing in its response.

According to the data as of May 28, 2020, over 40 million Americans have filed initial claims for unemployment insurance as a result of the COVID-19 pandemic, a number that is expected to continue climbing into the summer. Job loss of that magnitude has not been experienced in this country since the Great Depression—and even then, losses took place over the course of years, not weeks. And it’s not just about the quantity of jobs lost, but the quality. 

Consider the chef at your local restaurant. What happens if the COVID-19 pandemic forces the restaurant to shut down for three months or more? Financing for the restaurant could dry up, and the owner could decide not to re-open. 

“That chef has invested a huge amount of time and effort into establishing a reputation at that restaurant, and now all that value added just disappears,” said Lowell Taylor, H. John Heinz III University Professor of Economics at Carnegie Mellon University. “Now, this is a worker who doesn’t have a job in the short-to-medium term and may never find a job that’s as good. They conceivably could be unemployed for a long time, or find a job where they aren’t as productive and aren’t as well-matched. That’s the kind of thing you worry about.”

The federal government, state governors, health officials, and economists are engaged in a public debate right now over when the U.S. economy can open back up and resume some semblance of pre-pandemic normalcy. How soon is too soon? How long can we wait? If businesses remain shuttered, many of them may not ever recover, some may not even re-open at all. Meanwhile, if stay-at-home orders are lifted and the coronavirus spreads prolifically, the health care system could become overburdened, leading to worsening outcomes and death. Neither situation is tenable. An economic depression will cost people their lives whether they contract COVID-19 or not. At the same time, surging hospitalizations and excess deaths caused by abandoning social distancing efforts would exact an economic toll, not even getting into the human toll they take on communities and families.

The way a well-functioning society works, is that when you ask a lot of people, you step up and do your best to offer a lot back. Prof. Lowell Taylor

Much of the action taken by the federal and state governments so far has been emergency response to the public health crisis—increasing testing and health care capacity, and providing economic relief to businesses and individuals in the form of direct cash payments and expanded safety net programs, such as unemployment insurance. But looking ahead, Taylor suggests that we need to be very careful as a country about how we choose to approach the recovery phase, once we get there. In his estimation, there are three categories of workers that we need to pay particular attention to as the economy begins to come back online.

“First, there’s an entire segment of the U.S. economy, a pretty big group in fact, who are only marginally attached to the labor market. These are people such as gig workers and freelancers, people who move from job to job or take advantage of short-term opportunities. Many of those people are completely out of work now,” said Taylor. “Many of these workers are in families that already have tenuous economic circumstances to begin with, and are already struggling to pay bills and rent. While it’s true that states and the federal government have tried to extend unemployment benefits and other protections to workers of this type, it’s inevitable that many will fall through the cracks.”

The second group contains people like the aforementioned chef, who lose jobs where they’d created what’s known as “firm-specific human capital.” That kind of job is very difficult to replace. 

“We can talk about retraining programs and the kind of things we’d normally talk about when, say, an industry shuts down—miners losing their jobs when the region’s coal industry shuts down, for example. But this kind of job loss is a tough problem under normal circumstances, and now with [COVID-19], we really could be facing some long-term pain,” said Taylor. He added that the idea of turning government loans for small businesses into grants if they hire back their workers or don’t lay them off, might be a good plan to help with this—so long as the loan program is administered effectively.

“And of course, there’s a third category that we always must remember, and that’s the very poor,” said Taylor. “Any kind of economic downturn disproportionately affects the poor, who have tenuous relationships to economic activity, period. This is going to be a very tough time for people in that category, as is always the case.”

Taylor has expertise in labor economics and demography, and previously served as a senior economist with President Clinton’s Council of Economic Advisors. Researching demographic disparities in social mobility, educational attainment, and health outcomes, Taylor has spent his career studying some of the deepest inequalities in the American economy—inequalities the COVID-19 pandemic threatens to exacerbate.

“We need to be really careful to subsidize and help people who are displaced by this,” said Taylor. “Worst case scenario is that people lose their homes, so we have to make sure that doesn’t happen.”

Still, even with policies such as moratoriums on evictions, foreclosures, and utility shut-offs, low-income families with young children could lose ground.

“In general, poorer kids are the ones who benefit most from being in good quality schools, so they will suffer the most. They aren’t getting school support services, they aren’t getting school lunch that they may depend on in normal times,” said Taylor. “And for older kids, how will this affect college preparedness? Colleges and state departments of education should be paying close attention. They should be looking out for kids who are in danger falling behind as a result of this crisis, and making scholarships and support available to them.”

For the health care sector, coronavirus is war

Professor Taylor has written extensively about some of the problems plaguing the U.S. health care system, such as the way that employment is linked to health coverage for most Americans, an approach he calls an “historical anomaly” and bad policy for a variety of reasons.

“It creates problems even in a normal, well-functioning labor market,” he said. For example, people often won’t leave jobs they don’t like to find new jobs because they’re worried about not having health coverage. The tax incentives of employer-provided health care create distortions that result in, effectively, lower-income people paying more for health coverage than high-income people.

“And, of course, as you move from one employer to another and switch health insurance companies, you probably have to switch health providers which means you lose continuity of care. There are lots of problems with health insurance in our country. Now that we have this pandemic, it’s really exposing the flaws in the system,” said Taylor. He favors extending the protections of the Affordable Care Act or providing a government option that allows people to buy insurance that isn’t tied to their employer, through Medicare or otherwise.

But where health care is concerned, Taylor makes special note of the situation facing the country’s frontline health workers. They risk daily exposure to the coronavirus, and if they fall ill themselves it could create labor shortages in a system that is already being stretched.

“We owe enormous gratitude to our doctors, nurses, and other health care workers who are keeping us safe. The minimum we owe them in return is to provide the resources necessary to keep themselves safe,” said Taylor. “The way a well-functioning society works, is that when you ask a lot of people, you step up and do your best to offer a lot back.”

“This is where we need a war footing effort. It seems extreme to think of it that way, but that’s the reality. We have frontline health providers traveling into hot spots, into harm’s way, to help. It’s really remarkable.”

This story has been updated multiple times to reflect new unemployment data.