Saving the Economy After Coronavirus
At the time I am writing this, 30,300 people have died of coronavirus. By the time this article appears, more will have died.
It is well known that the economic damage has also been catastrophic. There has been massive unemployment. Massive loss of consumer demand. Many businesses are not going to survive the multiple months of no revenue that coronavirus has brought on.
I am not a doctor, so there is nothing I can say about how to stop the loss of life associated with this plague.
I am an economic sociologist and a sociologist of development. There is quite a bit I can say about how to stop the economic destruction associated with this plague.
The World Needs A Three-Month Moratorium on Commercial Rents and Commercial Mortgages
Right now, many retail establishments are going to go bankrupt, because they cannot make their monthly payments on the premises that they are renting.
They can not make these payments because the city that they are in is in lockdown. There is no street traffic and no business. Some establishments such as restaurants can get some revenue from take-out. But that does not compensate for the catastrophic loss of regular volume. As of March 14, a time when closings were less severe than they are now, restaurants in heavily impacted cities such as New York and Seattle were seeing over a 60% loss of business – and that is allowing for take-out compensation.
The loss is higher for some enterprises that have been shuttered entirely.
Supplies are a variable cost and can be scaled down.
Labor is a variable cost and can be scaled down – at a huge human price.
Rent is fixed and merciless.
That rent check is due every month, whether you have sales or no sales.
Under normal conditions, landlords and banks being strict about rent makes some commercial sense. If your business does not routinely generate enough revenue to pay your rent, you are not going to be able to continue doing business.
But these are unusual times. A bar that has no business because the city is on general shutdown might be perfectly viable under normal conditions. The inability to pay rent now says nothing about the intrinsic soundness of the firm’s business model.
So if landlords continue to collect normal commercial rent, they will bankrupt a broad range of businesses that would otherwise be robust profitable enterprises. The landlord gains nothing from having a bunch of empty properties. And the new tenants that the landlord would get would not necessarily be stronger or better businesses than the tenants the landlord has currently.
Well then, why don’t landlords just routinely forgive the commercial rent on their tenants who are having coronavirus?
Because the properties the landlord owns are often mortgaged; the property owner has to make his or her own monthly payment to the bank. If the landlord is not current with his payments on the building, the bank can foreclose on the mortgage and the landlord loses the asset. The landlord could be reasonable with his tenants if the bank would be reasonable with the landlord. But the banks are generally not reasonable with landlords.
Note that the long term logic for the banks is not that different from the logic for commercial landlords. The building may not be producing revenue during the coronavirus pandemic due to a temporary decline in the volume of business. But the objective commercial potential of the building has not changed. Changing ownership of the building or changing the composition of tenants in the building accomplishes nothing. And the transition costs in which the property sits empty or partially empty waiting for new tenants to come along is a deadweight loss for everyone.
So why doesn’t everyone just agree to ignore the rent payments on commercial buildings for a few months during the pandemic – and to ignore mortgage payments on the buildings where those leases are located? Better yet, why doesn’t the government pass some sort of policy calling for such a generalized moratorium? I am not a legal expert and do not know exactly what kind of measures could be passed on an emergency basis.
However, clearly the economy is facing a major emergency. The emergency could be easily survivable with some sort of relief for commercial tenants. The emergency could turn into catastrophic economic losses for the entire retail and service sector if relief does not come. The downtowns of most of our cities would be devastated. The damage would be just as severe both in the downtowns of smaller municipalities and in the commercial developments of
suburbs and exurbs. The big boxes would probably survive. The smaller establishments are looking at ruin.
Maybe commercial developers will do the right thing on their own initiative. Maybe the banks will do the right thing on their own initiative. I am not optimistic here.
Government can go a long way towards putting a more long-term rational option on the table ether as a moral suggestion, or as a more rigidly decreed regulation or short-term legislation.
The cost of not doing so might be making coronavirus far more economically damaging than it needs to be.