The coronavirus has forced us to rethink almost everything, including the role of government in our lives and the economy. A staggering 33 million people have filed for unemployment and now get their income from the government. Small businesses that got a Paycheck Protection Program loan or grant have the government taking over their payroll and paying rent. The Federal Reserve, meanwhile, has its own program to buy corporate bonds. Large companies like airlines are getting bailouts, too, with more likely to come.
One could be forgiven for thinking we now have a planned economy. The scale of this crisis dwarfs the financial crisis, which also saw bailouts and double-digit unemployment percentages. The government's interventions this time around have led some—including several major news outlets—to argue that we are experiencing the total failure of our economy and society. Beyond arguing for immediate assistance for the unemployed and struggling businesses, they are pushing for a complete rethink of the role of government.
New York University marketing professor Scott Galloway calls this phenomenon "capitalism on the way up...socialism on the way down." On the way down, we're seeing arguments for a Universal Basic Income, which would give every American a check in good times and bad. We're also seeing arguments for government ownership of private companies, more redistribution and running up the national debt indefinitely, financed by the Fed.
The critics have a point. Like any severe shock, coronavirus has exposed real weaknesses in our system. The sheer number of low-income workers who entered the crisis physically and financially vulnerable should be eye-opening. As we reopen, they may continue to be at a disadvantage because many work in service sector jobs that require human interaction.
But are we on the way down? The scale of the devastation has certainly exposed real weaknesses in our system, especially for the uniquely vulnerable low-income workers who have been hit hardest. However, the government is playing the role it was designed to play in a capitalist system: that of insurer.
In the same way we expect the government to provide sensible regulations and infrastructure, we pay taxes, in part, as insurance against extreme events. When disaster strikes, government is uniquely suited to step in—and then step back, when the storm has passed.
Many of the coronavirus-related interventions are justified by the extreme nature of the current moment. We all hope it is a once-in-a-century event. Few businesses can, or should, keep enough cash on hand to survive several months of no revenue or income—it's like keeping your own personal snow plow if you live in Arizona. For unexpected and unpredictable events, it's more efficient to have insurance. But a pandemic cannot be insured by the private sector, because insurance companies need to diversify risk across individuals. In order for the insurance to be viable, people have to experience a risk at different times (or never experience it). The coronavirus pandemic is a systematic event: everyone experiences the downturn at the same time, so it would bankrupt insurance companies to pay everyone at once.
Government, meanwhile, is uniquely able to diversify, because it can do so across generations, taking money from the future by issuing debt. Critically, the ability to borrow cheaply now depends on the market's faith the government will eventually pay the debt back. This requires not issuing too much debt when times are good and being as prudent as possible when the economy recovers. Our taxes and fiscal prudence in boom times effectively serve as an insurance premium.
When we emerge on the other side of this crisis, it is important that the government retreat as soon as possible. First, there is a limit to how much debt it can run up, especially when every other country is doing the same and flooding the market with their bonds. And, perhaps more importantly, we ought to remember that this role of government as insurance is not a case for socialism. A system in which government can step in to provide protection during unexpected downturns while stepping back during booms is the key to promoting growth and innovation, which will put us in a better position to bounce back.
Recovery also depends on a robust private sector, which is actively working on deploying vaccines and developing anti-virals. When we begin to reopen, it will also be best positioned to lead the recovery, by rehiring and adjusting effectively to the new normal. No one knows what that future holds, but price signals and markets will have the first indications of what the recovery will look like.
The government is providing insurance today, not a promise of socialism tomorrow. We are in unprecedented times that should not define the shape of our economy for years to come. Insurance companies do the same, providing limited support for unexpected downturns like fires, floods and broken legs. No one expects insurance payments indefinitely, and the same should be true for the coronavirus economy today.
This piece first appeared at Newsweek
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Allison Schrager is a senior fellow at the Manhattan Institute, author of An Economist Walks Into a Brothel (Random House), and a co-founder of LifeCycle Finance Partners, LLC, a risk advisory firm. Follow her on Twitter here.
This piece originally appeared in Newsweek