By now it’s clear that the CARES bill recently passed by Congress was not only inadequate, but deeply flawed because of the time it will take to get funds to the people who need them. As I write this, small businesses and households across the country are in a frenzy, looking for help from a maze of loan plans and not-yet-organized avenues of aid while what’s needed seems impossible: instantaneous relief.
But there is an instantaneous way to relieve pressure on both individuals and businesses, if we embrace a comprehensive—and counterintuitive—plan to do what normally would be anathema to American business:
Take money out of the economy.
Here’s how it could be done.
First, we’d have to agree that the financial goal in this crisis is to keep as much of the economy intact as possible, for as long as possible. This means making sure that people do not lose their jobs or go hungry, and businesses—large and small—do not go bankrupt. In a perfect world, we’d be able to achieve a kind of economic suspended animation until the danger of the virus has subsided.
The first step in this plan would be to radically reduce the amount of money everyone needs to live. What would that look like?
An across the board, three-month cancellation of all rent, mortgage payments, utility and insurance bills, for starters. This would bring immediate relief to many millions of individuals and businesses. A household’s monthly nut would be reduced to something close to food, gas, and car payments. And businesses would only have to worry about paying salaries—but more on that in a moment.
Versions of this sort of plan have already been suggested; even Sen. Rick Scott of Florida has proposed a moratorium on mortgage and rent payments for individuals below a certain income threshold. But a moratorium is not a cancellation.
Obviously, cancelling these debts could be ruinous to the landlords, banks, utilities, and insurance companies who depend on that revenue. But with the exception of landlords, these are all large institutions who can negotiate directly with state and federal governments for bailouts. And the goal of those bailouts would not be to make those institutions whole, but more modestly just to keep them afloat, too. Landlords with mortgages on their properties would be protected from great loss anyway, while existing FHFA programs could reimburse those without mortgages.
Since the goal is to keep every business operating, and every person who had a job before the crisis employed, businesses would only be able to avail themselves of this relief if they kept—or rehired—their employees.
But here’s the other side of the coin: Because the personal expenses of those employees would be so much lower, another condition of the relief package would be a three-month reduction of all salaries—all of them, even those of CEOs—to an agreed-upon, tax-free level that would sustain individuals and families through the crisis.
And the government would then reimburse idled businesses for those salaries.
That is the key to this grand bargain: Everyone—businesses and individuals—would agree to make do with the minimum necessary to get by, in exchange for an economy frozen more or less in time, that we can all walk back into in several months.
Looked at through this lens, the current congressional emphasis on loans seems misguided. Any non-forgivable loan made right now only saddles a person (or company) with debt once this is over, making recovery that much harder.
Are there holes in this idea? Of course; any plan this big will have problems and unintended consequences.
For instance, canceling mortgage payments for wealthy people will be a giant gift to people who don’t need it. But if the key component of this plan is speed, the minute we introduce means-testing we also introduce complexity, bureaucracy, inefficiency, and lost time—all of which are what’s killing the CARES act right now.
Some will also say this plan puts an undue burden on banks, insurance companies, large corporations, and even the GSE’s—all of whom might lose equity. This is possibly true. But whatever losses they might incur under this plan would be dwarfed by the pain they would feel if we fell into a full-on depression.
This plan also does not include the significant portion of the economy that is still operating: such as essential businesses and people working remotely.
Should their obligations also be forgiven? The trade-off, again, is speed versus savings. In order for the program to go into effect immediately, all individuals should have their expenses canceled regardless of whether they’re working or not.
On the other hand, businesses over a certain size—who can afford to wait for the bureaucracy to come online—should have to apply for the expense exemptions, to ensure they meet a threshold of revenue loss and comply with the conditions.
What would all this cost? Less than the plans already circulating.
Total rent and mortgage payments in the United States are approximately $125 billion per month. Insurance premiums are another $100 billion; utilities about $25 billion. Paying non-functioning businesses $800 per month for every employee they keep on the payroll would add perhaps another $50 billion.
Even without negotiating any reimbursements down, the plan would cost a total of about $900 billion for three months, way less than the CARES bill is already costing, and would allow relief to state governments whose revenues will have plummeted.
Other plans, such as Bernie Sanders’ or Denmark’s, are much more expensive, because they concentrate on maintaining worker pay at current rates, instead of cutting expenses.
The point of this exercise isn’t to lay out a single best-fit plan, but to show that attempting to prop up the economy is likely to be less effective–and more costly—than trying to find a way to let it shelter in place.
We face a stark choice:
Either we watch helplessly as an economic cataclysm unfolds, with more businesses laying off more workers—who will then need more government benefits and spend less money–with that decrease in spending leading to further revenue decline and–inevitably–more businesses collapsing.
Or—unlike how we responded to the virus—we get ahead of this catastrophe and choose not to allow a depression to darken the next decade.
Most of us are putting up with some deprivation in order to keep ourselves and our loved ones safe, and when you look at the data, it’s clear that the mitigation efforts are indeed starting to blunt the tidal force of the pandemic.
Why not choose to let the economy shelter in place as well?