Economics of pandemics: Looking through the wrong lens

In the event of an economic calamity, the general governmental response is often to boost demand and attempt policy stunts to encourage spending in every sector.

With the pandemic holding the sway over our economic activities, the government actions have not digressed much from the classical responses designed to move money through the economy and create or retain jobs to breed or sustain demand. The nomenclature agreed upon for such action is summarised within the three-syllable word 'stimulus'.

However, the unnatural magnitude of the current crisis, the effect it has had on both households and business confidence, the pervading economic uncertainty that it has precipitated raises the question of whether the policymakers are looking at this calamity of epic proportions through the wrong lens. 

The stimulus packages proposed by the government regardless of their quantitative and qualitative adequacy (or inadequacy) characteristically emphasises on mitigating post-pandemic economic impacts.

These programmes inject much-needed liquidity in firms but do not resolve a bigger looming issue: insolvency. The gap between the dip in revenues and plateauing payables – including the new loans that firms have to eventually repay – has to be addressed.

There is also doubt regarding whether the actions such stimuluses are designed to instigate (such as regular pay, employment retention etc.) will encompass the intended beneficiaries in the last yard of the organisational and socioeconomic hierarchy: the low skilled/unskilled worker.

Another question that looms overhead is whether businesses will take the bait. With the future gloomy, global supply chains disrupted and countries imposing higher restrictions on trade to keep scarce resources at home, will the credit be worthy to borrow at subsidised interest rates?

For the government providing loans, guarantees are good as it implies that the firms will have to pay back. It does not implicate immediate fiscal costs (in contrast to direct transfers) but for the businesses, it raises their liability.

With the demand side of our export-oriented industries dwindling in tumultuous waves of an anticipated global recession will the firms and the ancillary industries borrow to regain or retain the pre-pandemic productivity and productive capacity?

News reports are already surfacing on some businesses laying off workers amidst this ongoing crisis without paying off due wages and entirely ignoring government directives to retain workers.

In the clout of such events, the question of whether the right businesses will borrow seems to be a rhetorical one. 

Filing for bankruptcy or adoption of standard rescheduling procedure has been the practice the big players often engage in.

When circumstances are usual and the economy rolls regularly on its wheels these digressions from the ethical norm of paying off debts when it's due do not usually disrupt the macroeconomic balance. However, this time it is different.

Any failure to flag unworthy borrowers will raise the pressure on the budget in the long run and raise it at a time when the government might not have the required solvency to counteract and restore equilibrium.

An eagerness to keep the pressure on the budget low (while risking high budgetary pressures in the long run) at the expense of passing on the burden to a banking system that is already lacerated with its morbid weaknesses can cause more institutional failures than the government has the capacity to handle.

The government should realise that a pandemic can quickly escalate to a full-blown financial crash and a long recession, not just a V-shaped pause. The government should take account of the worst possibilities and should look at the economic crisis through a different lens. 

To this end the government should consider suspending bankruptcy procedures temporarily; doing so will prevent illiquid firms from transferring their assets to the banks. If done right this will force the firms to make attempts to stay afloat on the government subsidised loans now and resume business once draconian restrictions on mobility are eased.

Investment in reengineering workplace and work practices contingent to the preventive measures necessary to reduce the possibility of a contagion once lockdown is lifted should be a prerequisite to being a successful allottee of government assistance and the loans disbursed could be quantised with the firms reported profits in the previous fiscal period rather than leaving it all at the mercy of the much exploited 'bank-client relationship'. 

The government should also acknowledge and recognise that the economy rides on the strength of the middle class.

Unfortunately enough, due to our consumerist attitudes that fed much of our past fast growth, the average middle-income household constituting a salaried individual do not have the savings necessary to see them through a quarter.

These households will need support. Rather than direct transfers, the middle-income households can be issued zero-interest loans equal to a quantum of their quarterly recorded earnings.

A loan is better as it can be recovered. Rest assured it is the hard-working middle-class people who have the least tendency to be a defaulter. Should the government adopt this policy it will reduce the salary burden on the firms and the need to subscribe to government rescue packages.

This can prevent unwanted layoffs and help restore both households and business confidence while allowing the government to redirect the rescue net where it is most needed.

The policymakers across the politico-economic realm should realise that this is not a demand-side recession needing 'stimulus'. The policy challenge now is to allow the economy to shut down, and make sure it does not die in the process. A pragmatic change is needed in the way these financial aid packages are framed and anchored.

In all aspects, there will be an immense need for forbearance from all parts of society. No policy should be devised at whim, no lockdown relaxed under pressure from vested interests or suddenly overnight. The government should patiently hear out the critics because they help to view the world through a different lens; at times the right lens.

The author is the founder of Rational Nudge