America’s Fight for Economic Normalcy

Media outlets, economists and plenty of smart people are hypothesizing on what will be the new American normal post-COVID-19. These crystal ball readings range from the political and economic to the environmental and psychological. It will no doubt change the way we live, work and engage with others and our environment. But what’s most important right now is understanding, and mitigating, the near-term psychological and economic impacts on all Americans, most notably the 32M+, largely working-class Americans employed by the retail sales and hospitality & leisure sectors (collectively 21.5% of all U.S. jobs).

These sectors will shed millions of jobs with the risk of prolonged or permanent job loss given (i) pre-COVID-19 consumer & business confidence levels might not return for years and (ii) surviving businesses in these sectors will expeditiously search for ways to automate or permanently reduce labor (e.g. ghost kitchens v. restaurants) to better manage future demand shocks. This is America’s current psychological conundrum. These sectors employ millions of “unskilled,” low wage workers. These individuals lack savings to financially weather this storm as well as the education/training to find new work. Add to this already dire picture the fact that millions of working-class households living in urban job centers are severely rent-burdened thanks to last decade’s record urban apartment rent growth. This is America’s current economic conundrum.

With U.S. consumer spending representing ~70% of U.S. economic activity, as consumer spending goes so too goes the U.S. economy. What’s truly unique about this impending economic downturn is that solving the psychological conundrum and kick-starting spending isn’t only reliant on restoring consumer confidence, it’s reliant on restoring confidence in physical human contact. Until Americans feel adequately safe to congregate, high human contact industries like lodging, transportation (airlines, taxis, buses), retail and restaurants will feel a pain that no economic downturn in our lifetimes has inflicted.

How this health crisis is managed will therefore dictate the near-term and future job prospects of millions of out-of-work Americans, and, as a result, the social fabrics (and real estate values) of American cities as we know them. The millions of newly out-of-work Americans on the lower end of the wage scale have scraped by over the last decade by using readily available credit (auto, payday, consumer loans etc.). This scraping by, kicking the can down the road mentality works when credit and jobs are plentiful. But today both are not. Now millions are struggling to pay rent and provide other basic needs for their families due to lack of savings.

If this doesn’t scare all Americans, it should. While America’s working-class may not make a lot of money, they do spend. They are who companies pay Google and Facebook billions to market to. They are who companies like Ross Stores or Macy’s sell to. Those lucky enough to return to a hotel, retail or restaurant job will likely be in more debt thanks to permanently lost income and deferred rent obligations while those who don’t find new work are removed from the economy all together. The popular argument these people should further their education falls apart if they can’t find a job to sustain their basic needs while in school, let alone take on student loans. If a significant portion of these 32M people stop spending for an extended period of time, other industries like tech or business services stop hiring (or start firing) and stop spending on things like advertising, employee perks, consultants and enterprise software. Also keep in mind that mercurial venture capital funding is propping up hundreds of thousands of “skilled” jobs at unprofitable start-ups. According to economist and labor market expert Martha Gimbel, “people are being way too sanguine about a lot of the white-collar industries. This thing is going to come for us all (New York Times, April 2nd).”

Since 1950, the U.S. unemployment rate has only risen above 10.0% a combined total of ten months (nine months in the early 1980s and in October 2009). We could very well see twenty months above 10.0% in 2020–2022. Current near-term U.S. unemployment estimates range from 15.0% (Goldman Sachs) to 32.1% (St. Louis Fed). If we thought the 2008–2009 Great Recession was bad, anywhere between 15.0%-32.1% unemployment during 2020–2022 will be borderline catastrophic. To put into perspective, the peak U.S. unemployment rate of 24.9% occurred in 1933 during the Great Depression.

Today’s astronomical urban housing costs only add more fuel to the fire. In 1935, the Great Depression’s midpoint, the fragile financial health of urban U.S. households was at least buoyed by affordable housing costs. According to a 1941 report by the National Resources Planning Board, the average urban household spent 13.7% of their annual household income on housing. Today, according to Harvard University’s Joint Center for Housing Studies, the average percentage of renter households across the Top 25 U.S. MSAs that are either spending 30%+ of income on rent (rent-burdened) or 50%+ of income on rent (severely rent-burdened) is 49.1% and 25.7%, respectively. To see housing costs drop to 13.7% of median income, apartment rents would need to fall 50%-75%. That won’t happen without our entire financial system imploding. Apartment rents in many urban metros will fall, maybe upwards of 20%+ in some markets, but it won’t offer nearly enough help to millions of out-of-work Americans who are likely to be evicted. Pricey urban centers with large hospitality and tourism industries like New York, Miami, Los Angeles and San Diego could see 2–3x greater resident net out-migrations than ever before in 2020–2022 and U.S. consumer spending will plummet.

