economics
coronavirus
Should the Economy Be Placed into “Hibernation” Until the Lockdowns End?
Israeli Knesset (2010-2013)
Economist
0
0
Genesis
Response
Penultimate
Finale
April 4th, 2020
The extreme social distancing measures of lockdown and isolation required to arrest the spread of COVID-19, are sending distorted signals into the economy of supposedly precipitous fall in demand for numerous products and services. Yet, no price mechanism could correct this, as people are physically barred from acting. Businesses are closing and people are losing their jobs, not because of a natural decline in demand for their services, or a new technology that has made their job obsolete, or a bubble whose time has come to burst. These distorted signals will result in entire industries laying off workers, scaling down, and even closing, leading to a vicious cycle of increasingly severe and real economic slowdown which would outlast the health crisis.
To prevent the lockdown from destroying the economy, all underlying economic activity, other than that which is necessary to battle COVID-19, must be placed into hibernation. This would be done by freezing – without accumulating – all cash flow contracts during lockdown. Employees whose work is not necessary for fighting COVID-19 or maintaining the survival of the population will remain in their homes, not receive salaries, but not fired. Contractual commitments to suppliers, rent, mortgages, loans, and taxes would be frozen. The lockdown would effectively not exist on the economic calendar: the first day of the economic hibernation and the first day after it would be two consecutive days in cash flow contracts. This does not preclude two consenting parties continuing normal economic activity if they can and find it mutually beneficial.
The goal is that during hibernation everyone survives, and no one collapses. Businesses will not have incomes, but also no expenses and would be essentially mothballed for the duration, but not closed down. Individuals’ and families’ expenses would be for basic needs such as food and medicine. The state would provide assistance for those who cannot afford it.
The state would not need to pay unemployment benefits or secure salaries of people who are not working. Its emergency expenses would be limited to subsidising basic supplies for the needy and basic utilities for all, in addition to healthcare. This would be balanced by a drop in the state’s expenses due to the freezing of salaries of many public sector employees and fixed income pensions. The state could avoid assuming massive financial obligations that would otherwise be borne by generations to come.
Finally, when lockdown and isolation are over and a return to normal economic activity is possible, the state would declare exit from hibernation. From that moment on the contracts that were frozen are thawed and resumed from the point of freezing. People will receive salaries and start paying rent. Businesses will pay suppliers and receive payments.
We are currently in the throes of a new kind of crisis where the underlying economy is healthy, but a non-economic crisis is stopping it in its tracks. Only new tools based on original thinking can prevent a public health crisis from becoming an extended economic one.
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