OK. After thinking about several days on how big the stimulus should be in order to save the economy from a depression if it gets to lock down for more than several weeks, I think I found a solution that will not make any damage to the economy significantly and get rid of the virus even if it takes 6 months.
I know this is a radical idea and there may be holes in it. So I am open to suggestions or criticism on it. Try to put a whole in my theory and I will try to defend it. If I cannot, it means that it is not worth pursuing. My idea can be applied to the whole world if America takes the lead. I have no idea about legal or constitutional applicability.
The idea popped in my mind when I was listening Planet Money on NPR last Saturday where they asked three different economists their ideas about the package. All of them had different opinions. I listening and this idea came to my mind.
First of all what are our objectives in this crises?
1- Beat the virus as soon as possible with fewest death toll and smallest damage to the economy.
2 - Keep the economy moving and prevent it from getting into depression or a big recession and keep supply/demand structure of the economy intact.
How to reach objective number 1?
The first objective can be achieved with one big move. Most scientists and health officials are aware of this and recommend this but politicians who are afraid of economic costs and losing the next election are afraid to implement this measure. They wait until the point the virus spreads to a point of epidemic.
However, I will explain how this recommended move will not cause much damage in the economy with another radical move.
The measure to prevent spread of the Covid-19 is the total lock down of the whole county for minimum two weeks. I don’t know what the orange man and his administration is waiting for although we have observed what happened in other countries in the last three months? What are they waiting for? Are they waiting for the virus spreading to an uncontrollable stage? All because Trumpie is scared of economic costs and does not lose the election.
Anyway, during these two weeks everybody will be at home without stepping outside except for essential businesses such as health workers, grocery, utility (water electricity, gas etc) telecommunication companies (Verizon, Comcast, etc), some TV entertainment companies’ essential workers (Obviously Netflix has to continue running if you want people stay inside), plumbers if an emergency need happened in a house or something,etc. The grocery will be delivered to the doors. (voluntary work. More on that later)
Everybody else will be penalized monetarily (after the crisis is over) if they violate the curfew.
Instead of the closing the “shop” gradually and locally as it has been done until the virus already spread into the community and difficult to contain anymore, if the country (and the world) does this, the 14 day incubation period of the virus will pass and everybody who has the sickness will start showing symptoms Now, you know who is sick and who is not. Quarantine these sick people and return the other non-sick people to their daily life.
Let’s assume that we are wrong and those 14 days are not enough. Then make it for 1 month or 2 months until there is not much significant risk from the virus any more. Thus, I’m taking the worst case scenario and assume that we will be sitting at home until Jan. 1st 2021.
How to achieve objective number 2?
a) What are the proposals to prevent this economic catastrophe?
I will first cover the proposed solutions that have been discussed in financial and economic circles and the Congress right now and try to argue how these proposal even work it will make a huge wealth transfer from the bottom and the middle of the society to the top, society’s wealthiest people.
We all know that the American economy continues on a fine balance of supply and demand mostly dependent on consumer spending. In general as the mood of the consumers and businesses about the future shift downwards, this causes companies laying off people which decreases demand by consumers and causes recessions in cycles.
This also happens not in cycles when an unforseen systematic shocks hit the system which may put the economy in recession like in 2008 or maybe a depression, which I think will likely happen due to the Corona virus situation…
Now, let’s say that we go with the current proposed solutions of payroll tax cut, increase in unemployment benefits, sending checks to people so they can pay their rent/mortgage and grocery etc. and bail out some industry or companies like airlines etc.
Let’s say that the US spends a total of 2 trillion dollars (which I think ultimately will be much higher) borrowing with really low interest rates today to send these checks to business and people.
Where does this money come from? And where does it go in final destination?
Obviously, it will be added to the deficit and added to the total debt. So if the package becomes 2 trillion, the deficit for 2020 will be 3 trillion and the debt will jump to 26 trillion in total and which all will be paid by the next generation. For what? So our generation can continue to live on April 25th (assuming the package becomes extremely successful) as it lived on March 1st. Same living standards, same luxury items, same spending on most items we spend, keeping the current economy intact.
