A Ruthless Proposal

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We've waited too long to take the coronavirus seriously in the U.S., and there are now limited options for dealing with its fallout.

None of them are very good, so a debate is raging - not without merit - as to whether the proposed cure of a temporary economic shutdown is worse than the disease itself.

As regular readers will appreciate, this battle is what I’ve been most concerned about since day one in the U.S., as I feared it would lead to lengthy decision paralysis and infighting, and worsen the crisis exponentially.

Indeed, we now seem to have a mob that’s primed to start a civil war over our bad options because the camps are split between how to balance first-order costs (the health crisis), and second-order costs (the economic crisis and all of its potential collateral damage).

As Scott Gottlieb pointed out (in his typically cogent way):

"There’s a strong and understandable desire to return to better times and a functioning economy. But it should not be lost on anyone that there's no such thing as a functioning economy and society so long as covid-19 continues to spread uncontrolled in our biggest cities."

Well, I have a ruthless proposal that splits the baby, but would probably prevent total collapse.

As you know, I am not a policy guru, economist, financial wizard, health expert, or anything else that would make me “qualified” to opine on this. But the experts have utterly failed so far, and I’d like you to humor me and my attempt to infuse some common sense into the equation.

The solutions are straightforward, even if the execution is difficult, but what I propose below would give us 30 days to figure out the implementation protocols.

Four Phases
This four phase approach would require a herculean effort from healthcare, financial, and military leaders to get things right. But if we got this even 75% correct, it would be our finest hour.

+ Immediately: "shut down" the U.S. economy, interstate borders, and markets for 30 days; militarize the COVID-19 healthcare response, prioritizing QALYs.
+ By Monday: Implement universal basic income for furloughed employees; "suspend time” on fixed cost payments and reset duration of financial contracts for 60 days; pause payroll taxes
+ In 30 Days: Bifurcate red zones & green zones; ease some travel restrictions; implement tax incentive programs and selective industry bailouts.
+ In 60 Days: Mostly business as usual. If Wuhan can reopen in 2.5 months, then so can we. If our 60 day plan is sharp enough, then we might actually see a "V-shaped” recovery.

Before I go into these in detail, I should first remind you that the base case is pretty awful.

The "do nothing" solution espoused by the economy-first Florida and Texas governors will likely prove immensely costly not only for their states, but for the entire country, even if the full effect of their lack of seriousness isn’t felt for weeks.

We’re already looking at hundreds of thousands of deaths depending on the speed and severity of our response. But a continued lack of coordinated and enforceable containment measures might make today’s catastrophic economic forecasts of ~25% dip in GDP and 20% unemployment look rosy.

The good news is that we have three things going for us: the global reserve currency (which is gaining strength in spite of the Fed’s money printing); the Fed, which is the only policy maker that isn’t currently fast asleep at the wheel; and the world’s best military.

Most of what I propose is possible because we know the US Army and Fed will pull out all the stops to win.

Phase 0: Shock and Awe
Create a national, enforceable, temporary shut-down of non-essential travel and gatherings, and do it effective immediately in order to prevent panic and mass migration from major cities or “hotspot areas". Creating forewarning would defeat the purpose, as you’d just accelerate the spread from "red zones" to “green zones.” (See Italy.)

This would have to be done in conjunction with a stock market shutdown for an equal length of time. Unprecedented, but necessary. The market shutdown would need to be long enough to demonstrate that the extreme efforts had successfully flattened the virus’s curve, and that Phase 1-3 were well planned and underway or ready to credibly implement come late April.

We'd want at least a month, based on the virus’s incubation period.

At the same time, we’d need to see a bifurcation in the healthcare system between COVID treatment and everything else. We’d fully militarize COVID healthcare to take the gut-wrenching triage decisions away from individual hospital leaders and into a wartime protocol that prioritizes care based on expected quality-adjusted life years saved (QALYs). This would be controversial, ruthless, and utilitarian, and the military is the only leadership we have with the stomach and training to make those decisions.

Ironically, the only President in my lifetime who has seemed ruthless enough to pull this strategy off is likely President Trump. He just needs to prove he’s actually got some cojones.

Phase 1: UBI & Time Warp
If you look at Phase 0, there are two obvious problems that arise: people will lose jobs, and companies will go under as they continue to pay fixed overhead costs.

A temporary universal basic income and fixed cost suspension could keep personal and business P&Ls in survival mode for the duration of this crisis.

The average American household makes $63k per year, and spends $10k on housing, $9k on transportation, $7k on taxes, and $7k on utilities. Here’s a full typical household budget:

A better form of stimulus might be one that pairs a one time payment of $1,000 for all adults and $500 for all children, with a national unemployment benefit of $1,000/month for adults throughout the rest of 2020.

That could be paired with 60 day fixed cost suspensions including payroll taxes, rent, utilities, and all outstanding debt service (mortgage, automotive, education, other). This would alleviate fixed cost burdens universally, and normalize for areas with higher costs of living, so the UBI can prove sufficient at scale.

Land, buildings, cars, and financial assets are “stock” assets, and their value won’t be materially diminished because the income they produce is suspended for two months in a near-zero interest rate environment. For the back-office complications that might arise from such massive changes to debt duration restructuring, we have the Fed as the “unlimited lender of last resort” and some smart financial leaders who could untangle the contracts and chaos, which are almost certainly less complicated than those of the '08 recession.

To overgeneralize, there will be two types of companies to worry about during this shut-down: operational, and non-operational.

Operational companies will conduct business as usual, and receive a combination of payroll tax relief and fixed cost suspensions that help incentivize their hazard pay, and minimize the impact of customer weakness. For these companies and non-operational companies, the option to have employees enroll in the national unemployment/furlough program will allow them to layoff workers, but re-hire them once the economy comes back online.

We’d need to address the issue of how best to handle childcare for “essential employees,” but that seems like a solvable problem as well.

Phase 2 - Pork and Restart
The above would be extreme, but they would give the public and private sectors time to regroup and plan for an economic restart, while crushing the coronavirus’s momentum.

The thirty day planning would include details on how best to mirror the effective efforts in South Korea, Taiwan and other non-authoritarian regimes once we are through the worst of the crisis. We’d have protocols for bifurcating crisis zones into red zones & green zones after the 30 day suspension is lifted, and ensuring most young, healthy workers could gradually get back to work. This would also be enough time to allow policy makers to implement incentive programs that encourage financially healthy consumers to spend their stimulus checks and help restart small businesses. Enough time to let the pork barrelers pork, and fight for their pet bailouts.

Finally, we could re-open the financial markets with confidence that the worst - whatever it was - was likely behind us. The stock market could find its bottom, and those who need liquidity could sell their investments. We’d hit ’08-’09 levels, but hopefully rebound sharply from there if containment efforts continued to work.

Phase 3 - Back to Business
If Wuhan can reopen in 2.5 months, then so can we. If our 60 day plan is sharp enough, our leaders and citizens are brave enough, and our collective will is strong enough, then we might actually see a "V-shaped” recovery.

The interim 60 day monetary intervention would be immense, but manageable, and we’d likely find that the global economic system would be healthier with a dollar that survives, and a U.S. economy that ruthlessly eradicates its cancer.

No one - American or other - wants the U.S. to enter a depression or worse, to devolve into a failed state.

I’m eager to hear your thoughts, because I’m nearly certain the alternatives to this proposal will be less effective, and far more disastrous from an economic, social, and health outcomes standpoint.

The response to this shouldn’t be “this won’t work because…”, but rather “here’s how we will make this work…” because the stakes are unfathomably high.

Stay safe!

-TBI

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