As COVID-19 spreads around the globe, several governments find themselves at a crossroads, having to weigh between public health and the economic costs of a total shutdown. In this guest post, Smartkarma Insight Provider Sumeet Singh shares his own suggestion of a shutdown that could reduce infection risk for people without crippling the global economy – in other words, some financial pain now to avoid financial agony later.
With COVID-19 and stimulus packages being in the news day in and day out, here are my two cents on what policy makers need to do to get over this relatively quickly and with as little pain to the common man as possible.
Whether it’s possible to do so or not is a different story.
Why It’s Not Like 08/09
Having been in Lehman Brothers in September 2008, in the London office’s Equity team, the only main location not totally taken over by some other bank (Barclays took over New York while Nomura took most of APAC), I got to see 08/09 first-hand, including six months of doing nothing in London, i.e. being unemployed!
I’m not going to rant about 08/09 as most of us who are old enough know that it was essentially a crisis cooked by wannabe finance wizards and it didn’t impact the common man outside of the US to such a large extent, apart from the overall slowdown from the drop in US consumption.
COVID-19 is the reverse, where finance is but a bystander and the common man bears the brunt of the pain. However, the common man’s pain has the scope of quickly becoming finance wizards’ pain, not because of the crashing market but more because of the much higher leverage around the world.
COVID-19 Shutdown and Impact
So far we have seen every country fend for itself, with all countries announcing their own lockdowns. This might work to limit the spread of the disease but it won’t work to get the economy up and running again if your neighbour and other trade partners are still in their own trade lockdowns.
The main businesses, apart from tourism and travel, that feel the brunt of a lockdown are the small businesses since they still need to pay salaries, rent, and interest costs, along with other expenses. While bigger businesses have various means of funding, smaller ones are limited to being self-funded or by friends and family or by the neighbourhood bank.
In other words, for most small businesses, funding options are limited. Quite a few can ride out one or two months. However, the longer the shutdown runs, the slower the demand for most goods and services (apart from essentials), and the sooner the businesses will start to cut costs, starting from the most easily expendable: employees. This goes on to create a vicious cycle which someone needs to step in to break.
If governments around the world keep taking a piecemeal, fend-for-yourself approach with non-overlapping shutdowns, then the virus, which has gone from an animal market in Wuhan to the upper echelons of power around the world in less than two months, will not stop.
What is needed is a coordinated global shutdown for at least 30 days. Why 30 and not 14? Because if the incubation period of the virus is 14 days for one individual, even a shutdown that keeps families locked up for 14 days might not work if the virus jumps from member A of the family to member B, say, on day 5 of the lockdown and neither shows any symptoms. Then, on day 14, member B will still be shedding the virus, without symptoms, and we will be back to square one!
So I’m using 30 days as a benchmark but it should probably be more like 45 to 60 days.
So How Will It Work?
If the revenue for all businesses goes to zero, so must the costs. How can this be done?
For the entire duration of the shutdown there will be no salary, no rents, no interest, no capital repayments. The banks won’t earn any interest and they won’t pay any interest either. The bonds won’t earn any interest and they won’t pay any interest either. The landlords won’t earn rent, but they won’t pay any interest and won’t pay for electricity or any other associated costs.
So no school fees, no Bloomberg payments (this can go on even after the shutdown, they make too much money!), no mortgage payments for the entire duration of the shutdown. Theoretically, the world’s GDP goes to zero for the period of the shutdown!
But what about lost income? Well if you aren’t doing much apart from sitting at home, the only income anyone needs is for groceries. Governments need to provide this for free, along with electricity, water, medicine, and the internet (beaming workout and cooking videos). The trick is to make sure they work out how to distribute essentials. Grocery stores, pharmacies, and any other services deemed to be essential are allowed to remain open.
The army and the police need to still be deployed to make sure people abide by the shutdown. All governments declare an emergency giving the police and army the right to arrest anyone who violates the law, i.e. the shutdown.
At times of war most countries ask their citizens to volunteer – the same can be done now. Quite a few people will gladly help rather than sit on their asses for a month. I know I would. Volunteers will be used to make deliveries of groceries to each household on a weekly basis. These volunteers will not be allowed to stay at their homes, just like most front-line medical staff aren’t doing so right now. These volunteers will go into self-isolation when the rest of the population comes out of it.
It sounds like an episode out of Black Mirror. However, with a vaccine more than a year away at the minimum, and the hopes of summer killing the virus fast eroding (look at the number of cases being reported in tropical countries), just one country going into shutdown won’t work until all the countries have been in one (and freed themselves of the virus). Borders won’t open, supply chains won’t work, and trade and commerce won’t get back to normal. Even if a country saves itself, it won’t save a lot of jobs if it has to keep shutting down due to imported cases.
As I am writing this Insight, I have been told by my wife that Bill Ackman has tweeted a similar idea but just for the US. He is wrong because just one country doing it won’t work. As long as the virus is raging in some corner of the world, there will still be a risk of it coming back, as is starting to happen in China and here in Singapore. Both countries now have more imported cases each day, with most of them imported.
As someone on Twitter put it aptly, our grandparents were called upon to fight the war, the least we can do is to sit at home for a month!
If the piecemeal approach keeps going on, the eventual cost in terms of human lives and employment will be a lot higher than foregone GDP for a month or two!
Read Sumeet Singh’s follow-up Insights on this topic:
Lead image by Anna Shvets on Pexel