So we know where this money will come from. From the pockets of generation Z and beyond.
But where will this 2 trillion or whatever the final amount is will go? Well, it will go to asset holders. As we all know 50% of Americans today live paycheck to paycheck. They do not have $400 savings in the bank to take care of emergency needs. The next 30% may have some savings for emergency needs but still do not own to much wealth and assets. The top 20% and especially 10% of the population owns most of the assets and wealth in this country.
What will the person at the 50th percentile of the society do with his $1000 check sent to him by the IRS while he or she is at home not working because either their employer is closed due to lock down or they got laid off? Well, apparently the first thing is paying the rent. Credit card, car loan, etc. And who are the owners of those assets? The financiers of the credit cards, mortgage holders, owners of your house or apartment that you rent. They are mostly the most wealthy of the country, in fact, humanity.
You may guess that they are the top 20%, especially the 10% of the population. Basically, with a regular stimulus package, the Congress will create a huge debt for the whole nation to be paid by the next generation and send that money to the masses which will send those checks to the top 10% in ten days.
This will be the biggest wealth transfer in history in one move. Transfer from the pockets of the next generation to the pockets of the wealthy in this generation. And even in that case, there is still a significant likelihood that the economy will get into a recession anyway and millions of people still lose their jobs. Maybe the packet will lessen the impact on the economy and mitigate the downturn but it is unlikely to stop it totally.
My fear is that if the virus cannot be controlled in a few weeks or maybe a couple of months, the bill to save the economy from a depression may hit as much as 10 trillion dollars which will be also a transfer into the pockets of the top wealthy owners of the country.
There is one solution which will definitely work (IMO but I am open to criticism and correction) even the economy comes to a halt for six months.)
b) The radical solution to the Problem
Now what should be done to prevent this wealth transfer which has a chance not working properly to save the economy anyway but at the same beat this virus and save the economy at the same time?
That is banning any monetary transaction in the economy for two weeks (or for the period that this extreme curfew or precautions are in place) There will not be any rent payment, any mortgage payment, car loan payment, grocery payment for anybody.
The small businesses, restaurants, bars, plumbers will NOT have to close down because they miss their rent or payments to their vendors. Their vendors do not have to be in search for cash or loan from the government because they will not have to pay their vendors, employees, utility company.
Airlines will not have to go bankrupt because they do not have to pay for the lease of their aircraft during this period including the fuel that they already purchased, etc. either.
They do not have to pay their employees, too, because their employees will not need the money to pay for anything. (The employees will not be consuming much either. No more pizza orders. No new purse, shoes, car, eyeliner, couch, TV)
Nobody will pay anything for anything. Because they will consume nothing non-essential to sustain life because those products will not delivered or served to them.
Now you can ask “but if the grocery workers, utility workers, communications workers are working and not get paid, why would they continue working?”
I have two answers and if that is not enough one solution for that.
The first one is I bet they would be willing to do it. Their country and their fellow humans need their service to prevent this virus and economic depression once in their life. If they ask you the same thing, would you say no? Since they do not have to pay anything for that period anyway, they do not need an urgent payment anyway.
Moreover, if they do not do this the economy will get into a downward spiral and they will be worse off than not getting paid for a certain time and make profit. I do not think they would prefer getting into depression and risk losing their jobs to working several months for free when they do not have any cost either.
Let’s say, the employees do not do it and their companies have to pay them and their vendors (food manufacturers, farmers etc) It is not that difficult, either. In that case (which I don’t think will happen) give them tax break the next five years. No income tax for these grocery workers, farmers, people picking tomato in the farm, communication workers, etc. You can give this tax break to all the essential business workers. That will be the only cost to the treasury spread to the next five years, instead of giving several trillions of dollars to top 10% wealthy.
