We should compensate business owners for lost income and help with wage payments.
The oil market is down, stock markets are falling and the streets are empty. A virus has brought the global economy to its knees. The most important thing now is to reduce infections, but economic measures have enormous impacts. Which companies will survive, and what will the economy look like when we are through?
The short answer is that if we do nothing, bankruptcies in sectors like travel, arts, retail and service will increase to levels that will make the economy unrecognizable. At the same time, the physical world remains, airplanes still work, shops still exist and so does the human capital.
Two questions emerge in this situation:
- Who should pay for income losses resulting from the crisis?
- Who should own companies after the crisis has passed?
Society must intervene
A market-based economy decentralizes decisions. The market is an information coordination device where consumers vote with their wallets – thereby sending signals to companies. The companies compare these signals to costs when making decisions about production. This is a smart way to do things in ordinary times because millions of heads decide what should be produced where.
There are however situations where market-based solutions do not provide the best results for society. In order to reduce infections we now have to slow down economic activity. The effects are asymmetrical and force us to take economic measures. If we think that people should be protected from events outside their control this means we as a society must work to ensure neither income nor ownership should be affected by the virus.
As an example, consider a restaurant owner. She owns all her kitchen equipment, but rents her property. When the crisis hits, she lays off her staff and halts orders for more goods. If the crisis lasts, she will face bankruptcy because she cannot pay rent and interest. Nevertheless, her employees retain their skills, and the kitchen equipment still works. After the crisis is over, someone who has weathered the storm can buy what remains of the restaurant on the cheap and reopen.
If we allow this to happen on a large scale, it may signal to entrepreneurs that they should abandon their innovative ideas and instead go for safe alternatives. To avoid this situation, society (the taxpayer) can compensate business owners for some of her lost income, help with wage payments, and give affordable loans and VAT-exemptions. This will allow companies to survive the crisis and send the signal to budding start-ups that they should carry on.