Features
03.25.2020
8 minutes

Fight to win: create a time-limited Health Finance Corporation.

COVID-19 viruses are the equivalent of extraterrestrial invaders. To thwart their invasion of our planet, it is necessary for people to hide from the aliens (social distancing/quarantine), to identify them (testing), and to develop and deploy superweapons to neutralize them (treatments and if possible vaccines).

As in a 1950s science fiction movie, the war against the alien invaders will be won by the combined forces of mobilized science and industry. The role of economic policy is secondary and has two purposes: providing wartime resources to science and industry and cushioning the collateral economic damage done by the government’s order that everyone hide from the aliens.

That’s not what we’re doing now. In battling the coronavirus, America’s political leadership is making two harmful mistakes. One mistake is focusing on the indirect economic consequences of the measures taken to slow the pandemic while neglecting the urgent need to contain and neutralize this lethal microbe. The other mistake is trying to deal with the crisis by means of ordinary legislation, rather than delegating authority temporarily to a bipartisan agency which can carry out fiscal policy quickly, backed up by the Fed with monetary policy.

Our political and pundit class is treating this alien invasion as though it were a replay of the Great Recession of 2008, with recycled ideological arguments from a decade ago about bail-outs to firms and individuals. But the economic recession is not the main crisis. It is secondary, collateral damage as a result of public safety measures. The main front is the medical war against the virus. In that war, the U.S. and other nations are handicapped by inadequate testing and inadequate medical supplies. The focus should be on ramping up mass production here and abroad of testing kits, PPE, ventilators and palliative medicine, along with rapid training of new medical workers and R&D to find treatments and a vaccine.

A Decisionmaking Overhaul

Our system of government, with separation of powers and checks and balances, works well during peacetime. It does not work well during an alien invasion when the aliens are wantonly slaughtering great numbers of Americans throughout the country, including the nation’s capitol.

The republican city-states of ancient and Renaissance times recognized the need for temporary dictatorship during emergencies. But in today’s America, too much authority wielded by a partisan president would not be considered legitimate by half of the citizenry. Fighting the aliens therefore requires Congress and the White House to temporarily delegate the power to raise and allocate critical resources to a bipartisan, independent organization, the equivalent in fiscal policy of the Federal Reserve in monetary policy.

In World War I, this role was performed by the War Finance Corporation and other agencies. During the Great Depression, the War Finance Corporation was the model for the Reconstruction Finance Corporation (RFC), which stabilized the economy during the 1930s and then helped finance war production during World War II.

The economist James K. Galbraith and I have proposed the creation of a time-limited Health Finance Corporation (HFC). The HFC would be a temporary, federally-chartered, government-owned corporation that could leverage federal seed money to crowd in private capital by issuing its own government-guaranteed bonds. The HFC would have broad powers to do anything necessary to fight the virus, from rescuing medically necessary supply-chain firms to making grants or loans to state and local government for constructing temporary hospitals. A HFC could be a vehicle by which the Federal Reserve disburses large sums to critical medical equipment suppliers and state and local hospitals. Congress and the White House would have oversight power through a bipartisan board but would not micromanage decisions.

Instead of following the example of the U.S. in the world wars, however, to date we are responding to the crisis by means of ordinary legislative processes, with the two parties and the two houses of Congress squabbling among themselves over including renewable energy subsidies and money for rape-crisis centers in near-weekly emergency stimulus bills, each bigger than the last.

As our leaders recognized in World War I and World War II, this is no way to mobilize the economy in a global war. The sooner Congress and the White House delegate substantial but time-limited fiscal authority to our proposed Health Finance Corporation or something like it, the better.

First, Do No Harm

All too many progressives and populists want to impose punitive conditions on businesses which may be rescued by the government. All too many conservatives and libertarians want to impose punitive conditions on poor people who receive government relief in this crisis, or exclude them altogether.

