The Wall Street Journal - 12.03.2020

THE WALL STREET JOURNAL. Thursday, March 12, 2020 |A17

C

oronavirus is contagious. So

is financial panic.

The spread of the novel

coronavirus could cause a

run on the financial system

leading to a deep recession. Severe

stock-market drops and increased de-

mand for liquidity are warning sig-

nals. Bank equity capital has in-

creased by $750 billion to $2.1 trillion

since 2007, but a panic could still

overwhelm well-capitalized banks. We

need to restore the weapons to fight

contagion that Congress took away

during the last financial crisis. Strong

pre-emptive action would greatly di-

minish the risk of a panic.

The previous systemic threat to

the financial system was spurred by

the failure of Lehman Brothers in

2008. That threat came from within
      the banking system in the form of
      bad housing loans. This time is differ-
      ent. Wall Street risk-taking isn’t to
      blame for the coronavirus.
      In 2008 the Fed supplied needed
      liquidity to the banking and nonbank-
      ing financial sector, the latter
      through its authority under Section
      13(3) of the Federal Reserve Act.
      Meanwhile, the Federal Deposit In-
      surance Corp. expanded the limits of
      deposit insurance, among other
      things providing unlimited protection
      for transaction accounts. The Trea-
      sury Department offered guarantees
      to money-market funds.
      Once the crisis abated, however,
      there was growing public concern
      about “moral hazard”—that govern-
      ment backstops and guarantees cre-
      ated incentives for risky behavior. In
      response, the Dodd-Frank Act of 2010
      limited the Fed’s lender-of-last-resort
      powers for nonbanks, an increasingly
      important part of the financial system.

Dodd-Frank Worsens Covid’s Risk

Fed loans to nonbanks can now be

made only with the approval of the

Treasury secretary. They must be

done through a broad program, unlike

the one-off rescue of AIG, and must

meet heightened collateral require-

ments. Loans to nonbanks must be

disclosed to congressional leaders

within seven days and to the public

within one year. Loans to banks must

be disclosed within two years. While

disclosure is usually desirable, in this

situation it creates the specter of fu-

ture stigma that deters financial insti-

tutions from seeking even badly

needed Fed funding. Even before the

current crisis, banks’ use of the dis-

count window had dropped to record

lows.

Dodd-Frank also prevents the FDIC

from expanding guarantees to bank

depositors without congressional ap-

proval, as it did in the credit crisis.

And the Treasury is now prohibited

from guaranteeing money-market

funds. These legislative changes

make it difficult for the Fed and other

regulators to deal effectively with a

financial panic.

Government agencies have com-

pounded the problem of their own

weakness with regulations that make

it harder for financial firms to lend to

each other. The liquidity coverage ra-

tio, the Fed liquidity stress tests, and

the “living wills” process require the

largest banks to meet stiff liquidity

requirements that can result in li-

quidity hoarding.

Even before the coronavirus sent

markets tumbling, the scarcity of li-

quidity was a big problem. The 9%

spike of overnight repurchase agree-

ment, or repo, rates last September

caused the Fed to supply as much as

$75 billion a day to the repo market.

Although the demand for such sup-

port had fallen to about $26 billion

by the end of February, it rose to

$100 billion on March 4. The Fed re-

sponded Monday by raising the mini-

mum support offered to $150 from

$100 billion. While this change is

welcome, it falls short.

Here’s what should be done imme-

diately: First, the Fed should reacti-

vate all the facilities it created in the

crisis and any additional ones it be-

lieves necessary, so it is ready to be

the strongest possible lender of last

resort—to do whatever it takes, con-

sistent with its present legal author-

ity. This includes making U.S. dollars

available to other major central

banks through currency swaps. And

the Treasury secretary should an-

nounce his approval of these efforts,

consistent with the requirements of

Section 13(3). Second, financial regu-

lators should modify their rules and

supervision to stimulate liquidity in

the interbank and repo markets.

Third, Congress should restore all the

powers it took away from the Fed,

FDIC and Treasury during the crisis.

Fourth, international coordination

through the Group of 20 must be ac-

celerated. This is a global problem.

