Pandemic Pause
By: Trishan Arul
Tags: Unemployment, Congress, Economy, Stimulus, Covid 19 Crisis

At this point, it’s unclear if we’ll get some COVID relief as Republicans & Democrats tussle over their priorities. The current approach of minimal fiscal stimulus from Congress coupled with monetary stimulus from the Fed has exacerbated the “k” shaped recovery — financial assets like stocks are at all time highs benefiting high income people while lower paid workers in the service sector are struggling with unemployment and mounting bills. Aside from the immediate humanitarian crisis, this will not end well for the economy as a whole.

Some of the original COVID relief like the Paycheck Protection Program (PPP) was good but could be improved with better targeting and restrictions. Also, some form of Pandemic Unemployment Assistance (PUA) was badly needed but paying people a flat amount which in some cases was over 100% of prior earnings was counter productive. Other programs like cash payments for people who hadn’t lost their jobs was likely costly relative to the benefits; especially since it came when the sectors most in need of stimulus money like travel & hospitality were, and in some cases still are, shut down and unable to benefit from that stimulus spending.

Are there better solutions? Here’s one small idea and one big idea:

Provide PUA of up to $500/week but only up to a percentage of pre-pandemic unemployment (say 80%) and extend the duration at decreasing levels as the unemployment rate falls in each state or region of the country. So as unemployment falls below 6%, the maximum falls to 70% and so forth. This automatic stimulus will provide an incentive to return to work only when there are jobs available for people. It will give people time to find the best job for their skills which will benefit the entire labor market. Best of all, an automatic sunset tied to the economic recovery means we won’t have to rely on Congress to re-approve extensions or pull their regular shenanigans like shutting down the government. OK, this is the big idea: PAUSE residential and small business rental and mortgage contracts. Not just another eviction moratorium or more time to pay but simply allow people to pause their payments and continue where they left off once we are past this crisis. The current housing “relief” measures have led to people racking up months of overdue rent payments with little hope of ever catching up. If you can’t pay a single month’s rent because you lost your job, how are you going to pay 6 months of rent all at one time? You can’t. This will undoubtedly lead to an unprecedented wave of bankruptcies which will have ripple effects throughout the economy for everyone for many years. Congress’ refusal to pass additional stimulus during the Great Recession led to years of lower GDP, this will be much worse. (Side note: Funny how the GOP only cares about the debt & deficits when the President is a Democrat. Also odd how they continue to tout the idiocy of the Laffer curve to justify tax cuts while being unable to grasp how a relatively small stimulus during a recession will lead to huge returns of compounded GDP growth rates forever🤷🏽‍♂️). The Pandemic Pause is such a big idea, I’m going to dig into it in more detail below.

That’s it, two critical pieces for us to financially survive the pandemic. Of course, there are plenty of other things that are badly needed like another round of PPP for small businesses plus aid to state & local governments. There are also things that we don’t need like more corporate handouts & bailouts as folks like Chamath have railed against. I’ve focused on these two items which affect individuals and families. People who vote. Vote for the politicians who need to enact this new stimulus.

Why will a Pandemic Pause help?

The current situation helps no one. Amassing many months of overdue rent payments creates massive debts which people can never repay. It’s simply absurd to think that someone who was struggling to pay their bills and didn’t even have $400 of savings while they were working, will all of a sudden come up with four, five, six+ months of rent as soon as an eviction moratorium ends. This huge debt will lead to a wave of bankruptcies and extend out the current economic problems for a very long time after the pandemic itself ends. For virtually every person and small business, their biggest expense is their rent or mortgage. Providing relief from this huge expense, coupled with extended unemployment money, will enable most people to make it through the pandemic until they can economically recover with a new job, get through an illness, home schooling, or whatever is keeping them from “normal”.

How does the Pause work?

People who have been affected by COVID can opt-in to pause their rental or mortgage payments for themselves or their small business. That means they don’t pay anything during the pause. This lasts until they opt-out or until their region of the country has reached a reasonable level of recovery primarily determined by the unemployment rate. For every month which they paused payments, they will extend out their lease or mortgage term for one month— just as hitting pause on a movie for 5 minutes means it will take 5 minutes longer to reach the end. This Pause avoids the compounding debt problem and also provides the mental relief needed to tackle their personal situation. The Pause would also expand upstream so if a renter pauses their rent payments, the landlord could pause their mortgage payments.

Won’t this be abused?

There will always be people trying to scam the system but this won’t be abused more than any other relief program. People will need to certify that they were affected by COVID through a job loss, not being able to work from getting COVID or taking care of someone else, needing to quarantine to protect themselves or a household member being in a high risk group, etc. It can’t be too narrow but also needs to be reasonably broad.

Who would pay for this?

That’s the best part, hopefully no one! In the interim, the Fed would underwrite the program but similar to the Auto Bailout during the Great Recession, this could cost taxpayers nothing. While payments are paused, the Fed through a new agency (similar to Fannie or Freddie, let’s call it Pandie) would make payments to mortgage servicing companies or landlords. When the Pause ends, those companies and landlords would keep collecting payments for the same number of months. They would remit those funds back to Pandie. At this point, Pandie will have amassed a large portfolio of future payments at varying intervals. For example, a lease with 7 months left that’s paused for 3 months, results in 3 months of Pandie payments starting on month 8. Or a mortgage with 6.5 years remaining that’s paused for 6 months results in 6 months of Pandie payments staring on month 79. Combining all of these paused payments creates a large stream of payments with varying amounts, terms, and maturities. What can you do with a large stream of payments? Wall Street knows — create new securities. Pandie, as a government backed entity, can guarantee these new securities and sell them to investors at low rates. With Treasury rates going out 10 years at less than 1%, Pandie can use the difference in rates from the mortgage payments to pay for program administration and to fund defaults. Is it risk free? No, but it’s a lot cheaper than the current stimulus payments! And it targets relief only to people who actually need it.

Why is this better than stimulus checks?

Stimulus checks sound great and are politically popular since everyone loves free money. The problem is, it isn’t free. Every dollar spent on stimulus is a dollar not spent on other government spending priorities or is added to the deficit piling on to our country’s record debt level. Beyond the cost, stimulus is not targeted — this is key for an effective stimulus. Money should go to people who most need it and who will SPEND the money. This both alleviates poverty and gets more money flowing through the economy to spur growth for the country as a whole.

Isn’t this a crazy idea?

Maybe. Please respond and tell me why you think it is. No doubt, there are lots of details and legal issues to work around. But no less than the original COVID relief bills. And it’s less crazy than continuing to bailout particular industries and businesses to buoy up Wall Street while Main Street is dying. Far less crazy than doing nothing and suffering with an under performing economy for years to come.

Great idea, why don’t we do it?

I don’t know why we’re not doing it and haven’t already done it. Contact your member of Congress as well as both your state’s Senators and demand that they take action now!