(Bloomberg Opinion) -- Much of the U.S. economy is now shutting down to fight the coronavirus pandemic. Restaurants, bars and many other businesses that rely on people gathering are closing across the nation. Social distancing and local orders to shelter in place are cutting foot traffic, which will hit every retail store hard except for some that sell food and other essentials. Those shutdowns will ripple through the economy as consumption drops. The U.S. is looking at a plunge in output that, at least in the short term, will make the 2008-09 crisis pale in comparison.
In theory, a partial economic shutdown doesn’t have to cause long-term damage. After the danger of the pandemic ends, U.S. workers can go right back to what they were doing before -- eating in restaurants, walking into stores -- and economic output will go right back up.
But the economy isn’t defined only by real activity; it also is made up of a web of financial obligations. People owe rent, utilities, student-loan payments, auto payments, mortgage payments, property taxes and many other monthly bills even if they’ve been laid off or furloughed. Companies owe debt-service payments, rent and so on. As economist Larry Summers puts it, “economic time has been stopped, but financial time has not been stopped.” Financial obligations alone are a large share of disposable income:
So the U.S. economy is an elaborate, intricate, just-in-time supply chain of financial payments. Halting large portions of it, even temporarily, is like taking a hammer to that delicate machine.
One way to deal with this problem is to have the government give Americans cash to pay their financial obligations. The government is considering mailing everyone $1,200 checks. More targeted support for businesses and workers hit by the shutdowns ought to be added, in addition to extended unemployment insurance.
But for workers and businesses unable to make rent or pay taxes, this won’t be nearly enough. In addition, there is going to have to be some sort of general forbearance -- a moratorium on regular payments for rent, mortgages and debt service for a period of time. France, for example, is doing a lot of this.
President Donald Trump is also open to the general idea of forbearance. He has announced a 60-day suspension of student-loan payments and is considering a plan to let homeowners delay their mortgage payments (some borrowers with federally backed mortgages may be eligible to delay payments for as long as a year). He has also ordered the Department of Housing and Urban Development to suspend foreclosures and evictions.
This is a welcome development. But the question of which payments should be delayed, which should be canceled and which should be paid with government checks isn't an easy one. The optimal policy depends on the type of payment and who the payment goes to.
For example, suspending student loans is a no-brainer. The government can easily go one step further and just cancel much of the debt because it owns most of these loans:
So giving people money to pay their student loans is pointless; the government should just write off much of the debt immediately and cancel all payments until the crisis is over.
Government agencies can also cancel many mortgage payments, instead of just delaying them, because they hold many mortgages directly. Instead of making people pay these obligations later, just allow them never to pay them. As for those people and businesses whose mortgages and student loans are privately owned, they can be given government checks to make those payments (not doing this would be grossly unfair to those who were lucky enough to have their loans held by the government).
Taxes are a more difficult matter. Delaying tax payments is easy. But some companies and individuals will never be able to make up for the months they were forced to shut down or sit at home. In principle, the government can simply cancel tax payments, which is easier than handing out money. But the question of who gets to avoid taxes is a thorny one. Some businesses, such as delivery companies, may even benefit from the crisis; should they receive just as much relief as restaurants and bars whose business has been annihilated as part of the disease-fighting effort?
The argument over who gets their taxes canceled will certainly turn political. There will inevitably be allegations that leaders are bailing out favored industries and political allies. And anticipation of cronyism will lead many companies to jockey for a favored position, even if cronyism never comes to pass. This will be an ugly, protracted battle that will likely outlast the epidemic itself.
Rent is an even more problematic case. Many workers and businesses simply can’t afford to pay rent while their livelihoods and incomes are in suspended animation. But if they’re allowed to cancel or even delay rent, financial institutions may go bankrupt, which will make it harder for the economy to bounce back after the epidemic. In the interest of not turning a health crisis into a banking crisis, the government should probably mail checks to help affected workers and businesses pay rent, as well as pressuring landlords to allow delayed payment. But this will again turn into an ugly zero-sum political battle.
So although the real economy can bounce back from a short-term health crisis, the web of payment obligations that defines the financial side of the U.S. economy will have a harder time recovering. The government can do much to make it easier, but the fights over who gets to cancel rent and taxes is just getting started.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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