China, Europe and Japan already

have many of these powers. Policy

makers in the U.S. need them too.

Bold action can prevent a panic be-

fore it starts. The public knows the

situation is serious and wants the

government to act.

Mr. Scott is an emeritus professor

at Harvard Law School and the direc-

tor of the Committee on Capital Mar-

kets Regulation.

By Hal Scott

CHAD CROWE

The Fed, FDIC and

Treasury need the same

powers they wielded

against the 2008 crisis.

OPINION

Can Biden

Win Over

The Berners?

By Ted Rall

Paid Sick Leave Is a Failed Cure

D

emocrats in Congress have a

cure for the coronavirus cri-

sis: a nationwide paid sick-

leave mandate. Sen. Patty Murray of

Washington says this new benefit

would allow people to “focus on

staying healthy and preventing the

spread of this disease.” Her House

sponsor, Rep. Rosa DeLauro of Con-

necticut, said the lack of such a

mandate could “make coronavirus

harder to contain.”

Ms. Murray and Ms. DeLauro began

advocating such a policy in 2004 and

have clearly internalized Rahm Eman-

uel’s immortal political advice that

“you never want a serious crisis to go

to waste.” But the policy is poorly

suited to the current crisis.

San Francisco was the first locality

to require paid sick leave, starting in

2007. The law brought modest bene-
      fits and significant costs. A 2011

study by the Institute for Women’s

Policy Research found nearly 30% of

the lowest-wage earners reported lay-

offs or reduced hours, with employers

unable to offset the cost through

price hikes alone. Connecticut’s sick-

leave policy was the focus of a 2016

study (of which Mr. Yelowitz was a

co-author), which found a “sizeable

decrease in labor demand” as a con-

sequence of the mandate.

Today 12 states, the District of Co-

lumbia and several dozen other local-

ities require some form of paid sick

leave. In Washington state, employ-

ees earn one hour of leave for every

40 worked. In California, they earn

one hour for every 30, or employers

can provide 24 hours up front. Both

states also have localities that re-

quire more-generous benefits.

The coronavirus’s domestic ar-

rival in these two states complicates

Ms. Murray’s promise that a paid-

leave mandate could “prevent” its

spread. A nursing home in Kirkland,

Wash., northeast of Seattle, is de-

scribed as the “epicenter” of the U.S.

coronavirus outbreak. Employees,

residents and relatives have all

tested positive for the disease. Cali-

fornia has the third-highest concen-

tration of cases.

Why didn’t paid-leave regimes in

California and Washington prevent

the spread of the disease, as Ms.

Murray imagines? According to

Johns Hopkins researchers, it takes

five days on average for coronavirus

symptoms to present. That means

paid sick leave is of limited use. No

employee would come to work or a

public gathering knowing he had the

coronavirus, and no employer would

want him to. But he might show up

contagious before he has ever

showed symptoms.

Ms. Murray’s plan is also uniquely

ill-suited to the tenuous economic

environment. Her proposal immedi-

ately grants 14 days of sick leave in

the event of a “public health emer-

gency,” including the current one.

But employers are already cutting

back in response to declining reve-

nue. Local 360, a Seattle restaurant,

announced this week it would close

immediately “due to the impacts of

the Covid-19 situation.” Others have

done the same. Requiring struggling

businesses to pay for two weeks

leave for every staff member would

only compound the damage.

This is where the government has

a role to play. Rather than creating

a new mandate on employers, Con-

gress and the states should address

the present crisis through enhance-

ments to existing social-insurance

programs. Boston University’s Jay

Zagorsky proposes broadening

workers’ ability to tap unemploy-

ment insurance, such as by dropping

any waiting period to apply and

eliminating any requirement to look

actively for work. Others have pro-

posed using the unemployment in-

surance system to reimburse em-

ployers for the wages of laid-off

employees.

The relative benefits and conse-

quences of paid sick leave must be

considered carefully. Using a pan-

demic to justify its swift enactment

would result in ineffective policy

that may hurt the workers it’s meant

to help.