Though hard to imagine, this is an increasingly realistic economic scenario if we are not quicker and more aggressive with our medical and financial responses to COVID-19 today.

Medical Response

Americans should not be thinking of this as a 2–3 month health issue because it could just as easily be 6–12 months (or longer). Therefore, we must collectively exhibit a higher sense of urgency. We must all sacrifice our freedoms and stay inside and social distance as long as our health experts think is needed. That said, we cannot wait for a vaccine to restore consumer and business confidence. That’s 12–18 months away at best by most estimates (if even possible) and our economy cannot be closed that long. We need a more aggressive interim health strategy, one that dramatically ramps up testing, contact tracing, medical supply manufacturing and hospital capacity nationwide so we can gradually reopen our economy and at least partially restore consumer & business confidence to preserve millions of U.S. jobs.

Testing

First and foremost, Americans must feel confident about America’s COVID-19 testing strategy, both virus testing and antibody (serology) testing to check for immunity. Testing must be affordable, quick and readily available to all Americans with established tracing protocols when individuals test positive. Numerous Asian countries have been successfully using contact tracing. It’s something we’ll likely need to implement if we’re going to get our economy moving again soon. That said, all government agencies using contact tracing technology, such as Palantir’s Gotham, should be transparent with the American people and layout steps to discontinue use after the pandemic subsides to mitigate the warranted privacy concerns. Bottom line, we need (i) tens of millions of approved virus and antibody tests manufactured and ready for deployment nationwide and (ii) broad-based testing and contact tracing strategies by May 2020.

Healthcare Professionals

The tens of thousands of retired and student healthcare workers volunteering their time in both New York and California is incredible. It shows the power of having an on-call medical community and gives the American people a much needed boost of confidence. The U.S. government should go a step further and create a medical national guard. It should fund 100% of the tuition for 1–2M new licensed practical nurses (LPNs) and registered nurses (RNs) and offer a comfortable living stipend for these folks while in school. It’s a government-funded training program for millions of newly unemployed Americans to become on-call nurses. It will also pay future dividends as our healthcare sector expands to care for our aging population.

Medical and nursing students from the Top 50 medical and nursing schools should have their student debt forgiven, including those who are 1–5 years out of school or residency. Practicing doctors and nurses should also receive a 10–15yr government stipend totaling $5k-$60k/yr (dependent on practicing field). Doctors and nurses have always been among the most important workers in our society, and it’s time we better align their salaries with their efforts. We must instill confidence in all Americans that we have an adequate number of medical professionals who are well-trained, well-paid and student loan free (less stressed!).

Hospitals & Medical Supplies

We must develop more field hospitals on public lands (or hotels) and manufacture more medical supplies here in the U.S. over the next 12–24 months. Americans need to feel confident there are enough hospital beds and facilities are well-stocked with the necessary medical supplies if future waves of COVID-19 cases arise. Federal, state and local governments should agree on a concrete pandemic plan whereby military-like medical strategies enable cities to rapidly roll out field hospitals, including modular hospital rooms and leasing hotels. If manufacturing medical supplies like face masks or ventilators in the U.S. is not economically feasible post-COVID-19, public & private healthcare systems must ensure they stockpile more supplies and make inventory reports readily available to the American people. There should be no mystery around our health system’s medical supply inventory, mystery opens the door for unproductive and often dangerous rumor mills on social media. If healthcare systems can’t afford to stockpile, the government should work out ways to fill the void.

Many promising healthcare initiatives are already in process, but we must take more aggressive actions and federal-, state- and local-level coordination must improve dramatically to save lives today and restore consumer & business confidence ASAP. New health initiatives should be permanent, not temporary. We simply cannot be caught flat-footed in a health crisis like this again, no matter how unlikely a future global pandemic may be. Every American consumer and business must feel safe, our current and future health and economic livelihoods depend on it.

Financial Response

The U.S. government must stop offering solutions that make this crisis feel like a 2–3 month blip. It will not be and we’re wasting precious time by not fully grasping what consumers and businesses actually need.

