The financial crisis brought us the Tea Party, it looks like the pandemic is bringing us the yet to be named anti-lockdown party. Ideological lines have begun to be drawn about how to tackle the next phase of the pandemic and the brief unity we enjoyed in order to slow the progress of the virus seems to be starting to fade.

On the one hand, there are those that feel that lockdown needs to continue because it is saving lives. This is true, social distancing is flattening the curve in the hardest hit places like New York. On the other hand, there are those who feel that the lockdown has put an unnecessary stranglehold on the economy and worse may be to come in addition to the virus, if we don’t start getting back to work soon.

In essence, both sides have a point. If we look at it purely in terms of saving lives, which most medical professionals do, we need to lock down for as long as possible to slow and prevent transmission until a vaccine is found. The reality is however, that there is no white night vaccine that seems to be on the horizon in the coming months and that the extreme lockdown of everyone has only just bought us some time. Even if a vaccine is found and tested in the coming weeks as is hoped in this feature, there is good reason to believe that due to the logistics and constraints of production, that a vaccine would not be able to be distributed to the entire world anytime soon. The temptation for a national government to give priority to their own citizens first for any vaccine will be strong, one reason so many countries are working in parallel to be the first to find a vaccine.

The mainstream media has focused on the cases where relatively young and healthy people have died due to the virus but this is not the norm. It should be acknowledged that this happens and some young people may be at risk and therefore everyone should take the necessary social distancing precautions, but this is not the norm. Most studies have shown that the virus tends to kill people over 50 and especially those over 70.

As I described in this post, the working age public are essentially making a sacrifice in terms of the economy to save vulnerable people. This is morally the right thing to do and I believe a temporary stoppage was necessary so as not to overwhelm the healthcare system and produce more unnecessary deaths. In an ideal world, we would all social distance until a vaccine is found which could save hundreds of thousands if not millions of lives. Unfortunately, we don’t have this luxury because we simply can’t afford it. This is the uncomfortable truth that is pushing some national and state governments to start to open back up despite the knowledge that it could lead to preventable deaths.

Tightening the Belt

There are a number of reasons why we can only afford to be on total lockdown for a few months and they include:

• Most businesses in the US are small employers and most of these do not have the cash on hand to last more than a few months, or even one month for that matter.Source: JP Morgan
• The relief provided to small business by the government is only temporary and will only last 8 weeks.
• States have taken the brunt of the burden on and they do not have the resources of the federal government. There is a real risk of some state and local governments could become insolvent as revenues dry up due to lockdown and the cost of dealing with the virus explodes. The National Governors Association estimates state may need an additional $500 billion.
• The government is only going to have so much firepower. We are already approaching the highest levels of federal debt that the country has ever had and we are already starting to see political backlash to further bailouts.

In essence, the shutdown bought us time. In the case of the healthcare system, this time should have been used to secure further medical supplies and ready the hospital and funeral system for elevated sickness and death in the coming months. There isn’t evidence that the US has been very diligent or successful in this regard, another reason why some want to continue the lockdown. There isn’t much reason to believe though, that state, local, federal governments and hospitals will be able to get it together in this regard if we wait a few more months. They have had over a month and many still seem to be struggling with their preparedness, I doubt giving them more time would drastically change the situation.

As I described in this post just the fact that we have the resources to lockdown and still pay people something and feed ourselves counts the US as one of the lucky ones. The world is becoming more aware of what the pandemic looks like for those countries that can’t afford a lockdown due to weak government finances or financial mismanagement that predated the epidemic. Ecuador is one of those places. The government defaulted on its international bonds a few years ago and is likely to do so again in the face of this virus. This will shut the government out of the capital markets and put a stop to any additional measures to assist people during the a lockdown. In contrast, the US has funded all of its stimulus with debt which is also issued at historically low interest rates due to the Fed cutting rates and appetite from investors who continue to view the dollar as the world’s de facto reserve currency. What the pandemic looks like when the government doesn’t have the ability to borrow can be see here.

Congress CARES

The idea that many of us will have to head to work soon became clear to me in the two roles I have on opposite sides of the CARES relief package passed by Congress a few weeks ago and extended this week. On the one hand, I work in a client facing role at a bank by day. On the other hand I sit on the board of a charity which was approved by a bank (not my bank) for a PPP loan.

The bank side of my day saw corporate clients draw down their lines of credit as soon as rumors of the lockdown hit. Large companies were doing this to scramble to meet any liquidity needs they had during the lockdown to keep operations running. The risk now shifts to the bank especially if some of these companies fail because the banks will be left holding the bag.

The other side of the coin was with my charity which had to completely halt operations and figure out how to survive during the downturn. The solution seemed to be the PPP loan, which was designed to keep businesses paying workers temporarily. After reviewing the (brief) terms of the loan, there is good reason to believe that this won’t happen for many businesses for the following reasons:

• Congress tried to create an incentive to pay workers by saying that the portion of the loan paid to workers as if they were working full time would be forgiven. This essentially made it a grant if you used it for that purpose. However, the loan amount is typically for the average 8 weeks of expenses and if your company’s employees are most of your overall costs, it is essentially a giveaway to the workers and almost all of it may be used to pay them.
• The interest rate is a flat 1% so is likely more attractive than the line of credit that many companies have with their bank so their is a strong incentive to take the PPP loan as opposed to a market rate bank loan.
• If you choose not to use the loan for payroll, the funds just become a typical loan which is siento be repaid in 2 years. I suspect that this 2 years will be extended, especially if there is a prolonged economic slowdown.

What the above means is that if a business owner with high labor costs takes the most conservative approach, even with the loan, the incentive is still to furlough all their workers and keep the money as a cheap “just in case” fund to whether the crisis and hope they can pay it back when times are good again. To me this seems to go against the spirit of the act, which seemed to be aimed at keeping workers employed and giving them their salaries while they were on lockdown. The way the act was designed though, it creates little incentive to do that. Rather, businesses will likely still lay-off or furlough their workers and will keep the money to try and ride out the pandemic.

Conclusion

The fight over going back to work is just gearing up. My suspicion is that we will eventually make a compromise between the two conflicting themes: getting back to work versus suppressing the virus. This may look like partially going back to work with rotating shifts to maintain social distancing and more heavy work from home than pre-pandemic for those that can. The choices from this point on will just get harder.

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