Subsidy payments: A new way to beat lockdown

Many European governments are trying to combat the second wave of the COVID-19 pandemic by imposing a “lockdown light,” usually including limitations on the operations of restaurants, bars, and some non-essential shops. The assumption behind these partial closures is that the risk of infection is high when people mingle in closed spaces. A recent paper published in Nature provides further evidence that places like restaurants, gyms, and cafes can play a major role in spreading the coronavirus.

The mandated closures have led to strong popular protests (especially in France and Italy), because they threaten many small shop and restaurant owners’ livelihoods. These sectors were already under pressure from e-commerce before the pandemic, and many marginal operators fear they cannot survive even a light second lockdown. Governments have been trying to help by compensating them for lost income. But in many cases the compensation has been late, partial, and difficult to target at the most economically vulnerable.

Yet, governments might not need to resort to mandated closures if they consider the alternative of taxes or subsidies. Such fiscal measures have so far played no role in so-called non-pharmaceutical interventions to fight the pandemic, even though they could achieve the same social-distancing goals.

In concrete terms, the government could announce a subsidy to any store or restaurant owner willing to close their establishment for a certain period (say, 1-3 months). A longer closure would be better because it would help to keep COVID-19 infections low during the remainder of the winter.

Once a large proportion of stores have closed, policymakers would need to prevent the remainder from becoming more crowded. But they already regulated overcrowding prior to the new second-wave restrictions by asking customers to keep a minimum distance from one another. This type of regulation should be maintained in the simplest form possible, by requiring a minimum number of square meters of space per customer.

The government could thus start by specifying a subsidy in terms of a lump sum per square meter, paid up front to the owner of any establishment prepared to close (for in-store shopping or dining) for a number of months. Takeaway services and online sales would still be permitted. Operators would then calculate their opportunities from other sales channels. For those least able to adapt, accepting the subsidy might be the best option.

In principle, it would be preferable to conduct a reverse auction under which retailers submit the price at which they would be willing to close. The government could then hold successive rounds until it achieved the desired reduction in retail space. But there might simply not be enough time to organize this now.

A similar discrepancy between social and private interests exists with regard to climate change. Most economists recognize that a Pigovian tax on greenhouse-gas emissions – named after the British economist Arthur Pigou – can achieve the desired reduction in emissions more efficiently than direct regulation of polluting activities can. Policymakers should also apply this lesson to pandemic control.

In the case of climate change, policymakers broadly agree that a tax on emissions is more appropriate than a subsidy not to emit. But with pandemic control, the choice between taxes and subsidies is not so clear.

In a 1960 article, the Nobel laureate economist Ronald Coase argued that, provided transaction costs can be neglected, the efficient solution to a problem involving a difference between social and private cost should be independent of the allocation of property rights. For pandemic control, the interests of society are represented by the government, which keeps transaction costs low. The key question, then, is whether the right to keep a store or restaurant open is held by the owner or instead belongs to society. The fact that governments are providing compensation during lockdowns indicates that they recognize that the decision whether to stay open should belong to the owner. It follows that a subsidy aimed at encouraging restaurants and stores to close would be more appropriate than taxing them.

More practically, a closure subsidy offers a number of advantages. It would provide income compensation to the most marginal businesses at a reasonable fiscal cost, while still reducing social interactions in stores and restaurants. The subsidy for closing in-store activity should be especially attractive for struggling shops and restaurants, whose owners are most inclined to protest against mandated lockdowns. And it would obviate the need for policymakers to make arbitrary distinctions between essential and non-essential goods.

Another, longer-term advantage of this approach is that it would encourage small shop owners to modernize (or quit the market). That way, policymakers might help to overcome the very strong resistance to structural change in this sector.

The lesson is clear: As the second wave of the pandemic threatens Europe, governments should change tack by inducing restaurant, bar, and shop owners to take a paid vacation, rather than ordering them to close. Such a policy promises much lower fiscal and social costs and would be politically far easier to sustain in the tough winter months ahead.