You may ask the same thing further down the supply chain where the material you need costs you something not because of you pay for it but because you will forgo your future profits. Such as gas will be free in the gas station but the oil company is still extracting oil from the ground. That oil has a cost for that company. That also can be solved with a tax break if the material to produce an item really creates a cost to the business ultimately. (for example, you extract something from the ground or some kind of natural resource to produce something which will lower your profits in the future. In that case, a tax break will solve the problem.
Given these condition there will be no wealth transfer in the economy. Of course everybody in the nation will lower their standard of living to the basic minimums just to sustain their life and get their basic daily needs for a certain period. And that is a loss but it is still much better than getting into depression and losing your job and having all that stress the next 5-10 years.
Yes, if you look at the aggregate, we are decreasing the GDP of the nation to 10% of its regular size by living with the basic minimum, let’s say until January 1st 2021 when we make sure the virus is gone.
Yes, there will not be any new cars purchased, new shoes purchased, new fancy clothes purchased but since there is no change in the balance of wealth and available money that will circulate in the economy when we turn back to normal on January 1st 2021, the same supply/demand structure will be almost unchanged than it is today.
Because I will go back to the same job that I have today (well, maybe with some less weight due to the lack of junk food I could not eat several months. lol) the restaurant owner will go back to the same building he has today with the same amount of money in his bank account that he has today. He will have the same amount of employees and most likely the same amount of customers (although it is likely there may be a little slower business at first for a few days because of some psychological effects on the society but I will pick up much sooner that a depression, you can bet)
And even the top 10%ers who are mortgage owners, asset owners, home owners, banks who lose the inflow of mortgage, rent, loan payments for several months until Jan 1st 2021 would prefer this scenario to another scenario where business go bankrupt close their doors causing office buildings stay empty resulting much more rent loss, restaurant spaces stay unoccupied because of depression or recession for months again loss of income, consumer spending plummeting due to loss of income putting economy a downward spiral.
One more point. Let’s say we implemented this in America. But we still need to import some raw material for this essential stuff, oil from S. Arabia etc. which may require us make payments. In that case, make those payments from the treasury with no cost to essential businesses. And if you look at the trade accounts with China, Mexico, Canada, S. Arabia you will see that that amount will pay will much much much smaller than 2 trillion dollars they are discussing today in the Congress.
In fact, I believe if America takes such an action, all the countries around the world will start taking similar actions. Remember? They have the same virus problem, too.
One final point! What will happen to GDP then?
Well, we will not measure or calculate the GDP for next several months. There will be an empty space in the GDP records for the 2Q, 3Q and 4Q of 2020. So what? As long as we turn back to business as usual in 1Q 2021, who cares whether there was a GDP record for 2020 or not or whether the GDP was only 2 trillion dollars the whole year.
Now, as I said in the beginning I have no idea about constitutionality or legality of this move but is it applicable politically?
I am pretty aware that Republicans will definitely vehemently oppose such an extreme economic move to save the economy because it is the total opposite of their free market laise-faire capitalism religion. Basically, we are putting capitalism on hold for several months due to extreme circumstances.
Remember, our objective today is not to make the economy more efficient or creating the higher growth number which is the strength of capitalism. Our objective is save lives, survive until the virus is contained and prevent an economic catastrophe afterwards.
I know Republican minds will do anything to keep their free-market religion intact even if it costs the nation 5-6 years of economic depression. I know they function according to their beliefs not based on reality or outcomes.
But maybe, just maybe, they come to their senses once in their life and do the right thing based on the reality. Extreme conditions need extreme measures. We are in an economic situation never seen in modern times that we may need to lock up everybody inside for a certain time.
Of course, all I said above is based on the assumption that what I explain above works. I am open to criticism. Political and legal applicability aside, do you see any holes in my thinking in economic terms?
IF you see whose holes, what are they? What are your objections?
Thank you for reading this long post.