9 Things Canadian Governments Can Do to Avoid a “Social Distancing” Economic Tragedy
Flattening the Coronavirus curve is going to bankrupt a lot of people and businesses if drastic and immediate action isn’t taken.
For some reason, the Canadian government has rolled out the 2008/9 financial crisis playbook to solve the short-term complete collapse in demand caused by the coronavirus. Lower interest rates! More debt! More announcements to come! (Let me guess…infrastructure? More more debt?)
There’s one major problem. This is not a financial crisis.*
The measures being taken to “flatten the curve” and avoid an unmanageable coronavirus outbreak are creating a short-term cash crunch for a lot of people and many small to medium sized businesses. This is the problem we need to solve and it won’t be solved by easier access to debt.
Look, this situation has spiraled fast, so let’s give the government a pass on using tools that are familiar to them for now. They have a chance to fix their approach over the next couple of weeks before April 1 rent cheques are due, and I’m going to lay out some ideas on things they could try. But first, let’s talk about who we should be trying to help and who we should be asking to bear the burden.
Society is asking a lot from people and we need to have their backs
For healthy, working-age individuals, the risks of coronavirus are low. So, when we ask them to engage in social distancing, we are asking them to make a personal sacrifice for the good of the more vulnerable in our community. For those with permanent, full-time jobs with established companies, the financial hardship of this is probably limited. For others, this is a complete and total disaster. The inequality in outcomes will be staggering.
Across the economy, temporary and part-time staff are being laid off. Freelance work is being postponed. This means no income at all for a significant number of people — more than a third of Canada’s workforce is in something other than a full-time job. For many of them, EI won’t be helpful; few people who are self-employed or freelancers are even eligible for employment insurance. Meanwhile, their expenses haven’t changed. Rent, debt payments, utilities — all of that continues to be due.
When we cancel large events and ask people to stay home, the impact on small business is immense. Unless you sell toilet paper, retail stores are all empty. Restaurants are ghost towns. A friend of mine who owns a co-working space is facing massive pressure to close (social distancing!), even though that will almost certainly mean she will go out of business. And she gets it — she’s a wonderful person and wants to be part of the solution. But she has put all her money and the last two years of her life into the business, and it could all be gone in an instant. Her story is far from unique. I’ve been in and around small business for 25 years and never seen anything like this — the total collapse of healthy businesses in a matter of weeks.
We are demanding behaviours from people that will have terrible financial repercussions for them. And we need them to comply. We have an absolute responsibility to help them weather this storm.
Lower interest rates and additional debt capacity won’t help
The two main responses to the crisis have been the Bank of Canada reducing its interest rate and the federal government providing $10 billion in loans to small and medium business through the Business Development Bank of Canada and the Export Development Bank of Canada. It’s pretty clear that neither of these will directly help individuals, so the goal must be to help businesses who will, as a result, keep people employed that they would otherwise have laid off.
It’s easy to see why this is an absurd proposition, and we can use my friend’s co-working space as an example. She (until recently) employed several people. Imagine her calling the BDC and saying: “Look, because of social distancing my revenue is down 80% in a week and I may not be able to pay the rent. I had to lay off most of my staff. The government may force me to close at any time. Can you lend me $50K?” There’s literally no chance she would get the loan, no matter what guarantees the government provides. And she’s exactly the kind of business we’re trying to help. Think of your local (non-chain) coffee shop, or day care, or dry cleaner, or your favourite restaurant. Think about them being empty, and then begging for a loan.
And what does a loan do but create a problem later? These are not businesses that can afford to take on additional debt. And it’s not as if BDC loans are cheap! They generally run 8% or more.
I know there’s the general perception that these measures helped avoid a depression in 2008/9. But that was a very different type of crisis. Each crisis needs its own approach to deal with its specific needs.
If the tools we used in the financial crisis won’t help, what will?
Simply: not paying rent. I’m serious. Justin Trudeau said this week that “We do not want any Canadian to have to worry about whether or not they are going to be able to pay their rent, whether or not they are going to be able to buy groceries or care for their kids.” Well, if that’s the goal, speedier EI payments, lower interest rates and more debt just won’t cut it. The way to ensure Canadians don’t have to worry is to temporarily reduce or eliminate their short-term cash costs without creating a burden for them down the road.
So, let’s try to reduce the cash costs of the people and businesses we’re trying to help. For this exercise, our goal is to reduce expenses during the months of April to June. Our targets are rent, mortgage payments, car payments, credit card interest, utilities: all the major expenses that will crush families and small businesses who don’t have the float to get them through a temporary massive reduction in income.
It’s important to remember the scale and seriousness of the situation, and how unequally it’s distributed. It’s worth repeating here. People with full-time jobs in government or established businesses will not likely experience any reduction in their income, while part-time, temporary and freelance workers, as well as the owners and employees of many small businesses may see their income entirely eliminated. We cannot allow this to stand.
We need to shift the burden from those who can’t afford it to those who can
If we can’t let the burden fall uniquely on those least able to handle it, where should it fall? Who is most likely to survive a three-month cash crunch?
There are three obvious groups who can help:
1. Government. The ability to borrow at very low rates and print money allows the government to suffer any short-term decline in revenues and still meet obligations.
2. Big Banks. Canada’s biggest five banks are extraordinarily profitable and have the cash reserves to manage almost any short term decline in revenue. They can also borrow from the government at very low rates.
3. Landlords. Companies and individuals who own and rent property will often have very low real expenses other than debt payments. So, as long as they can meet their debt obligations, almost all of them would be able to survive a few months of unpaid rent.
How do we shift the burden that society is imposing from the people and business who will not survive three terrible months to people and businesses that will?
