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The Musical Chairs Economy

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There are an almost limitless number of economic questions now facing policy-makers, managers, workers, everyone. There’s one issue I want to focus on. Call it musical chairs economics. For the last two summers my son went to camp. For this summer, long before COVID-19, he decided he wanted a change of pace. So we didn’t enroll him in camp. If we had enrolled him we would already have paid the fees in advance. This isn’t about that camp or my son. This is to illustrate a more general point. Lots of people in the economy have already paid for things they now cannot receive. In the normal course of things those people would be entitled to refunds in most cases. But of course we’re not in the normal course of things.

There is an entire domain of law called force majeure, basically events so vast and unpredicted that they can release parties from contractual obligations. This domain of law will see quite a lot of action in the coming months and years. Courts will be litigating these matters as far as the eye can see, long after the disease itself is brought under control.

But there’s a point beyond this.

When the big elite universities started shutting down a week or ten days ago, I saw many people asking whether they’d be refunding students their tuition or, more concretely, whether they’d be refunding room and board fees to students who now needed a place to live and food to eat. Big universities like Harvard are so rich they could do these pay outs without acute economic damage. But many college and universities simply don’t have the money. In some half way cases maybe they could do refunds but at the price of possible insolvency.

This is the case on a few different levels. In the most concrete sense many will not have cash in the bank. They literally don’t have the money. There’s also a more general point. With lots of businesses or educational institutions, they collect the money and have already paid a lot of it out to various companies and people. If camp or school is canceled it’s not like all the tuitions are sitting in the bank ready to be refunded. Lots of that money has already been contractually committed and in many cases already spent.

I’m focusing here on schools and camps. But that’s only a matter of explanatory convenience. The same principles apply throughout the economy. Money is continuously changing hands through the economy for things in the future, or for services that are on-going. The question in many cases will be: who was holding the cash when the music stopped? This goes beyond the law and force majeure or whatever else. We’re looking at a situation where the old saw that possession is 9/10ths of the law will have particular force.

If I’m a business which was holding the money when the shutdowns started, do I refund everyone’s money and cut my own throat? Probably not. I may not even have the money to refund. And remember, every business will have contractual commitments to others up the chain. Like I said, who was holding the money when the music stopped? I suspect many organizations and businesses will say, ‘Sure. Sue me in three months when the courts reopen and if you win I’ll pay you back in three years when the world is back on its feet. Now? Good luck.’

Obviously that is a zero sum world in which everyone loses but some lose more than others. Only dramatic and unprecedented action at the national level can save the situation. But these nano-crises (though macro for the business and individuals in question) will be taking place every day throughout the economy.

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Japan economy: Shinzo Abe has $1 trillion coronavirus relief plan – CNN

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Japanese Prime Minister Shinzo Abe on Monday announced a 108 trillion yen ($989 billion) relief package — a staggering amount equivalent to about 20% of the annual output of the world’s third biggest economy.
It includes tens of billions of dollars in cash handouts for families and small business owners who have lost their incomes because of the virus. The package also features tax breaks and zero-interest loans.
Abe is expected to give more information at a press conference in Tokyo on Tuesday.
Japan is the latest country to unleash a massive amount of government spending aimed at helping households and businesses cope with the sudden shock to the global economy as countries go into lockdown.
The United States last month passed a $2 trillion stimulus bill, the largest emergency aid package in history. Germany, France, the United Kingdom, Italy, Spain and other major economies have also announced huge spending plans.
Even in the coronavirus pandemic, the Japanese won't work from home until Shinzo Abe makes them
The flood of stimulus comes as the number of coronavirus cases continues to mount. So far more than 1.27 million people worldwide have been infected, while 69,000 people have died, according to Johns Hopkins University. Japan has recorded more than 3,600 cases and 85 deaths.
Recent unemployment, industrial production and retail sales data have suggested that Japan’s economy was showing signs of resilience as the virus ripped through Asia in February, noted Tom Learmouth, Japan economist at Capital Economics. But “there is no doubt that coronavirus disruption will deal a severe economic blow over coming months,” he said in a research note on Friday.
Infections have accelerated in major cities such as Tokyo and Osaka, he said, adding that concerns about a “second wave” of the virus has led residents to stay home and shops to close.
Abe also announced that he would declare a state of emergency on Tuesday, lasting for about one month — a notable development, as the prime minister had declined to do so as recently as last week.
While Tokyo’s governor has urged the city’s 13.5 million residents to telework where possible until April 12, many workers have continued to commute into their offices. About 80% of companies in the country do not have the ability to let their employees work remotely, according to 2019 government data, and Japan’s work culture makes it hard to persuade people to stay home.
— CNN’s Will Ripley, Yoko Wakatsuki, Julia Horowitz and Emiko Jozuka contributed to this report.

