What If We Froze the Economy?

Even amidst the pandemic, historic unemployment, and the near-halt of our lives, many have worries about what will happen when isolation eases. Like the rumble of an avalanche yet to be seen, there are plenty of signs that economic problems are snowballing to hit later.

What will happen after a third of Americans do not pay rent? What will be the effect of less discretionary-spending overall? Of a quarter or more of all small-businesses in the United States closing? Exponentially more personal bankruptcies and foreclosures? Pensions and investment-retirements losing much of their value? Of states unable to make payroll or provide services?

The stimulus packages already seem to be fraught, which creates more doubts. In all, there is justification for worries about allowing the economy to hobble along as it is.

What, I wondered, would happen if we froze everything, right now? What if no one had to pay rents or mortgages, residential or commercial, or debt payments such as credit cards, student loans, auto loans, or business loans? And what if we canceled problems all the way upstream, so the financial suffering spread democratically? Landlords would not have to pay banks, and the banks would be forgiven, temporarily. Salaries for the unemployed would be partially replaced by stimulus, to the degree they paid for food and other necessities. Utilities would be covered, and medical care would be provided at cost, and covered by stimulus for the uninsured.

What would be lost in this? The fight against the virus has been called a war, but that is partly metaphor. After all, the rolling stock, factories, infrastructure, and workforce still exist. Would the only real damage be the loss of profit for those months to the wealthiest stakeholders in our society? And would the costs to the government be less than doing it piecemeal?

I asked Dr. Gaetano Antinolfi, Chair and Professor of Economics at Washington University, these questions. He said I was correct to a degree: If we could turn this quarantine into “a long night where everyone goes to sleep and wakes up in a month,” there would be no effect, and we could all go on as if nothing had happened.

The problem, Dr. Antinolfi said, is that in reality “the world doesn’t work that way. We never collectively go to sleep.” Food must be produced, packaged, transported, and shelved, for instance. (“Agriculture, food, and related industries contributed $1.053 trillion to U.S. gross domestic product (GDP) in 2017, a 5.4-percent share,” says the USDA.)

Antinolfi said there are some people for whom things go on as usual, and others who will do well in this time. But since we cannot stop everybody, “those who stop will end up suffering a lot.” The trick for us as a society is to “make time as cheap as possible for those for whom time is expensive.” There are two ways to do this.

The first, Antinolfi said, is monetary policy, “which can make credit abundant, available, and inexpensive.” Time would be made cheap, for instance, if you could borrow at zero cost, since interest would not compound. This would require no redistribution, beyond interest-rate changes. And while “Apple can go on for a while” with its own reserves, a stimulus plan with credit is especially important to small businesses.

Redistribution is fiscal policy, Antinolfi said, and that is the second way to help people suffer less. For many small businesses, such as a local coffee-shop or small restaurant, it is impossible to survive one week without revenue. How do you make workers wait for their pay? “It is not enough to say, ‘The restaurant will be here, and we will hire you back in a month or three.’”

Redistribution by the government, as with stimulus checks, could help. But Antinolfi acknowledged the challenges: How much do you have to pay workers to keep them going? Also, the cash will not immediately generate spending—no one is going to take that ski vacation like they wanted to before the hard times came. The immediate goal, he said, is that “nobody’s starving.” In that, policy could help.

The ultimate goal of all policy is to “regenerate spending,” he said, but we will “have to wait for that for a few weeks.” Consumers who might have been planning to buy a car will not do so soon, but maybe in a couple of months some cars might begin to be sold.

For other categories, there will be no substitution. Diners at restaurants will not eat twice as much when they go back, to make up for losses to the restaurants. Some services will simply be gone, and their effect could “multiply persistency in a downturn.”

Dr. Antinolfi said both monetary and fiscal policies are being used, and he does not see policymakers making large mistakes. Still, once the unemployment rate hits 10-15 percent, it will “take some time to go back down.” If we stopped the economy entirely for three months, it might cost four trillion dollars, Antinolfi said, but he does not believe the damage will be that bad.

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