The Musical Chairs Economy

March 21, 2020 4:10 p.m.

There are an almost limitless number of economic questions now facing policy-makers, managers, workers, everyone. There’s one issue I want to focus on. Call it musical chairs economics. For the last two summers my son went to camp. For this summer, long before COVID-19, he decided he wanted a change of pace. So we didn’t enroll him in camp. If we had enrolled him we would already have paid the fees in advance. This isn’t about that camp or my son. This is to illustrate a more general point. Lots of people in the economy have already paid for things they now cannot receive. In the normal course of things those people would be entitled to refunds in most cases. But of course we’re not in the normal course of things.

There is an entire domain of law called force majeure, basically events so vast and unpredicted that they can release parties from contractual obligations. This domain of law will see quite a lot of action in the coming months and years. Courts will be litigating these matters as far as the eye can see, long after the disease itself is brought under control.

But there’s a point beyond this.

When the big elite universities started shutting down a week or ten days ago, I saw many people asking whether they’d be refunding students their tuition or, more concretely, whether they’d be refunding room and board fees to students who now needed a place to live and food to eat. Big universities like Harvard are so rich they could do these pay outs without acute economic damage. But many college and universities simply don’t have the money. In some half way cases maybe they could do refunds but at the price of possible insolvency.

This is the case on a few different levels. In the most concrete sense many will not have cash in the bank. They literally don’t have the money. There’s also a more general point. With lots of businesses or educational institutions, they collect the money and have already paid a lot of it out to various companies and people. If camp or school is canceled it’s not like all the tuitions are sitting in the bank ready to be refunded. Lots of that money has already been contractually committed and in many cases already spent.

I’m focusing here on schools and camps. But that’s only a matter of explanatory convenience. The same principles apply throughout the economy. Money is continuously changing hands through the economy for things in the future, or for services that are on-going. The question in many cases will be: who was holding the cash when the music stopped? This goes beyond the law and force majeure or whatever else. We’re looking at a situation where the old saw that possession is 9/10ths of the law will have particular force.

If I’m a business which was holding the money when the shutdowns started, do I refund everyone’s money and cut my own throat? Probably not. I may not even have the money to refund. And remember, every business will have contractual commitments to others up the chain. Like I said, who was holding the money when the music stopped? I suspect many organizations and businesses will say, ‘Sure. Sue me in three months when the courts reopen and if you win I’ll pay you back in three years when the world is back on its feet. Now? Good luck.’

Obviously that is a zero sum world in which everyone loses but some lose more than others. Only dramatic and unprecedented action at the national level can save the situation. But these nano-crises (though macro for the business and individuals in question) will be taking place every day throughout the economy.

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