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U.S. Is Nowhere Close to Reopening the Economy, Experts Say – The New York Times

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WASHINGTON — How long can we keep this up?

It is still very early in the U.S. effort to snuff a lethal pandemic by shutting down much of the economy. But there is a growing question — from workers, the White House, corporate boardrooms and small businesses on the brink — that hangs over what is essentially a war effort against a virus that has already killed more than 9,000 Americans.

There is no good answer yet, in part because we don’t even have the data needed to formulate one.

Essentially, economists say, there won’t be a fully functioning economy again until people are confident that they can go about their business without a high risk of catching the virus.

“Our ability to reopen the economy ultimately depends on our ability to better understand the spread and risk of the virus,” said Betsey Stevenson, a University of Michigan economist who worked on the White House Council of Economic Advisers under President Barack Obama. “It’s also quite likely that we will need to figure out how to reopen the economy with the virus remaining a threat.”

Public health experts are beginning to make predictions about when coronavirus infection rates will peak. Economists are calculating when the cost of continuing to shutter restaurants, shopping malls and other businesses — a move that has already pushed some 10 million Americans into unemployment, with millions more on the way — will outweigh the savings from further efforts to slow the virus once the infection curve has flattened out.

Government officials are setting competing targets. President Trump has pushed his expected date of reopening the economy to the end of April. “We have to get back to work,” he said in a briefing on Saturday. “We have to open our country again. We don’t want to be doing this for months and months and months. We’re going to open our country again. This country wasn’t meant for this.”

Some governors have set much more conservative targets, like Ralph Northam of Virginia, who canceled the remainder of the school year and imposed a shelter-at-home order through June 10. Other states, like Florida, only recently agreed to shut activity down but have set more aggressive targets — April 30, in the case of the Sunshine State — to restart it.

Those targets are at best mildly informed guesses based on models that contain variables — including how many people have the virus and how effective suppression measures will prove to be. The models cannot yet give us anything close to a precise answer on the big question looming over Americans’ lives and livelihoods.

To determine when to restart activity, said R. Glenn Hubbard, a former top economist under President George W. Bush, “we need more information.”

Interviews with more than a dozen economists, many of whom are veterans of past presidential administrations, reveal broad consensus on the building blocks the economy needs — but does not yet have — to begin the slow process of restoring normalcy in the American economy.

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That includes widespread agreement that the United States desperately needs more testing for the virus in order to give policymakers the first key piece of evidence they need to determine how fast the virus is spreading and when it might be safe for people to return to work.

Without more testing, “there’s no way that you could set a time limit on when you could open up the economy,” said Simon Mongey, a University of Chicago economist who is among the authors of a new study that found that rapid deployment of randomized testing for the virus could reduce its health and economic damage.

“It’s going to have to depend on being able to identify people that have the coronavirus, understanding how readily those people can transmit the disease to others and then kind of appropriately isolating people that are contagious,” Mr. Mongey said.

Policymakers will also need better data on how strained hospitals and entire regional health care systems are likely to be if the infection rate flares up and spreads. Ideally, they would sufficiently control the rate to establish so-called contact tracing in order to track — and avoid — the spread of the virus across the country.

Once such levels of detection are established, it is possible that certain workers could begin returning to the job — for example, in areas where the chance of infection is low. Some experts have talked about quickly bringing back workers who contract the virus but recover with little effect. Testing is the best way to identify such workers, who may have had the virus with few or no symptoms and possibly not realized they were ever infected.

