How to Save the Economy from Coronavirus

 
Obviously the economy is going to shrink dramatically during this virus outbreak. This will be true whatever policies are put in place… So perhaps the more important question for policymakers is what steps can be taken to minimise the harm to the economy when the outbreak is over and try and ensure that perfectly viable companies are not lost through bankruptcy.

A powerful tool for solving complex problems is to first make a simplified model of the problem, solve that, and then start thinking about how the real-life complexities might alter that solution…. So what I’m going to do here is present a kind of cartoon version of the virus interacting with the economy and present a solution for that scenario. I will then propose that this “cartoon solution” could be a starting point for dealing with the real world coronavirus issue.

The cartoon: Imagine a world with a normal economy ticking over nicely. Then one day a kind of magic-freezing-virus fell from the sky and prevented all living things from moving a muscle – a bit like a game of musical statues. Nobody was killed, they were just put into a state of suspended animation. This state lasted for five whole years and then suddenly the effect wore off and everyone “woke up”. Now let’s consider what should happen with the post-suspended animation economy. You might imagine it should and could carry on from where it left off and life could get back to normal in an instant but there are some issues to be resolved.

Issue 1 Wages: The workers may go to their bosses and say “we’ve got contracts, you owe us five years wages!”. Obviously the companies will have earned zero during those five years and the bosses could say “but you did not work for us during all those years why should we pay you?” If the back pay was enforced then most companies would instantly be bankrupt and be forced into liquidation. Hopefully you will agree that the best thing to do is simply not enforce the back pay of all those wages.

Issue 2 Rent and/or Interest: Landlords and banks may demand five years of rent and interest payments. If this was enforced then again a huge proportion of business would be immediately bankrupt. Hopefully you will agree that the best thing to do is not enforce the back pay of rents and interest.

In conclusion, in the case of the magic-freezing-virus, the economy can continue unharmed from where it left off so long as wages, rent and interest were deemed non-applicable during the suspension and could not be recouped retrospectively.

Relation to the real world COVID-19:
Obviously the magic virus is not the same as COVID-19, but it does share some similarities. Around the world, otherwise viable companies are temporarily having to cease operating. Whether or not they will be able to restart again when the pandemic is over may depend critically on the decisions made by policymakers. What would be ideal is if companies could go into a kind of suspended animation and not have to pay any wages, rent or interest during any virus-enforced shut down. One difference between COVID-19 and the cartoon story is that during the COVID-19 outbreak people still need to pay for at least the bare necessities of life, food, water, gas, electricity. If they were getting no wages then how would they get the money to live? The answer is to pay everyone a citizen’s income. This would be enough to cover food, utilities and not much more. The money can just be created by the Bank of England. Now before you all scream “but what about the inflation!” don’t forget that this money would not need to cover mortgage or rental payments because these will all be non-applicable during any enforced shutdown. The total amount needed may be as little as say £100 per week per person. This corresponds to around £28 billion per month. Now consider that Rishi Sunak is talking about injecting £330 billion into the economy, this £30billion a month is a mild measure indeed.

What Sunak is proposing is that all rents and interest should be 100% applicable during any shutdown. Even if some of those things are not collectable during that time, they accrue and will be recoupable in the future. He wants Landlords and moneylenders to not lose a single penny in the long run – as if the pandemic never happened. Why should this group of the wealthiest people in society have the privilege of being so fully immune? It makes no sense. Under Sunak’s plans, the amount of debt businesses and families will be saddled with after the pandemic will have risen horribly.

In conclusion, the best thing to do in a shutdown is to properly cease all rent and interest payments and allow hibernating companies to cease paying wages. Add in a not too expensive citizen’s income and you have a recipe for both surviving the crisis and recovering afterwards.