When the Great Recession happened in 2008-09, resulting in double-digit unemployment and the destruction of trillions of dollars of wealth, few economists, including Nobel Prize-winning laureates, had seen it coming. And, those who had, like the University of Chicago’s Raghuram Rajan, had been widely mocked by their fellow economists for being alarmist.
Of course, just as a good doctor can’t always predict her or his patient’s deep illness and a good mechanic can’t always anticipate a spun rod bearing in a car engine, a world-class economist won’t always be ahead of the next economic downturn.
That said, few would characterize economists’ performances during the Great Recession, as well as now, during the coronavirus pandemic, as confidence-inspiring. We need new, bolder thinking.
Thus, where is the cogent plan for nations to weather a prolonged loss of global economic demand, an extended shutdown of our economy? (And, for the sake of robustness, let’s plan for a worst-case scenario, while hoping for the best: A multi-year pandemic that halts most all economic activity.)
In the words of Tess Vigeland, one of the hosts of a new podcast, “Pandemic Economics,” “I don’t see any solutions out there. And that’s what scares me.”
In the context of the economy, there has essentially been only one camp for helping everyday Americans and their small businesses: Compensate, by either re-opening the economy, issuing subsidies, issuing bridge loans, or some combination of the aforementioned, their lost revenue.
However, in focusing on compensating for lost revenue, we risk a mismatch between one’s expenses and the revenue needed to satisfy them. While people await their government checks, they also know that that assistance will probably be inadequate to paying the bills. In other words, bankruptcy, in many cases, will be delayed, not prevented.
Focusing, instead, on waiving expenses — while still providing government subsidies for various essential items — gets to the root worry on most people’s mind: paying their bills.
This starts with the banks, which were generously bailed out by the federal government during the Great Recession. Payments for car loans, home mortgages, credit cards, student loans (which should be, at least in part, forgiven), and consumer loans should be halted, without interest and missed payment accrual. The situation should be frozen, to be restarted once the pandemic has passed. On the other side, the payments banks must pay to others can likewise be forgiven until society is truly ready to be re-opened.
It extends to rent payments, as well, which should be halted until the pandemic has passed (and, of course, evictions must be disallowed). And, regarding essential goods and services like health care, utilities and food — where Cost of Goods Sold is incurred, workers are being paid, and a complex (even multinational) supply chain may need protecting — the federal government should commit to paying for those goods and services in full. (During emergent, disinflationary conditions, large deficits are required.)
The fundamental tenet here is that your revenue is my expenses, and my revenue is your expenses. When we remove the expense variable from the relationship, there is no existential need for revenue — for persons or businesses. In other words, lost revenue — lost wages, salaries, investment income — becomes inconsequential in the pursuit of financial solvency.
The key advantage in removing expenses from the picture is that the government need not have to guess or customize what the revenue needs of millions of people and businesses are — a task for which, on shortest notice, it is poorly suited. In addition, this approach is sustainable, no matter how long the pandemic should last.
As I heard a worker once say who was stuck in a minimum wage job, “I’d be willing to work for free if they’d just pay my bills.”
That’s where things stand today: The bills of the American people and their businesses need to be addressed and the federal government should take the lead on that. It starts with congressional legislation waiving our expenses — for all Americans and small businesses.
Otherwise, if the pandemic persists and compensatory revenue schemes, however well-intentioned, predictably undershoot expenses, we could actually lose our country.
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