While they wait for the infection rate to fall, policymakers will need to provide more support to workers who have lost jobs or hours and to businesses teetering on the brink of failure. That could mean trillions more in small business loans, unemployment benefits and direct payments to individuals, and it could force the government to get creative in deploying money to avoid bottlenecks.

Lisa D. Cook, a Michigan State University economist who worked in the Obama White House, said lawmakers should consider funneling $1,500 a month to individuals through mobile apps like Zelle in order to reach more people, particularly low-income and nonwhite Americans who disproportionately lack traditional bank accounts. Mobile payments, Ms. Cook said, would also make it “easier and faster to make onward payments to family members and friends in need.”

The government’s efforts could prove crucial to maintaining public support for what amounts to a prolonged economic drought. Adam Ozimek, the chief economist at Upwork, said additional money for small business will be crucial throughout the full extent of the crisis — both to prevent a crush of business failures and to keep owners and customers from flouting the national effort to reduce infections.

“I don’t think you can force hundreds of thousands of small business owners to voluntarily shut down and let failure happen to them,” Mr. Ozimek said. “They won’t do it, the public won’t support it, and frankly I don’t think local authorities would stop them.”

Policymakers will also need to give better support and protection to Americans who are putting their own health at risk to keep the essential parts of the economy running, like doctors, nurses, grocery store clerks and package delivery drivers.

Heather Boushey, the president of the Washington Center for Equitable Growth, a think tank focused on inequality, said those workers needed to have paid sick leave, adequate health coverage, access to coronavirus tests and affordable care for their children while they worked in order to stay healthy and to protect consumers from further spread of the virus.

“That is the economy at this point, those workers,” Ms. Boushey said. “And their health and safety is imperative to my safety.”

Policymakers will need patience: Restarting activity too quickly could risk a second spike in infections that could deal more damage than the first because it would shake people’s faith in their ability to engage in even limited amounts of shopping, dining or other commerce.

“It’s important not to lift too early,” said Emil Verner, a Massachusetts Institute of Technology economist who is a co-author of a new study that found that cities that took more aggressive steps to curb the 1918 flu pandemic in the United States emerged with stronger economies than cities that did less. “Because if we lift too early, the pandemic can take hold again. And that itself is very bad for the economy.”

Finally, policymakers will need to level with Americans — and themselves — and concede the possibility that the shutdown and its effects could drag well beyond the end of the month.

Aggressive suppression measures could lead to a gradual resumption of activity that begins in some places as soon as May, several experts said. But business as usual might not come back until a vaccine is developed, which could take more than a year.

“We should certainly be prepared for a meaningful level of deliberate suppression of economic activity for the rest of the year,” said Jason Furman of Harvard University, who was a top economist under Mr. Obama.

The Congressional Budget Office wrote on Thursday that it expected at least a quarter of the current suppression measures to last through year’s end, and that the unemployment rate could still be 9 percent at the end of 2021. Lawmakers need to be ready to keep filling the void, with support to businesses and workers, said Karl Smith, the vice president for federal policy at the Tax Foundation in Washington.

“The possibility of an unofficial quarantine for weeks or months after the official one is lifted is real,” Mr. Smith said. “After that, my guess is that the economy is in major trouble.”

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Coronavirus support packages will reshape the future economy, and that presents an opportunity – The Conversation AU

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Governments across the world have rolled out extensive financial packages to support individuals, businesses and large corporations affected by the COVID-19 pandemic.

Equally, central banks have decreased their lending rates to almost zero, and have announced extensive and previously untested direct lending to private corporations and financial companies.

In many wealthy countries, the support packages are record-breaking in their size and scope, such as the US$2.2 trillion stimulus package for the US economy.

The US and Australian stimulus packages each represent about 10% of GDP. New Zealand’s program is about 5% of GDP, but each country is experiencing the economic shock differently, has different existing safety nets and priorities, and different mechanisms to deliver this assistance.

