March 30, 2020

How to Prevent a Coronavirus Depression

Helping people who lose their jobs won’t, by itself, prevent long-term economic damage.

With vast numbers of businesses experiencing a collapse in revenue — and in many cases a complete suspension of operations — there is an acute risk of widespread bankruptcies and business closures.

Think of a neighborhood restaurant that is reduced to a handful of takeout and delivery orders while customers are self-isolating. The restaurant can cut back employee hours, reducing payroll cost. But it still owes rent to its landlord; loan payments to its bank; utility costs; property taxes and more.

If the restaurant can get some mix of forbearance from its creditors and favorable loans or grants from the government, it may be poised to open as soon as people can safely eat out again, allowing a rapid return to its normal role in the economy.

If the landlord evicts or the creditors force the company into bankruptcy, it could be months or years before that economic activity returns.

Yes, eventually a new tenant could be found, and the former employees could find new jobs. That’s why bankruptcy works perfectly well in typical business failures. But when all kinds of businesses are failing all at once, it paralyzes the economy.

“Ideally you want all those small and medium-sized businesses that were solvent and doing a great job as of Feb. 1 to still be around and able to do business when folks can get back to work,” said Heather Boushey, president of the Washington Center for Equitable Growth.

It’s true even at bigger scale, with large companies like cruise lines and airlines. In a vacuum, it would do no harm to the economy for them to go through a normal bankruptcy process, with shareholders being wiped out and creditors taking over ownership.

Article source: https://www.nytimes.com/2020/03/25/upshot/preventing-coronavirus-depression.html

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