Easy Gains Mostly Over

– unless smarter actions are taken

On one hand, the US jobs data of the past two months appears impressive: millions of jobs added attaining the highest job growth rate on record.

Within the context of the crisis where millions of people have been “suspended” in a kind of furlough, economists and lawmakers understand that these were the easy gains. The businesses that are still alive and that still hope to make it through the crisis are calling (some of) their employees back.

Unfortunately, we cannot and should not extrapolate this as a trend and think that it will continue for much longer. The true extent of the damage has not yet been accounted for: millions of businesses have been pushed out of existence; and if the pandemic drags on, or has any kind of resurgence, millions more will join the ranks of the bankrupt.

Without any action, the crisis will now mutate into a traditional recession, requiring at least 12–24 months to recover as completely new businesses will have to form from scratch — instead of the existing ones simply reopening. While we have total confidence in the strength of the US economic structure, this will be a slow process.

Therefore, we must make the process much faster to minimize both the length and the severity of the crisis. But that will require much smarter action than simply doling out another mammoth trillion-dollar package.

This is because size alone does not provide either long-lasting relief or actual stimulus.

The way to confirm this is to follow the money: most of the bridge loans and grant money simply flows through the businesses, accomplishing little other than preserving the revenues of landlords and creditors, who have continued to receive their payment as if nothing had occurred. The same applies to households: most of the money just flows through to financial and capital asset owners.

Loans and grants in this form alone, will not limit the damage in spite of repeated, enormous and unsustainable government outlays.

It is clear that to actually “stimulate” anything, stimulus money must do much more than just zip through small businesses, but must remain there as long as possible so it can be used to pay employees and for essential operational business expenses (such as utilities, maintenance…).

To have a chance at “stimulating”, any potential solution must possess the following two characteristics:

1. It must direct the money to be deployed where it can do work, instead of just servicing debt;

2. It must spread the burden of the crisis across the largest possible base in order to protect the vulnerable goods and services businesses that are the productive engines of the economy.

The Time Suspended Proposal

The Time Suspended solution sets ALL interest rates on ALL financial assets, ALL unproductive business real assets, and ALL personal mortgages to 0% on all preexisting contracts while the crisis lasts; and concomitantly sets a grace period for any installment, and extends all contracts by the same amount of time, as appropriate. The deferments and suspensions are modulated over time in proportion to business or household income contraction.


But we need to go much further: 0% interest and zero-dollar rents (in proportion to business or household income contraction) during the crisis + proportional deferments of all principal repayments.

CRUCIALLY, this freeze must be applied throughout the entire economic chain. That means, the creditors themselves will also have their obligations proportionately suspended.

Implementing the “Time Suspended” measures will essentially get the economy to self-finance by spreading out the burden of the crisis and retaining liquidity for essential business operations and employment.

At the same time, relief will be automatically sustained for as long as (and in proportion to) the crisis lasts, dramatically reducing the size of the required government outlays. That way, the government will be able to take additional action in a much more targeted and efficient manner.

A much more detailed explanation of “Time Suspended”, why it works, how it works, and its effects on the various kinds of economic agents and the government can be found in the academic paper on SSRN:https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3635812

Late, but not too late. It is far easier to restart an idled economic engine than to rebuild one anew. Keeping the economy ready to go is much more effective and requires a fraction of the capital that the current proposals on Capitol Hill do. If lawmakers can focus on providing genuine stimulus, we still have a chance of going up the path of a V-shaped recovery instead of the slow path out of a traditional recession.

with Prof. Raphael Douady
research Professor at University of Paris I: Pantheon-Sorbonne; mathematician, statistician, extreme risk specialist

Jeremy Dilbeck, MPP, Intl. Trade & Finance

[i] https://www.aspeninstitute.org/blog-posts/the-covid-19-eviction-crisis-an-estimated-30-40-million-people-in-america-are-at-risk/


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