Mr. Yelowitz is an economics pro-

fessor at the University of Kentucky

and a senior fellow at the Cato Insti-

tute. Mr. Saltsman is managing di-

rector of the Employment Policies

Institute.

By Aaron Yelowitz

And Michael Saltsman

Washington state already

has a mandate. Contrary

to Sen. Murray, it hasn’t

helped arrest coronavirus.

From a January job posting at a

public university:

The Department of Feminist

Studies at the University of Califor-

nia, Santa Barbara, invites applica-

tions for a tenure-track position at

the rank of assistant professor in

queer migrations. Research may fo-

cus on trans/queer geographies, im-

migration and migration, racializa-

tion, decoloniality, and flows of

people, ideas, and objects across

borders. Of special interest to us are

innovative methodological ap-

proaches to gender and sexual citi-

zenship, discourses of belonging,

and human rights in the context of

state and social violence against

LGBTQ communities in historical or

contemporary national and transna-

tional frames.

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Congress Can Take the Economic Edge off Covid-19

C

ovid-19 will soon be an epi-

demic in the U.S. Large cities

need to take emergency mea-

sures to protect their residents, es-

pecially those who are at greatest

risk for hospitalization or death.

Congress has an important role to

play in supporting states and cities.

President Trump’s announcement

on Monday that he would work with

legislators on a package to help

workers is a step in the right direc-

tion. As negotiations begin, what

economic policies can Congress pass

to help limit the virus’s spread and

reduce some of its damage?

A top priority: shielding the poor

from economic distress. Congress

should make direct cash payments—

mailed checks or direct deposits—to

low-income households in places

with severe outbreaks. Hourly wage

workers should not feel compelled to

show up to work sick because they

need to pay bills. Congress can help

these Americans recover and keep

other people healthy by financing

their time away from work.

In states experiencing severe out-

breaks, Congress should waive the

requirement that people receiving

unemployment insurance payments

look for work. Better that such un-

employed workers receive financial

assistance for rent, mortgages and

groceries than to risk spreading the

virus by applying and interviewing

for jobs. Congress should also waive

work requirements in the food-

stamp program.

Children in low-income families

will miss subsidized meals if schools

are closed. Federal subsidies to

those households should be in-

creased to account for lost break-

fasts and lunches. This might help

relieve some of the pressure on low-

income parents, who might other-

wise feel the need to go to work

even if ill.

Cash-strapped states may be re-

luctant to divert spending from

other priorities toward health care,

especially as more people use ser-

vices. States that experience out-

breaks may also lose tax revenue.

Congress should increase the share

of Medicaid spending financed by

the federal government to alleviate

the budget pressure.

Last week Mr. Trump signed an

$8.3 billion emergency spending bill

that will fund the public-health re-

sponse to this outbreak, including

research and development for drugs,

vaccines and diagnostic tests to

treat the coronavirus and stop its

spread. The legislation also includes

resources for state and local pre-

paredness and response. This is a

welcome development and a sub-

stantial amount of money. But if the

virus continues to spread, more

funding may be needed to expand

hospital capacity and help local

health departments enforce “social

distancing” measures.

This coronavirus may be a once-

in-a-generation pathogen that com-

bines lethality with easy transmis-

sion. It is deadlier than the seasonal

flu, and as contagious if not more so.

Many will suffer and die if it is al-

lowed to spread unchecked. Italy’s

health-care system is on the brink of

collapse. In China, fatalities in Wu-

han increased as hospitals were

overwhelmed. The U.S. must try to

slow the spread so that health re-

sources can be spent on those who

most need care.

The bump in federal spending

should be temporary and only for

states experiencing severe out-

breaks. Amid trillion-dollar deficits,

the federal government shouldn’t

spend more money unless necessary.

But the risk to public health from

overreacting is much smaller than

the risk from an inadequate re-

sponse. The country is better off

spending the money to prevent

deaths than spending the money to

deal with the aftermath of a lethal

epidemic.

More to the point, a severe out-

break could push the economic

growth rate close to or below zero.

In that event, additional spending to

stimulate and support the overall

economy—and not only areas experi-

encing severe outbreaks—may be

necessary.