These support packages will play a significant role in shaping our world for many years, and we should not allow the clear emergency of the situation to stop us questioning their design.




Read more:
New Zealand outstrips Australia, UK and US with $12 billion coronavirus package for business and people in isolation


Goals for financial support

Our work on economic recovery following natural hazards and disasters defines a set of build-back-better goals, and how they should be assessed.

This kind of thinking applies equally to our current predicament. We argue that globally, the purpose of COVID-19 stimulus packages should be threefold, and we should assess them against these three goals:

  1. make sure people’s basic needs are satisfied

  2. make it possible for the economy to spring back into action once the necessary social distancing measures are relaxed

  3. use these funds to create positive change, and rebuild areas we previously neglected (in many countries, this will mean investing in public health systems).




Read more:
Five principles to follow if your job is to lead your staff through the coronavirus crisis


To achieve the first goal of making sure people can meet their basic needs, many high-income countries – including the US, Greece, the UK and France – are either providing direct payments to all citizens (as in the US) or targeted support to those who lost income or jobs.

These payments are sometimes a fixed proportion of each recipient’s previous income, up to a cap (as in the UK), or are identical for everyone who has lost income (as in New Zealand).

From an economic perspective, it is clearly more efficient to provide support only to the people who really need it – those who have lost income and would not be able to support themselves and their dependants.

But these programs are also shaped by politics and ethics, and different countries chose different ways to distribute this assistance, not always based on need.

Restarting economies

Even better are programs that provide the wage subsidies through existing employers, such as Germany’s famed Kurzarbeit program (which translates to “work with shorter hours”) which was implemented during the 2008 global financial crisis.

New Zealand’s wage subsidy package is a similar program. It supports businesses to continue paying their staff even if they are unable to work.

Details of payments to businesses are posted online, to make sure employers comply and transfer these funds to their employees. This initiative was trialled after the 2011 Christchurch earthquake.




Read more:
Three reasons why Jacinda Ardern’s coronavirus response has been a masterclass in crisis leadership


A similar support was also implemented in Australia.

Generally, wage subsidies allow for continued employment of individuals who would otherwise be let go, and they will also assist in achieving the second goal of resuming economic activity once restrictions are relaxed.

Such programs have been shown to be effective in Germany and New Zealand in ameliorating unexpected shocks.

While employees need support, directly or indirectly, it is also important that small and medium-sized businesses are propped up so they are ready to forge ahead once it is possible to do so. They should receive grants and subsidised loans to pay their costs, other than wages. Otherwise many businesses will fail, and the recovery will be slow and hard.

Global impacts

Whether large corporations need to receive support depends partly on the longer-term importance of their sector. It is easier to justify support for national airlines, which are an important linchpin in many countries’ global ties, than to support fossil fuel producers, for example.

Nor are there many reasons why taxpayers (present and future) should bail out wealthy individual owners of large businesses, when these businesses could be restructured in bankruptcy proceedings that should not lead to their shutdown.

But the COVID-19 pandemic has impacts well beyond individual countries and their economies and may require global support mechanisms.

Most low- and middle-income countries have either not yet announced any assistance or their packages are less than 1% of GDP. They typically cannot afford more with their existing debt levels.

It is therefore incumbent on high-income countries that can afford larger fiscal support packages to help countries that cannot. But so far only a handful of high-income countries, including Finland and Norway, have provided such support.

The international institutions supported by the rich world, such as the International Monetary Fund (IMF) and the World Bank, should pull out all the stops and lend enough, and at concessionary rates, to low-income countries so they can, at the very least, provide for their people’s basic needs.

Without that support, the virus will continue to spread in low-income countries and defeat the draconian social distancing measures that almost every country is implementing now.

Finally, it is important that we scrutinise these programs carefully now, rather than only once the public health emergency has passed and they have been entrenched. The sums involved are incredibly large and we will be remiss if we mis-spend what we are now borrowing from our children and grandchildren.

* Stay in touch with The Conversation’s coverage from New Zealand experts by signing up for our weekly newsletter – delivered to you each Wednesday morning.

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