Yesterday I corresponded with a TPM Reader who referenced the theory that the cataclysmic economic data we are now seeing predicted on quarterly GDP, unemployment and more are categorically different because they are being created deliberately to accomplish a specific purpose. We don’t have a bad economy. We deliberately shut the economy down to save lives and prevent a specific sort of economic and societal chaos caused by mass mortality. There are significant ways in which this is true. But I wanted to explain key ways it is not.
We have intentionally placed what amounts to a pause on broad portions of the national economy. It’s not a mystery why we’re heading into a period of mass unemployment. We specifically told tens of millions of people not to go to work. But this is something like placing a pause on blood flow through your body. When the blood stops flowing it’s not just a matter of starting it up again. When the blood stops flowing a lot of things start to break and they don’t unbreak when the flow resumes. The analogy between the physical body and economic life is a strong one.
We know what happens to a body. With the economy, one business shutters. The company may hold out for a while before laying off its employees but with no new revenue it probably can’t meet more than a couple payrolls before it literally runs out of money. Then employees rents aren’t paid. Then they’re evicted. Landlords can’t make mortgage payments. Then they’re in arrears. They lay off their employees. Along the way individuals’ savings and company cash reserves get burned through triaging the crisis. In other words, relatively short periods with a shut off of economic activity and businesses, contractual relationships, residential life quickly break in ways that simply isn’t easily recoverable.
What’s needed isn’t stimulus. It’s more like life support for big sections of the economy. Stimulus will make sense when you start shifting back to full economic life because even if you manage versions of life support for a lot of the economy you still likely need infusions of demand to kickstart things.
As we’ve discussed, the UK’s version of this is basically becoming the payroll of last resort for all affected portions of the economy. Yesterday Canada announced a similar if slightly less generous version of that approach – a 75% wage subsidy for employers who see revenue declines of more than 30%. The US is sorta/kinda doing a more rickety and less generous version of this with a mix of loans to companies that will be forgivable if they don’t lay off workers and beefed up unemployment insurance. But it is both less generous and severs the employment relationship with workers, even if their spending power is buoyed with more unemployment insurance.
Some of this is basic economics. But a lot of it I know intuitively having run a small business for years. The great majority of small businesses don’t have enough money to cover more than a few payrolls in the absence of any new revenue. They may handle that situation more or less generously. But very soon there’s literally no money and that chain reaction ricochets through the rest of the economy. (Big corporations have more ability to float temporary borrowing that creates more options. But the same basic dynamics apply.) Why we stopped the economy is important for a number of reasons, economic, conceptual and moral. But the need to create some version of economic life support – a role which only the state is able to play – is the critical thing, simply to prevent things from breaking or preventing as much as possible from breaking until you can restart things again. Then you will need a lot of stimulus and infusions and the like. But life support or suspended animation is the model to think about as long as we’re in something like the current state.