Congress should not wait until

the crisis intensifies to enact these

measures. These changes should be

signed into law immediately, with

clear triggers for additional funding.

This would allow the changes to be

executed before a regional outbreak

spirals out of control. States will be

in a much better position to plan

and to address any outbreak if they

know these measures will automati-

cally kick in.

States and localities are the tip of

the spear in the fight against coro-

navirus. Congress can—and should—

give them weapons to battle the dis-

ease.

Mr. Strain is director of economic

policy studies at the American Enter-

prise Institute, Dr. Gottlieb is a resi-

dent fellow at AEI and a partner at

New Enterprise Associates. He was

commissioner of the Food and Drug

Administration, 2017-19.

By Michael R. Strain

And Scott Gottlieb

Give cash assistance to

low-income Americans so

they don’t feel compelled

to go to work sick.

E

very Democrat wants to win in
November. But getting progres-
sives to show up for Joe Biden
will be a heavy lift. This year has be-
come a remarkably tight analogy to
2016, when enough Bernie Sanders
supporters either boycotted the gen-
eral election or voted for Donald
Trump to deny Hillary Clinton her
“inevitable” win. And “Bernie or
bust” is as big as ever. A mere 53% of
Sanders voters told Emerson poll-
sters they would definitely vote for
the Democratic nominee, compared
with 87% of Mr. Biden’s backers and
90% of Elizabeth Warren’s.

Mr. Biden’s agenda is indistin-
guishable from Mrs. Clinton’s and
thus anathema to the left Democratic
base. The joint endorsement by his
former rivals—Pete Buttigieg and
Amy Klobuchar live at a rally with
Mr. Biden the daybeforeSuper Tues-
day—fed a conviction among Berners
that the fix was always in. They feel
cheated again.
Fear-mongering about a second
Trump term won’t sway progressives.
Bernie or Busters believe their No-
vember 2016 boycott moved the
Democratic Party to the left for the
first time in decades. If Mrs. Clinton
were president they’d still be out in
the cold. Why not stay home again?
Mr. Biden’s most consistent sales
pitch, restoring the Obama adminis-
tration’s glories, won’t work. Today’s
Democratic progressives put down
ideological roots during Occupy Wall
Street, a movement of lefties angered
by Mr. Obama’s bank bailout and his
failure to include a public option in
the Affordable Care Act.
If Mr. Biden wants to avoid Mrs.
Clinton’s fate, he’ll have to win pro-
gressives over. He can’t claim to be
one of them, but he has to make a
credible, verifiable show of respect
and persuade them that he’ll bring
them to the table and push for a sub-
stantial part of their agenda.
His most important decision will
be his choice of running mate. Some
reports suggest he leans toward Ms.
Klobuchar, but the left would never
overlook her refusal to endorse Medi-
care For All or free college. Mr. Sand-
ers is the safest choice, even though
he’s older than Mr. Biden. Progres-
sives are annoyed at Ms. Warren for
failing to endorse Mr. Sanders after
she dropped out, yet she remains a
solid second choice. Activists are
pushing for Stacey Abrams, whom
they believe was robbed of the Geor-
gia governorship, but she doesn’t
have national star power.
Mr. Biden should announce his
choice well before the July conven-
tion. He should name some cabinet
picks too: Ms. Warren or Mr. Sanders
for Treasury secretary? Tulsi Gab-
bard as ambassador to the United
Nations?
Mr. Biden recently told MSNBC
that he would veto a Medicare for All
bill if it crossed his desk. He’d have to
walk that back and assure progres-
sives that a Biden administration
would push for a more robust na-
tional health-care plan. He can proba-
bly get away with continuing to op-
pose free college and the Green New
Deal, but he does have to get behind
a $15-an-hour minimum wage.
Odds are the Biden campaign
won’t take this advice. They’re too
beholden to establishment party op-
erators and contributors to compro-
mise with progressives. Which de-
creases the chance of beating Mr.
Trump.

Mr. Rall is a political cartoonist,
columnist and author of the graphic
biography “Bernie: Revised 2020
Edition.”

He has to make a credible,

verifiable show of respect

and persuade them that

he’ll further their agenda.