We Are Facing a Post-Pandemic Downturn. What Would Reagan Do? | Opinion

In times of crisis, it is especially hard to think carefully and calmly and yet, during a crisis, it is more important than ever to think analytically.

The health impact of the Coronavirus is way above my paygrade, but the economic impact of what's been done to stave off the Coronavirus is my bread and butter. So if you'll forgive me for not weighing in on what we should or should not have done for health reasons, I'm going to take the world the way it is, not as I wish it were, and proceed from there.

The U.S. stock market is, on a real-time basis, as good a measure of the economic consequences of policy as I can think of. As such, the story told by the markets is one of an impending huge downturn matching or besting some of the worst times in recent history. This is not just a scare that's going to pass quickly, this is the real deal and it will probably last a long time.

My first observation comes from my extensive background as a policy insider from the Nixon White House, the Reagan White House, and on through to today's Trump Administration. Whenever politicians make decisions when they are either panicked or drunk, the consequences are rarely attractive. Doing nothing and taking careful inventory of what's happening and what can and should be done is hard, but desperately important.

First of all, make sure with absolute certainty that anything you do does not harm the situation. Nixon opted to cover up a rather banal, petty political break-in at the Watergate and look how that turned out. And then of course there was President Ford's Whip Inflation Now, Jimmy Carter's National Energy Plan and attempted rescue of the hostages in Iran, "W" and Obama's failed stimulus packages, etc. etc. The unintended consequences of ill-conceived and poorly thought out policies are more often than not far worse than the actual precipitating event. And, I believe hurried actions are as dangerous today as ever.

In the deep recession of 1982, President Reagan resisted the advice of many of his advisors to eliminate the third year of his tax cut. On January 1st, 1983, one of the most prolonged booms in U.S. history began. Likewise, during the crash of 1987, President Reagan's policy was, "Don't just stand there. Undo Something." Again, prosperity continued unabated. President Reagan was the perfect example of how politicians should behave in times of crisis. Today, we are more at risk than ever by the flurry of panic-driven policies, most of which will do a lot more damage than good. We need to do two very simple things:

1. One huge part of the crisis that faces the U.S. is the short-term need for liquidity faced by otherwise solvent industries and companies. Inherently solvent companies need temporary access to liquidity. Without the liquidity, these inherently solvent companies will terminate too many employees and will sell assets in a fire sale way below their replacement costs. If these industries and companies don't get the liquidity they need, their liquidity crisis will morph into a solvency crisis. This happened in 1930-31 and 2008-09. Unsuccessful companies with inherently insolvent businesses should not be bailed out. Who cares who owns Boeing? As long as someone owns it and runs it well, America is fine.

The Federal Reserve, the Treasury, the Small Business Administration, Housing and Urban Development, etc. should lend to these good companies or provide loan guarantees to these good companies to tide them over these unforeseen hard times back to normalcy. Paraphrasing the words of Walter Bagehot, "In times of crisis, discount freely."

2. The equally large second part of a recovery package has to be making working more attractive and making employing workers more attractive. Today, there is only one policy that can achieve both of these objectives: a temporary payroll tax (Social Security and Medicare) waiver for both employers and employees through December of 2020. This policy also has the added benefit of providing widespread benefits across all segments of the population. No one is to blame for the Coronavirus and no one should be selected for special dispensation at the expense of others.

By waiving the employee contribution to the payroll tax, each and every employee will receive an increase of 7.65 percent in their after-tax wages. Also, by waiving the employer contribution to the payroll tax, the cost of hiring or retaining an employee is reduced by 7.65 percent, as well.

The loss in output and employment can best be reversed both in magnitude and timeliness by a temporary waiver of the payroll tax through December of 2020. By making sure the waiver is only temporary, what happens is that both workers and employers know that these benefits won't last long, and, therefore, they will have an enormous incentive to put as much production as they can into the eight-month period when the payroll tax is waived. They will pull 2021 production forward and increase 2020 production as much as possible. Helicopter money, such as the proposed check for $2,000 per family, will reduce the bounce back. Just look at Europe and Japan over the post-World War II era to see the enormous damage done by helicopter money.

The total static cost of a plan to waive all payroll taxes through December 31st will be scored in budget terms at around $750 billion. In dynamic terms, the total cost will be a lot less than $750 billion. If one includes the costs of welfare payments and other tax revenue losses—federal and state and local—the feedback effects on the budget will be very large indeed. And if you only consider the human suffering that will be alleviated, I can't think of any policy more compassionate than the quick reversal of the economic downturn brought on by the health policies implemented to stop Coronavirus.

Art Laffer is a former member of President Ronald Reagan's Economic Advisory Board and a Presidential Medal of Freedom Recipient.

The views expressed in this article are the author's own.