The Pandemic: A Lemonade and Utilitarian approach
As 2019 began to fade, the makings of a pandemic started in China. A regime uniquely qualified, through its massive social engineering and belief in the needs of community over individuals, to stop a virus in its tracks failed. By February 2020, the virus has become the 21th century’s black death—a mutating virus stalking the weakest in society. There is no city or building that is safe from this scourge. The words of Moses in Deuteronomy come to mind: from within the home fear and from the outside world more fear.
Most physical social interactions have been cancelled. Schools have resorted to fully interactive classrooms—care of Zoom. Families have been forced to rediscover each other—for better and worse. Work habits have been upgraded to the limits of technology. Consumption trends have radically shifted towards a stay at home consumer. Our healthcare systems are being rebuilt from within. And our economy is undergoing the most radical change since mainframe computers were introduced in the 1960’s.
Governments today, after years of neglecting the poor voters, have realized that most people live paycheck to paycheck. 90% of Americans do not have any significant savings—and the same figures are true in the rest of the G50 countries. The skimpy social net offered by most governments simply is inadequate when the black market economies are dramatically scaled back. Populations clamber to return to work as they face starvation and depression from not working.
Yet most scientists today predict that this virus will not disappear within the summer’s haze. They are most doggedly convinced that we are faced with a long (12-18 month) battle to combat and neutralize (via vaccination) the threat of this deadly unseen foe.
Another important fact to consider is that the 1997, 2000, and 2008 financial crises were about liquidity and financial factors driving a crisis. This one is different. It is health driven and compounded by an aging demographic.
Finally, it is time we realize that the government grants monopoly licenses to certain industries…some directly and some indirectly. The direct governmental grants would refer to institutions who apply for permits to operate and lever themselves financially for the “greater good” of society. These related governmental entities include: banks, insurance companies, utilities, phone companies, etc. Then there are companies that have grown to occupy “strategic positions” through their growth and size—think companies required to divest of certain assets when mergers occur: certain food processors, distribution companies (think Walmart, Amazon, etc.) Finally there are companies that rely on Federal funding of services to maintain profitability: hospitals, healthcare providers, defense firms, etc.
All three types of industries, in times of crisis, show how fundamentally they depend on government for their survival. The equity in these companies is really a call option on a functioning economy guaranteed by the Federal Government and should be considered as such.
Immediate Governmental and Governmental Related Entity Actions
A few precepts:
1. The Health War far outweighs economic issues.
2. If all governments inflate funds equally, the net effect on exchange rates is minimal
3. On a 10-20 year horizon, the effects of 1 year of lost GDP is minimal
4. People starving and depressed, will resort to desperate measures which test societal norms
5. People who feel fundamentally secure are willing to tolerate large inconveniences
Based upon these axioms, here are a few action points:
1. Massive Stimulus Directed at Individuals
Governments around the world need to prepare to print 1 year of GDP and place it in the hands of individuals to spend as though they were working. This action needs to be coordinated among the top economies. A worker not saving any money, in a non-essential job, should be able to stay at home and reduce his, his family’s, and his immediate community’s exposure to health risks—for a year if required. Those who do work, may be eligible to double dip as a bonus -- recreating capital when the world emerges from this supply chain economic Armageddon. The most efficient manner for achieving the result of “stay at home if you are not needed outside” would be to pay people’s electric bills, healthcare bills, home rents (to the limit of an interest only + personal payment for the landlords= no capital repayments allowed), and some direct food and clothing allowance per person. This might have a scale up pending a set of previous years of tax returns with a cap at say $70,000 of gross earnings less tax payments. The Federal government should also guarantee (and pay) all state and local governments revenues. These revenues will not be collected (1 year tax holiday) in lieu of a direct government payout based upon an average of the last 3 years collections.
What would be the results of such a massive stimulus package?
- Citizens will feel secure knowing that as long as the pandemic continues their basic needs will be met. This will massively reduce the level of panic that individuals feel and society collectively are reverberating and resonating.
- Citizens will become compliant to health regulations that governments issue
- A certain amount of monetary inflation, which when coupled with economic slowdown, will result in a net modest inflationary uptick
- If executed in a co-ordinated fashion by all major economies, the net effect on relative exchange rates will be minimal.
- Scientists will gain time to develop: tests for rapid disease identification, cures for symptoms, vaccines, etc.
- For non-SDR (Special Drawing Rights) economies, there may arise questions for how to repay these expenses. Here there are two options: a. Printing money and not issuing loans b. Issuing loans that call for an increase in VAT post the crisis with a 10-15 year duration to defease the issuance of the emergency debt. All banks/insurance companies, as government related entities, or other Central banks could be compelled to hold this paper as a reciprocal arrangement.
