One obvious solution is for the private sector to be able to do this for themselves. Sure, our restaurant owner’s landlord could evict them because they are no longer able to pay rent. But the landlord could also not do that. They could realize—because it is plainly obvious—that the restaurant is a viable business in the middle of a hiccup and so agree to suspend rent payments. In actuality, they may not be technically losing out from this choice because (1) they are unlikely to find any other renter in the meantime and (2) they won’t have to look for another renter beyond that.
This is all well and good if the landlord has the power to make such decisions. However, behind many landlords are banks that have provided them with mortgages. They have provided loans to many property owners and may struggle to work out who is really participating in the pause. Thus, they may choose to foreclose on the landlords. If we could all see what was going on, maybe we could coordinate the pause without help. However, because that is risky and the pause button needs to be hit urgently, governments can help coordinate that just as they do with daylight savings time.
This is not specific to rent or mortgage payments by small businesses. The services that comprise their fixed costs extend well beyond that. The popular fresh fast food chain in Boston, Clover Food Lab, put out a plea in March 2020 for tech companies to not require payments for three months.8 Its founder, Ayr Muir, wrote:
I’m hours and hours into painstakingly reaching out to the HUGE number of services Clover uses to operate. For all it’s the same thing. (1) We want to use these services as soon as we re-open, (2) we DON’T want to lose all our data and set-up all over again, (3) We CAN’T pay while we have no revenues coming in.
Some companies responded to Muir’s plea, but the majority did not. For companies that have otherwise very high margins, a pause would be a sensible response compared with pushing businesses off their services and making them pay the costs—in time and otherwise—of setting up again. The difference between these Big Tech companies and landlords is that it is highly likely they won’t face any costs from offering a pause.
All of these considerations apply beyond small business. There are employees who face consequences in terms of paying ongoing household expenses should they find themselves unemployed. So, while we cannot necessarily expect them to be paid while not working for an extended period of time, the pause notion surely equally applies to them with respect to their rent, mortgage, debt, and utility payments.9
How to Pause
For once, it didn’t take governments long to realize the nature of the problem. Through March 2020 they ordered lenders and landlords to hit the pause button on foreclosures and evictions for a month or two.10 French President Emmanuel Macron was more strident and suspended utility payments and rent for small businesses, promising that “no business would be allowed to fail.”11 The US government pushed back its annual tax payment deadline from April 15 to July 15 and allowed student loan payments to be stopped without penalty. But perhaps no country opted to “freeze” their economy quicker than Denmark. In mid-March 2020, they opted to pay 75 percent of all salaries of potentially laid off workers (earning up to $52,000 a year), guarantee 70 percent of new bank loans to companies, and cover the fixed expenses of small businesses. The total cost was 13 percent of their usual GDP.12 If the United States did the same thing, it would be $2.5 trillion.
Halting consequences and payments is a very direct way of pausing the economy and making sure that the temporary harm is not baked into the recovery. In other cases, the government tried to provide money to achieve the same thing. In Canada and the United Kingdom this included wage subsidies when businesses keep employees and delayed tax payments that businesses make on their behalf.
Perhaps the most radical proposal came from French economists Emmanuel Saez and Gabrielle Zucman, who argued that governments should become “payers of the last resort.”13 If a business was facing shutdown, the government would come in and pay for employees and for fixed-cost payments such as rent, utilities, and interest. In other words, they would have governments pay for businesses to pause. They suggested that unemployment payments could simply be made as if workers have lost their jobs, to provide an easy route to such payments. They would also allow self-employed or gig economy workers to report themselves as idle to be eligible for such payments. For businesses, if they are part of lockdowns for more extreme social distancing, they would report their costs, be reimbursed, and then any misreporting would be worked out later.
Is it better to stop bill payments or to pay them? Stopping certain bill payments is straightforward and easy to enforce. The problem, of course, is that it is not clear we are allocating the burden of preventing a recession equitably. In fact, when the dust settles, that won’t be the case. The problem is that, at the moment the policy needs to be introduced, there is no easy way of knowing this. This suggests that there may be some political fallout or economic recompense to be hashed out postcrisis. That uncertainty may actually cause some short-term problems to become long-term ones.
By contrast, paying bills can circumvent this by, in principle, sharing the burden at the outset. For instance, you could make sure that the hit to workers in terms of lost income was proportionate to the likely loss in capital returns. This is done by paying part of the invoiced amount of bills and wages. The challenge with this is that it requires some verification (eventually) of what those bills might have been and, in the meantime, a process of getting those payments to where they are needed. In other words, neither of these options is cleanup free.14
An Alternative: Income-Contingent Loans
The problem with both stopping bill payments or paying them is that each becomes more difficult the longer the initial pandemic recession lasts. What is more, we do not actually have a good sense of how much more difficult these would become. In other words, they are really temporary emergency measures.
One measure that has the potential to last longer is government or private loans with a government guarantee. At the time of writing, various government support loans are being contemplated. As Sendhil Mullainathan wrote:
During the 2008 crisis, the government understood this principle well. It bailed out large financial firms for much the same reason: They were facing temporary shocks that, without intervention, would unnecessarily become permanent ones. Whatever else one may feel about those bailouts, that economic logic was sound. Those investments yielded healthy profits for the government.15
The same logic of using loans has also been considered for some of the more hard-hit industries, including travel and hospitality. Loans are a way of allowing bills to be paid without having to sort out what bills and how much because whoever takes out a loan is still responsible for repayments.
However, it may also be the case, given the absence of revenue or wages, that full loans may be not be financially possible. In this regard, there is a debate regarding whether governments should step in and handle some of the short-term payments to give debtors financial breathing space or to provide support to reduce the loan principal. The rationale for the latter is that it reduces the future debt overhang of businesses and others, assisting them in getting back on their feet.
A careful study by Peter Ganong and Pascal Noel showed that if your goal is to prevent temporary issues becoming long-term ones, it is better to provide short-term help.16 Using the differential impact of certain programs offered during the financial crisis of 2008–2009, they were able to measure the impact of reducing long-term obligations (a direct improvement to wealth) versus reducing short-term payments (assisting liquidity). As it turned out, the former did nothing for borrowers who were already underwater, while the latter significantly reduced default rates. This study strongly suggests that we want to help borrowers with government-backed assistance for loan repayments rather than assistance paid directly to lenders to reduce loan principals.