How to stop our economies from falling like Humpty Dumpty

7th May, 2020

The peak of the pandemic is passing in Europe, but at a grievous economic cost. If we reopen, there is every reason to expect coronavirus will come surging back. What then? Another lockdown?

The difficulty is that we are looking at two exponential processes pitted against each other. Before social distancing measures, cases were doubling every few days, meaning a week’s difference in the timing of lockdowns in March might well have represented the difference between a healthcare system idling below capacity, and one being utterly overwhelmed.

It is reasonable to guess that the economic cost of lockdowns also grows exponentially — if not addressed by policy. One day’s lockdown is little more than a public holiday. Two weeks’ lockdown threatens those who are already in a precarious position. Three months’ lockdown can do widespread damage that lasts for years.

Economic distress is contagious, too. A shuttered restaurant creates jobless waiters and cooks, landlords with no rental income and food suppliers in distress for lack of clients. Let’s not even think about the impact of a worldwide pandemic-induced default on too-clever-by-half debt-backed derivatives.

The economy has fallen off the wall — pushed, deliberately, for good reason. We need it to spring back like Jackie Chan, not crack like Humpty Dumpty. The aim must be to prevent temporary economic injury from causing permanent scars.

One delightfully crazy plan, popularised on the Marginal Revolution blog, is to take the concept of daylight savings time to an extreme. Governments would simply stop the clock: Thursday 30 April 2020 would become Friday 30 April, then Saturday 30 April. Your rental payment, due on May 1, would — like orphan Annie’s “Tomorrow” — always be a day away, at least until lockdowns end. Your landlord’s mortgage payment would also be postponed indefinitely. The messy co-ordination problems of who will forgive or forbear on debt, from whom and for how long, disappear in a stroke of a pen on a calendar.

This solves a lot of problems. Unfortunately, it creates many new ones. As Joshua Gans puts it in a new book, Economics in the Age of Covid-19, “much of the economy needs to actually keep running — some more intensively than before — which means that just calling a timeout won’t do”. Still, the time-stop idea is on to something: it’s vital to stop a cascade of debt defaults bringing down healthy businesses. Ad hoc forgiveness will not be enough, since landlords and banks have their own frailties to worry about.

Professor Gans argues that governments should be transferring debt obligations to themselves: if a restaurant can’t meet its rent, the government should offer to do so. The restaurant now owes the government, but the manoeuvre buys breathing space. Much later, the government can collect repayment on an income-contingent basis, perhaps through a modest surcharge on business taxes. Like a state-backed student loan, it would be repaid only by those with a solid income.

A company that springs back strongly thanks to the support will be able to repay the loan. Another may limp back into action, unable to repay but able to employ staff, serve customers and pay suppliers. In that case, the government gradually forgives the loan, and the cash injection will have been public money well spent.

The scale of economic support from governments around the world has been encouraging. As with the lockdown itself, in the short term it is better to do too much than too little. However, economic damage will be minimised if we can return to some kind of normality without triggering a second outbreak. Current economic and public health measures have had to be crude, the equivalent of operating with a hacksaw; now we need to figure out how to do keyhole surgery.

One hopeful scenario is that we have already reached herd immunity without realising it. If so, antibody tests will soon make that clear. But since we should plan for the worst as well as hoping for the best, we must energetically plan clever reopening strategies.

The most straightforward require mass testing to trace new outbreaks. If that capacity does not exist, there are workarounds. One idea is to let everyone out for four days, then go back into lockdown for 10 days to wait for any symptoms to emerge. Another, proposed by Philip Clarke, Amanda Adler and others, is that people living in odd-numbered houses are allowed out for a day, then must withdraw, letting even-numbered households take their turn. (The Queen could toss a coin to see who starts.) This quasi-randomised trial would rapidly give us information about the effect of reopening. Or we could release the under-50s early, which would be intriguing in my household, since my wife and I are on opposite sides of that divide.

Each exit strategy has problems, but it’s time to choose one and start planning for it. The Humpty Dumpty economy is still in freefall. It is not too late for us to bounce back.

Written for and first published in the Financial Times on 24 April 2020.

My NEW book The Next Fifty Things That Made the Modern Economy is out in the UK in May and available to pre-order; please consider doing so online or at your local bookshop – pre-orders help other people find the book and are a huge help.

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