I propose temporarily stopping time. This means that today’s date, Tuesday, March 17th, 2020, will remain the current date until further notice. This also means that everything that happens in time (e.g. mortgage due dates, payrolls, travel bookings, stock market trading, contractor gigs, concerts, sporting events) will be paused. It also means that all of these events remain on the books, and will continue as planned once time is resumed.I mentioned "the debt clock keeps ticking when the economy shuts down" as the central problem, but didn't go as far as to advocate this simple solution. (Which I still don't, read on.)
The central problem is really a coordination problem. A owes B money. A is shut down so can't pay. B understands and would be happy to wait until the crisis is over. But B owes C money, so can't wait. And on down the line it goes. It's like daylight savings time. We could individually decide to move things an hour earlier in spring, but mostly A wants to show up at work when B will be there. There are lots of coordination problems like this, and a useful function of government is to solve them.
But the economy is not completely shut down. Food and medicine need to keep going, and need to be paid! If we literally stop all payments, shutting down the ATM machines, credit card machines, and salaries of the 80% or so who will keep their jobs, we create an insane mess. So some clocks shut down and some others don't and now you have a mess on your hands.
So while this is a useful metaphor and guide to a central problem now, it's not a practical solution. An economy is much like a human. We can sleep, but we can't freeze the clock, shut down totally and restart again.
I think really this is a metaphor for widespread forebearance, and we can see a hint of this in what the government is already doing -- no evictions, urging banks to forbear loans, for example. Widespread debt forbearance in crisis is an age-old tradition. Courts sort of shut down, and decide in a rough and ready way which bills and contracts will be enforced right away and which won't. It does, however, stop somewhere, ending up in C art D's lap. It usually means a transfer from whoever entered the crisis not immensely leveraged to those that did.
Again I am reminded of Graham Allison in understanding what's going on. Bureaucracies cannot innovate much in a crisis. You only get the options they have rehearsed. Our government has rehearsed a replay of 2008 stimulus and bail out, and that's what we're mostly getting, though a virus and government-imposed shutdown are a totally different economic problem than a bank run. Adding ex-post forbearance clauses to lots of -- but not all -- debt contracts and payments is a nice idea, but needs much more fleshing out than a pronouncement from the President that the clock has stopped.
But save your clever ideas. In the aftermath, our job as economists is to write the playbook for next time. There will be a next time. Let us do a better job than the mess of bailout, Dodd-Frank regulation, stress tests, macro-prudential policy, QE, and the rest that remains the playbook left behind from 2008.
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Update: on how bureaucracies cannot innovate in a crisis.
Two suggestions. Vastly broaden the business tax deduction for NOLs. Second, 2.5L/day of (a little) gin & (quinine) tonic or plaquenil, 60 tabs for ~$20 at Walmart or Costco. See, http://joannenova.com.au/2020/03/antiviral-drugs-antimalarials-and-anti-hiv-may-be-useful/
ReplyDeleteThere appears to be a strong inverse correlation in countries with the highest incidence of malaria between occurrences of malaria and coronavirus. Trials of malaria drugs approved 65 years ago have sprung up everywhere in the past few days. And China, Japan, Italy and Israel appear to have stepped in to control such drugs.
Very sharp and insightful, as always.
ReplyDeleteBeautiful! Bernie Sanders would love it. As we all know, the only thing we have to fear, is fear itself.
ReplyDeleteMaybe postpone principal and interest payments to financial institutions. These could then discount themselves at the discount window.
ReplyDeleteThere's even a name for that - moratorium - so they must be common. Hungary's central bank is calling for one, albeit limited to households, now
ReplyDeletehttps://hungarytoday.hu/mnb-calls-on-banks-to-introduce-moratorium-on-household-loan-repayments/
> But the economy is not completely shut down. Food and medicine need to keep going, and need to be paid! If we literally stop all payments, shutting down the ATM machines, credit card machines, and salaries of the 80% or so who will keep their jobs, we create an insane mess. So some clocks shut down and some others don't and now you have a mess on your hands.
ReplyDelete> So while this is a useful metaphor and guide to a central problem now, it's not a practical solution. An economy is much like a human. We can sleep, but we can't freeze the clock, shut down totally and restart again.
Am I the only one who sees the flaw in your logic? You're an economist, of all people you'd think you could see it.
> But save your clever ideas. In the aftermath, our job as economists is to write the playbook for next time. There will be a next time. Let us do a better job than the mess of bailout, Dodd-Frank regulation, stress tests, macro-prudential policy, QE, and the rest that remains the playbook left behind from 2008.
"Bureaucracies cannot innovate much in a crisis. You only get the options they have rehearsed" doesn't only apply to bureaucracies, it also applies to humans, including economists.
I think there's a way to do it, and while it's certainly easier said than done, it's no more crazy than other things now happening on a daily basis.
Here is an example of the world's largest bureaucracy innovating during a crisis:
ReplyDeletehttps://www.youtube.com/watch?v=XU9FVqwO4TM
Hubei provence major, Jiang Chaoliang, mangled the initial response to the crisis.
When President Xi realised how bad the situation was getting, he fired Chaoliang and replaced them with his allay Ying Yong.
They since:
- 100% locked down entry and exit from Hubei without warning, with mandatory temperature testing for all people in public.
- Created and converted 16 temporary treatment hospitals
- Established incredibly strict mask, glove, bodysuit and possesion protocols for treatment staff
- Took in medical teams from the army and other regions of China to treat in Wuhan
- Took everyone with +ive test to isolation centres
- Traced everyone who left Hubei before lockdown, and everyone they contacted
- Boosted mask manufacturing from 20m to 110m in a month, everyone in public wears them
For the past 2 days only new detected cases in China are from Chinese citizens landing at the airport, fleeing from Western countries the see as unsafe.
I was not a fan of Xi before, but it's plausible to think that he saved millions or even 10's of millions of his citizens' lives by taking the necessary drastic action as soon as he did.
Admit there is downside of some chance of '2nd wave' resurgence in cases, and need to maintain some costly lockdown procedures to prevent it.
In the UK the government is paying firms to maintain labour earnings (below quite a generous threshold) funded by adding to the national debt. Unfortunately businesses are going insolvent because they still have liabilities for rent/interest and other time-based payments. These firms will not stand up again after the lockdown.
ReplyDeleteIt occurred to me that it is just these time-based liabilities that need to be suspended for the duration, perhaps by mandating an extension of contracts except as mutually agreed. Landlords and holders of other financial assets would take the hit, but they would at least have offsetting reductions in their own debt servicing costs.
The UK could act unilaterally on this for contracts under UK law, but this would provoke the insolvency of those with foreign borrowings to the extent that other countries did not also adopt the policy.
My non-expert presumption is that this would collapse the banking system, which takes us back to 2008, so it would only work with wide international agreement.
It's all very interesting!
Congress would have to act and freeze the clock on all debt instruments, local or international. Debt would not be forgiven, but only added to the end of the contract without interest. Banks wouldn't suffer as the monies that they pay, as we know, were almost non-existant and they wouldn't pay it to their depositors.
DeleteIndustries that are required have an influx of money and therefore can afford to pay people working to support the company. Look at any Super Market!
Printing money only delays the problem. Monies paid to individuals by the government will be used to pay for mortgages and returned to the banks, who wins?
FREEZE THE CLOCK