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Ideas Made to Matter

Economy

5 bold ideas for an economic restart

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As cities and states wrestle with the thorny questions of how and when to open up their economies, broader issues are coming into focus. Experts agree that a post-quarantine economy will need to be reinvigorated in novel, unprecedented ways that focus on innovation, resilience, and a restructuring of previous labor hierarchies. Here are five bold ideas from MIT Sloan and other researchers that pave the way forward.

Expand federally funded research

The federal government has a large role to play in jumpstarting innovation through research, said MIT Sloan economist in an interview with MIT Technology Review’s Radio Corona.

It’s a move that probably could have started sooner: The world has experienced sluggish productivity since the oil shocks in the 1970s, Van Reenen said, though the pandemic has amplified the issue. The United States used to spend just below 2% of gross domestic product on federally funded research; that number is now below 0.7%. 

“The main way that we improve productivity in an advanced society like the United States and Europe is through more innovation. You have to think of how we can put significant resources into rebuilding our innovative capacity,” Van Reenen said. "We have loads of ideas. We have great strengths.  I hope the pandemic galvanizes people into thinking that we really need to reinvigorate the economies in the West to get out of this low-productivity malaise and start really putting resources into innovation rather than consumption.”

Respect and protect service roles

Certain industries might take on new importance, such as health services and trash removal, Van Reenen predicted, since their necessity has grown starkly clear.

“I think there may be a cultural shift in society, which means that we give more emphasis to those things, which means we decide to actually tackle some of the fundamental problems that we’ve seen over the last few decades — such as the very rapid increase of inequality, the dysfunctional political system, the increased polarization,” he said — all of which hold the potential for radical change.

Such workers could become indispensable, as the country has seen with the increased popularity of grocery and restaurant delivery, he predicted. As these role gains societal importance, it “might lead to much greater demands for stronger labor standards, for greater protection.” 

Diversify supply chains

While climate change has long posed a threat to global supply chains, the urgency of the pandemic has swung the issue into sharper focus. We need to act accordingly, said MIT Sloan Management Review contributor Andrew Winston in a recent interview about COVID-19 and climate change.

For example, Wuhan, China is a leading supplier of masks; pandemic-ravaged Lombardy, Italy manufactures swabs — which is why they’re now so scarce.

"We’re waking up to the fact that there’s this long chain of people in logistics that gets stuff to us. It’s an incredible shock to the system, I think in the U.S., for people to see empty shelves,” he said. “I’ve thought for years that it’s hard to tell people that we’re reaching climate and resource limits when they can walk into a Costco and see limitless stuff.”

With the tenuous nature of supply chains now jarringly apparent, it’s time to diversify so we’re not confronted with shortages, Winston said. “That may mean a mix of local and distant duplication of sources. This is hard. This goes against a core shareholder capitalism belief of cutting, cutting, cutting, making everything more efficient.

“It’s incredibly efficient to make everything in one place at the biggest scale, but we need to challenge that and acknowledge that business fundamentally owns and is responsible for its whole value chain. This is one of the big shifts in what it means to be a business,” Winston said.

Encourage companies to back a clean, equitable economy

As the economy restarts, companies need to be bold in asking hard questions about long-held beliefs regarding public health and the climate, Winston said. First and foremost, they should be “focusing on people, not market numbers or the GDP, but impacts on real people.”

Beyond that, “We’re going to invest and build for the future. Trillions are being thrown at the economy. Are we going to choose the cleaner, more resilient economy?” Winston asked. In his view, the “clean economy” is the answer to the country’s biggest problems: climate, health and wellbeing, and jobs. “And this means fundamentally that companies need to get off the sidelines on policy to help think big. One of the biggest failings in companies in recent years is on the climate front.”

The pandemic economy may “steel business leaders to get off the sidelines and be courageous,”  Winston said. “We’re seeing even the most financially oriented organizations saying, ‘Hey, maybe we need to rethink some things and put on the table a basic income [or] wealth taxes.’ These are things that seemed radical just a couple of months ago.”

Institute rent relief overseen by the federal government

As statewide lockdowns began, it became clear that millions of businesses would be hard-pressed to make even one month’s rent, but proposed solutions for relief have stalled at the local level.

A new proposal by MIT Sloan Professor and Harvard Business School Professor Robin Greenwood suggests a rental contract “master agreement” provided by the federal government.

“The essence of this solution is that the federal government provides a master agreement that will reduce expensive haggling over debts, provide a floor on repayment for renters, and take advantage of the government’s unique position as a shareholder in all American corporations — from corporate taxes — to fund the policy,” said Thesmar. “The idea is to reduce debt overhang and uncertainty and share the burden of adjustment between government and landlords.”

Under the proposal, the government would offer landlords and businesses a plan for modifying rental contracts during the lockdown and for two months afterward. Landlords would forgive 100% of rent during that time for contracts signed before March 1, 2020. At the end of the fiscal year, landlords could claim a tax credit equal to 30% of the forgiven rent. To induce landlords to take the contract, rents received during this grace period could be subject to a surtax.

Landlords would be incentivized to accept the deal when they believe the business tenant is unlikely to afford the rent, the researchers write. Given existing income taxes and the tax credit offered, Greenwood and Thesmar calculate that landlords may find it beneficial to “take the deal” if its benefit is as low as 20% of the rent — as keeping the business tenant alive will allow them to snap back to normal operations as fast as possible.

The government, meanwhile, benefits by receiving tax payments on the additional business income generated by reducing the tax burden on small business. “Debt overhang of small businesses will be a major problem in months to come: If too many obligations have accumulated during the lockdown period, firms will not be able to invest, to hire, or even survive, and the recovery will be sluggish,” Thesmar said.

“The government and the economy will gain from alleviating the debt burden of companies. Our proposal tries to incentivize landlords to help with this, possibly with a direct subsidy,” Thesmar said. “It is a simple value proposition from which all can benefit.”

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