The answer is in asking the three groups above to take a series of large and painful steps to lower the short-term expenses of the Canadians most affected by the crisis. Here are some specific ideas:
1. The Federal government should meet with the CEOs of the big five banks (virtually, of course!) and figure out how to postpone principal payments and waive interest payments on all property and automobile debt up to some amount for the months April to June.
2. Similarly, all business loans up to a certain amount should be granted a principal holiday from April to June.
Government and the big banks can negotiate the sharing of the cost of numbers 1 and 2. But it should not fall exclusively on the government, as you will see there is a significant burden on them outlined in steps 6, 7 and 8 below. Banks should be asked to aim for net zero profit over that time period (and possibly through to the end of 2020), which will have no impact on their long-term outlook, a minimal impact on their share price, but a tremendous impact for people in great need of short-term cash flow. We can’t get caught up worrying about bank shareholders. Shares are valued on long-term expectations of a company’s performance, not short-term cash flow. There’s a strong argument to be made that a healthier economy coming out of this crisis will be better for the banks long-term, and these initiatives will help achieve that even though it comes at a short-term cost.
Because we’ve taken these measures to reduce property debt costs in step #1, we can cascade those savings to the people who really need it most: small business owners and people who rent. That’s where the owners of property need to play a role:
3. Canada’s largest commercial and residential landlords should be asked to waive rent payments for April through June for individuals and small to medium-sized businesses.
4. Short-term tax incentives and tax penalties should be brought in to encourage smaller landlords to waive rent from April to June. Property income and revenue are reported to the CRA every year. Landlords that can show they waived rent for their tenants (commercial and residential) should see their income tax on that property reduced for 2020. This, along with the reduction in debt payments, should be a significant incentive and will make this request far more manageable. Landlords who choose not to reduce their rent, which would show up as them having income in 2020 that’s similar to 2019, should be forced to pay significant punitive penalties when they report next year’s income tax.
Auditing numbers 3 and 4 will be hard. Will some people cheat and find a way around this? For sure. Will they get away with it? Maybe. But they’re assholes, and these are desperate times when we should be trying anything and everything. Most will comply. The benefits to people are immense. We can also count on social media. Tenants everywhere would be posting about their landlords that didn’t comply. That social pressure will mostly work.
5. Credit card providers should waive all interest charges for individuals and small businesses up to a certain amount for April to June. This will provide additional float for companies and individuals until income returns.
6. Given we’re in the midst of income tax season, the Canada Revenue Agency should shift as many resources as possible to processing income taxes where refunds are due to taxpayers. All requested refunds should be processed with minimal review, postponing those reviews until after the crisis. People should be encouraged in a massive marketing campaign to file early, with the promise of speedy refunds.
7. Provincial governments should, effective immediately, postpone collection of sales tax for all business with less than a certain amount of revenue, and obviously charge no interest on delayed payments. This is much better than a loan! It gives small businesses and some self-employed people a small float to get through the cash crunch without adding to their liabilities. Depending on what happens, this tax may eventually be forgiven, but for now let’s assume it’s collected exactly one year later, in 2021.
8. Provincial and municipal governments should move to reduce or eliminate household and small business utilities costs under their control for the months of April to June.
9. Property tax collection should be temporarily suspended. Federal and provincial governments should extend loans and grants to municipalities to support these efforts.
To summarize, these efforts will drastically reduce the cash costs of people and small businesses and provide them with some additional short term cash flow, allowing them to survive the potential elimination of all income over the next few months. All of the above should be means-tested but without making it so complex that the help doesn’t get to those who need it.
I know this isn’t comprehensive and there are holes. The big five banks don’t hold all the debt, so we will need to think through credit unions and other credit providers. Some of this help will go to those who don’t need it. Especially in the case of landlords, we’re relying on a lot of good will.
But time is short, and we need to prioritize. If we continue down the current path people are quite simply going to go bankrupt, and in huge numbers. Some will never recover. It doesn’t need to be this way. If we’re creative, and ask (force) those that can, to give more than they’ve ever been asked before, we can save those who will be put on the edge by this crisis. And the only sacrifice will be short-term profits.
It’s possible that the federal government is working on a package like this, but I think there’s good reason to worry that they aren’t. Justin Trudeau recently limited his concerns about the economy to “slowdowns in the tourist sector” and the fall in the price of oil. In his Friday press conference Finance Minister Bill Morneau talked about being in constant contact with the banks, and that “they aren’t seeing any challenges around credit.” I mean, who cares? We’re so traumatized by the 2008/9 crisis that we are thinking of the health of the financial system before we consider the challenges of everyday Canadians.
Our governments need to listen to other voices and limit the influence of the big banks on their thinking if they’re going to develop an economic package that will really help people.
Coming back to my friend, having gone through her numbers, I know that the measures I outlined would actually save her business. It would reduce her expenses to the bare minimum, allowing her to skate by on minimal revenue with the cash she has left in the bank. Once people started coming back after the worst of this is over, she would be able to hire her people back, giving the economy a boost. The alternative might be another shuttered storefront that would need months to be rented, renovated and ready to contribute. Which of these is better for the economy’s long term health? Isn’t it obvious we need to do a lot more than loans?
People are making hard choices all over the country to put society’s interests above their own. We simply can’t let a lack of creativity and boldness on the part of our government damn those people to suffer for making the right choice. We have two weeks before end of month to get this right. Please, please, please let’s not hear any more talk of interest rates, new loans and infrastructure. When the new package of supports is announced over the next couple of weeks, let’s make sure we’re focused on this crisis, and not the last one.
*Certainly this could become a financial crisis. And the government and the central bank should try to avoid that. But because we have PTSD from 2008/9, we now think every crisis is primarily a financial crisis. It’s simply not true. This crisis is PRIMARILY a consumer demand crisis caused by society’s health concerns, and should be treated as such.