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Coronavirus crisis spurs debate over which social model is best

Coronavirus crisis spurs debate over which social model is best
Business
The coronavirus crisis is proving a test case for contrasting social models, as governments in the U.S. and Europe pursue different policies to cushion their economies from much the same shock.

It’s the latest revival of a long-standing philosophical debate — and at its centre is the question of who should absorb the costs and risks when there’s a sudden change in economic fortunes.

On one side, the U.S.’s traditionally more flexible labour markets mean individual workers are expected to take the brunt. Last week’s stimulus bill included about $300 billion in cash handouts for households — to support families until the virus clears, even if they lose their jobs in the meantime.

Meantime, in Europe, where states provide more generous unemployment benefits and it’s harder to fire staff, the focus has been on giving companies incentives to keep workers on their books, holding out for business to return to normal as soon as possible.

“The starting point for the two systems is very different,” Catherine Mann, chief economist at Citigroup Inc., told Bloomberg Television. Europe has “a much better social safety net that will support people. In the U.S., it’s necessary to be supportive of people and supportive of firms.”

‘Larger rise’

In the unfolding transatlantic experiment, the virus’s effects are likely to show up differently in economic data. The U.S. has already seen a record surge in unemployment claims, and policy-makers have had to improvise a safety-net.

“In contrast to the systems which have subsidized short-term work programs and heavy costs associated with layoffs, it is likely that the U.S. will experience a larger rise in unemployment rates, even under the best policy design,” said Bruce Kasman, chief economist at JPMorgan Chase & Co.

That has knock-on effects for households, he said, including a loss of access to health-care — which in the U.S. is often linked to employment — and credit.

It’s rare to get a beauty contest between distinct approaches, and economic ideologies, like the one created by the virus. The 2008 crash wasn’t quite the same: European and U.S. authorities responded differently in part because their banking systems faced specific challenges. But the pandemic is posing the same kind of threat to public health and economic activity across the developed world.

Rescue bill

The surge in jobless claims is likely only just beginning in the U.S. Many analysts, including some Federal Reserve policy-makers, say unemployment rates will hit levels not seen since the Great Depression. After the 2008 crisis, the U.S. already lost a long-held lead over Europe in terms of the share of the prime-age population in work.

The $2.2 trillion rescue bill adopted by Congress, and signed by President Donald Trump on Friday, is designed more to cushion this blow than to forestall it. As well as the checks to households, $350 billion is earmarked for credit to small and medium-sized businesses, which employ about half the workforce. These loans can be waived if companies retain staff — people they already laid off. But there are worries that the bureaucracy supposed to administer the plan is ill-equipped for its scale.

In Europe — where the first data on virus-driven job losses is due this week — governments have off-the-shelf furlough plans they can resort to. Countries like Germany, France and Italy have responded by making more cash available to these programs, and widening their scope.

France, for example, is promising emergency pay of 84 per cent of normal after-tax earnings for those who earn up to 84,000 euros ($94,000 U.S.) a year. It’s 100 per cent for those on the minimum wage. Even the U.K., whose work practices have historically followed U.S. lines, announced that the government will cover up to 80 per cent of the wage-bills for private employees who risk losing their jobs. Canada followed suit on Friday with a similar policy.

The idea has attracted attention in the U.S. – and not just among left-leaning admirers of the European model.
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