- Government officials will not feel economic costs or pressure to release people from their homes for safety reasons. If this were a toxic waste site, no one would feel such pressure. Our officials need to have the same latitude to operate with the facts before them.
- By creating a true 1 GDP print upfront, rather than the current piecemeal approach of $1 trillion at a time, the government sets the stage for a truer, believable, long term narrative which can then be used as a basis for base planning of economic activity.
2. Supply Chain Management Control
In addition to the stimulus package, governments need to assume production powers to assure that the key parts of the supply chain are functioning. It is inexcusable that 10%+ of America’s hog slaughtering is shut–in by the virus for more than a week. It is inconceivable that hospital supply chains or drug supply chains are in danger of collapse. It is wrong that utilities worry about how to pay for providing electricity as consumers default on their debts or that utilities petition the government to reduce the need for safety protocols in nuclear reactors to reduce costs during these times (actually happening in the US). The government must have a blueprint for managing all the critical the supply chains of the country. All employees could become federalized marshals (reducing insurance issues) and then production can be properly managed and, where needed, institutional knowledge can be transferred between manufacturing plants to ensure that there are no shortages until the end of the crisis.
3. Infrastructure Retention and Development
The government must ensure that critical infrastructure is maintained for when the economy reopens. This would include pipelines, bridges, refineries, etc. Certain infrastructure nodes (think pipelines, coal plants, refineries) may need to be shut-in. They need to be able to be guaranteed a clean restart without needs for massive upgrades. To the extent that the government wishes to use this opportunity to fully upgrade and modernize their industrial base at the end of this crisis, there should be a special and separate government fund established to provide a near 0 interest loan to companies to renovate their industrial plants. This would be available only to the largest corporations, and to the extent the materiel/planning efforts are available today, could commence immediately. It should be in the range of 20-25% of a company’s PPE (Property, Plant, and Equipment) less Depreciation. The engagement of managers in this process, and the planning process will motivate workers. It will also help ensure a V start to the economy.
To the extent that shut-ins are not possible, production from these infrastructure nodes, needs to be given 1st use rights.
4. Small Businesses
There are 2 areas where small businesses require help. Small businesses are tools for their owners to make living. It is essential that these tools be at the disposal of their owners. The 3 major cost drivers for small business owners are: rent, payroll, and inventory. To the extent that everyone is receiving the payout above, there would be no payroll costs for the period of the shut-down. For the rent, all rents need to be adjusted to cover interest-only payments on commercial properties. (All loans would be reset at the greater of US Treasury rates or 0.5%. For simplicity of this paper, it would be a loan reset for the banks) For inventory holding costs, to the extent that they do not spoil, owners should receive a near 0 loan for holding these until the end of the crisis. All small businesses should be able to use an expedited mini-bankruptcy process, whereby they could clean-up any liabilities and re-emerge from bankruptcy, as owners after the crisis without affecting their customer base. There needs to be a method whereby payables to other small businesses are higher in line for recovery than those to banks, landlords, etc. This will enable a jumpstart for the small business owners at the end of the crisis. This would be in addition to special loans to help start new businesses.
5. Education System
As all readers are aware the overall state of elementary and high school education was abysmal before the current crisis. From having spoken to many high school students and educators, most prefer Zoom classes to physical classroom settings. The interactive component, home setting, and ability to learn with fewer distractions—and teach to those who want to learn, all contribute to a positive learning experience. The ability to create, real content, real classes, at times convenient for the student and teachers, should become the basis for an alternative junior high/high school system. NYU, for example, offered courses simultaneously in Abu Dhabi and Tel Aviv via digitally connected platforms before the crisis. These were very successful and meaningful classes.
The government needs to fund/sponsor digital classrooms as a permanent teaching platform for junior high and high school students. These could be done via major Universities where Universities could oversee and integrate such High School curriculums more easily, at a higher level, than state run high schools. Also, for certain students, this becomes a seamless track into vocational training or higher learning. The level of absenteeism in classrooms should drop as well as a direct function of being able to take classes when it is convenient for the student. (Much absenteeism is due to needs of poor students to work, child pregnancies/day-care responsibilities, etc.) Furthermore, the young generation views technology differently and for them such interaction is far more natural than for the parents.
6. Personal Actions
The last few weeks, and coming months, will allow all of us to spend more time with our families. We will be privileged to see children grow and partake more actively in their lives. We will learn that the values with which we raised can be passed down. We will learn that we can relearn high school math and science. We will spend time speaking with parents, distant Uncles and Aunts, and friends. We should also recall that we work to live and not live to work. In this vein, while healing our families, we need to consider that we really need to spend annually more time together and increasing, especially in the US, the normative number of vacation days.
Please let me know your thoughts.
Best,
Philippe Blumenthal
Founder & CEO
The Governmental Savings Institute
+1 (470) 808-4089
pb@govtsavings.org