Individuals

A $600/wk increase in unemployment benefits and the 13-week unemployment benefit extension was a very welcome piece of legislation, but the additional $600/wk lasts only four months. The one-time, up to $1,200 stipend (and $500 for each child) for every working American was also nice, but only a flash in the pan. These solutions are simply not enough to ensure millions of working-class Americans don’t become saddled with deferred rent or more high interest credit card debt. In addition to unemployment benefits and a $1,200 stipend, all Americans making under $60k/yr should be given the option to secure a $10k line of credit from the U.S. government at 2.50% interest and drawable over 18 months using a government-issued credit card. All drawn and unpaid debt after 18 months automatically converts to a 3–30yr, fully-amortizing loan. A loan’s term should be based on income, with low income Americans qualifying for up to 30yr loan terms to minimize their annual payment. Line of credit uses can be limited to groceries, rent, healthcare needs and interest on (or to retire) other debts. This program could be stood up using the same central bank emergency lending authorities being used to provide loans to Corporate America, as discussed below. If this isn’t possible under the current law, it should be changed. Payments could be run through the IRS and be made in quarterly installments or at the time of annual tax return submission. Americans who default on loans will have loan balances transferred to their income taxes owed and incur a higher interest rate. Giving every lower income American a cheap line of credit to tap for 18 months would make a world of difference. The government could even consider offering incentives to forgive loans if individuals further their education.

Real Estate Debt Market

The U.S. banking system is currently sitting on $1.7T of banking reserves versus only $44B prior to the Great Recession. Unlike the Great Recession, where lenders were forced to be reactive to an over-levered financial system they helped create, lenders in this crisis are healthier and should be proactive in their aid to borrowers. The government should mandate that borrowers with direct financial impact due to COVID-19 qualify for up to a 12 month extension on home mortgages, auto loans, consumer loans and payday loans with up to 12 months of payment deferrals at no increased cost. These lenders could tap the Federal Reserve’s $4T lending program to borrow funds to run their day-to-day businesses while loan payments are deferred. With holders of this debt (banks, investors etc.) facing the real possibility of principal loss by doing nothing, they should be amendable to a loan extension/payment deferral program. Apartment, retail and senior housing lenders should be required to offer the same loan extension/deferral program to all borrowers so long as borrowers agree to offer COVID-19-impacted tenants partial rent forgiveness and delay all rent increases and evictions for 12 months. Lenders to all other asset classes (office, hotels, industrial) should be required to allow at-risk borrowers the option to pay a fee to opt into an A/B loan structure, a method that reduces the loan amount on which interest payments are made (which becomes the A note) and creates a hope note with the remaining loan balance (the B note). Many at-risk loans could eventually end up in this situation anyway, so this is a proactive head start that can be reversed if cash flow recovers. Lastly, all commercial real estate lenders should be required to waive loan covenants for 12–18 months.

Retail & Apartment Landlords

Federal, state and local governments have all made efforts to stem the tide of potential evictions for retail and apartment tenants who cannot pay rent. Some cities have also banned rent increases during the crisis. Both are good steps and should be extended as needed. Many landlords are also offering rent payment plans, where rent is still due at a later date, for tenants who are directly impacted by COVID-19. Some landlords are even offering partial rent forgiveness. I applaud those offering rent forgiveness during this trying time and believe it’s something that all well-capitalized landlords should strongly consider. It’s times like these where tenant/landlord relationships can be either mended or further frayed. For our entire economy’s sake, let’s hope it’s the former.

Businesses

The Small Business Administration (SBA)’s $349B loan program enables small businesses to secure loans for up to 2.5x their monthly payroll to help with working capital (i.e. payroll, rent, utilities etc.). Loan interest is 1.00% and loan payments are deferred for 6 months. If small businesses maintain their workforce, don’t reduce employee pay and use up to 75% of the loan for payroll, the SBA will forgive the loan. Loan forgiveness is wonderful, but again, this program is too short-term. It should be expanded. What’s best for small businesses right now is to work with landlords (or lenders) on a mix of deferral and forgiveness of rent (or loan interest). If landlords are able to get loan extensions/deferrals or property tax deferrals, they should be required to pass this on to their tenants in the form of rent deferrals/forgiveness tied to lease extensions.

The government’s stimulus package included $500B for corporations which, using the central bank’s emergency lending authorities under the Federal Reserve Act, will allow the Fed to lend $4T+ to Corporate America. Corporate America employs millions of Americans and is the cornerstone of millions more Americans’ investment portfolios, so its health is extremely important. That said, corporate appetite for stock buybacks over the last decade did not go unnoticed. Companies that tap the Fed’s loan program are banned from stock buybacks for the term of the loan plus one year. The appetite for corporate debt over the last decade was also sky high, so the Fed should use extreme caution when lending to over-leveraged corporations. Only the strong should survive, as in every economic cycle. Some debt-laden household name brands will file for bankruptcy. However, if consumer confidence is restored quickly, these brands can reemerge with what is hopefully a more prudent operating strategy and capital stack.

We cannot drag our feet on implementing aggressive medical and financial measures any longer. Our ability to establish our return to normalcy timeline and avoid a depression will depend on how quickly we act (and the strategies we implement) in April and May 2020.