The mistake in both cases is the same. There are corrupt corporate executives and improvident poor people. But the virus invasion was not caused by stock buybacks by corporations or by bad personal decisions by low-income individuals. If aliens invaded the earth, would we means-test admission to shelters, or exclude executives and shareholders of particular sleazy firms? Of course not. The rain falls on the just and the unjust alike and so must the rescue.

Compensation, Not Loans

Oren Cass, the conservative thinker and founder of American Compass, is right: the appropriate model for paying firms and individuals is the takings clause of the U.S. constitution.

In the interest of public safety, the government has taken the ability to earn income from both firms and individuals.

Suppose aliens have invaded the United States and are murdering people in every city and county. The government orders people to hide in their homes and orders businesses to close. Why would payments to the sheltered citizens and the shuttered shops and factories during the war against the alien invaders be considered loans to be repaid?

The proper analogy is wartime taking by the government. If the government during the alien invasion takes your land to be used as a bunker, this is a legitimate exercise of the government’s power of eminent domain. But the government is obligated to pay the landowner the fair value of the land, and the payment must come out of general taxation. For the government to take the land from the landowner for a public purpose, pay the landowner, and then insist that the money paid to compensate for the taking was merely a loan which the landowner must repay in its entirety with interest, makes no moral or political sense.

Universal Laws, Not Conditional Relief

Many Americans from the Right to the Left are understandably opposed to bailing out large corporations which could then spend the money on stock buy-backs or huge bonuses for executives. But if eliminating stock buy-backs is a good idea, then outlaw it. If limiting excessive executive bonuses is a good idea, then limit them for all firms. But it is makes no sense to impose one set of conditions on firms which take federal money, while exempting firms which may not need it. Any conditions on firms written into today’s legislation should govern all firms from now on.

We Can Afford More Debt and Deficits

There are no atheists in foxholes and there should be no deficit hawks in alien invasions. Wars should be paid for on the installment plan. The government should borrow as much money as it takes to isolate, identify and defeat the invaders while minimizing the economic damage done to Americans by the necessary war effort. This is no time for halfway measures. To quote Gilbert and Sullivan, what is needed is a “short, sharp shock.”

Following the crisis, to maintain its credit rating, the U.S. government over time should repay the nominal value of the national debt, which has necessarily been increased by its responses to the Great Recession and the COVID-19 pandemic. But with the help of moderate inflation over decades, the real value of the debt can decline. Several decades of inflation helped melt away the national debt the U.S. ran up in World War II, so that the World War II bond my grandfather gave me in the 1970s was nearly worthless.

Savers reliant on cash in banks suffer from even modest inflation. But most affluent people hold their wealth in the form of diverse investments, not cash. As for the working-class majority, they do not have significant cash savings. During their working years their wages can be adjusted for moderate inflation, and Social Security is already inflation-adjusted for retirees.

U.S. government debt will continue to be among the safest assets in the world during and after the present pandemic, and can be rolled over as long as the U.S. is a going concern. To be sure, interest on the debt will have to be paid down by taxes, even if the real amount is reduced by inflation. Would moderately higher tax rates decades from now be an intolerable burden? No. If there is even modest productivity growth after the crisis, then Americans a generation or two from now will be wealthier than they currently are. Thanks to productivity, they will be able to pay a higher share of income in taxes and yet be better off in absolute terms than their equivalents today. I pay a much higher share of my income in taxes than my ancestors in 1920. But because productivity growth has lowered the cost of everything from clothing to smartphones, I can purchase much more with my after-tax income.

In sum, the U.S. government must have two goals—limiting the deaths caused by the COVID-19 virus while limiting the economic damage to firms and individuals caused by the prosecution of this necessary war. We must stop thinking of the crisis caused by the pandemic as a mere replay of the financial crisis of 2008 and instead understand it as an alien invasion.

is the author of The Next American Nation: The New Nationalism and the Fourth American Revolution.