22 March, 2020

Cash is King! It's time for helicopter money for the CoV-2 induced loss of revenue from services - amalgamating all other claims

Countries and territories are responding to the economic ramifications of the pandemic

Emergency economic measures taken by many countries and territories in response to liquidity crunches by the SARS-CoV-2 crisis essentially foresee for generous compensation for short-time working arrangements as well as loans - sometimes secured by guarantees - and, if necessary, subsidies. These measures help the manufacturing industry; on the other hand, they take no account whatsoever of the special features of the service industry and thus of tourism. Rather, this sector should primarily be considered for helicopter money for legal entities (companies) but also for the self-employed, thus placing the emphasis on subsidies. Possible means of implementation: A negative lump sum tax.

Not everything fits all

The justification for this request lies in the nature of services.
Losses in sales in manufacturing industries that produce durable and capital goods can probably be made up in the years following this crisis. The procurement of such goods is often budget-relevant, which results in planning times; these plans can be extended, leading to higher sales in the future. Furthermore, producers of such goods can also simply increase stock keeping, assuming that these stocks can be reduced again at a later date.

In this context, "time" or the temporal perspective is quasi extended and stretched. Short-time working arrangements and bridging loans are certainly helpful, since they ultimately close the gaps that open up as a result of the shift in outbound and inbound payment flows. However, the sum of these payment flows – more or less - remain in place within a different and longer period than planned. The purchase of a screen, car or production machine can be postponed - provided the situation returns to normal - and procured later (always provided there is no urgent replacement threatening, which would then be immediately satisfied).

Not so in the service industry and even less, e.g., in tourism. It is in the nature of services that they are provided to or even together with customers and naturally cannot be put on stock. If they are not provided, they are irrevocably lost because they cannot be stored and time cannot be recovered (this is why they are affected by "perishability"). Once hotel rooms have not been sold, they can never be sold again. Once a potential haircut could not be provided, it will be replaced by continue to grow the hair or a self-cut. And the income has also been lost forever, meaning it cannot be generated in the future either. But costs, such as rent, capex, and other, are continuing to run. In addition, many services are often purchased on the basis of very short-term decisions; if such a decision could not be made at a given moment in time, it rarely comes back in a similar way.

General economic relief may become a threat in its own right - one must think alternative solutions

Urgent liquidity, which is not earned through sales but through loans and credit, will certainly provide some breathing space in the service sector. However, such business/ operational loans also lay the foundation for a long-term disaster, because the sales for repayment are lacking. As a result, they ultimately create additional indebtedness that cannot or can hardly be reduced. The problem with such loans is that they also have to be repaid. While, when the economic cycle goes into positive territory, demand in the manufacturing industry at least partially makes up for previous losses and loans can be repaid, this mechanism is missing in many cases in the context of services, due to the fact that time cannot be turned back.

One must rethink the relief measures for the service sector

The solution must therefore be to compensate for the loss of sales - if applicable -  by means of a generous supply of non-repayable subsidies, possibly by means of a negative lump sum tax. The basis for assessment could be the average of the annual sales from the worst two years within the last five years (this signals that the service providers are also bearing costs). The payout would be effective each month - neglecting seasonality. The number of months would still have to be determined, e.g. depending on the duration of possible government shutdown. It further could include a waiting period. Other criteria, unless they are objectively measurable and not dependent on considerations, could or should be dispensed with. Sales can be relatively clearly traced from the tax-relevant annual accounts; if someone has cheated on taxes, they will now be punished because the declared losses of turnover are smaller than the actual ones.

There are counterarguments which need to be considered

The objections that such measures would maintain unsustainable structures are justified. However, it could also be argued that with a temporary (!) helicopter money based on lost sales buys everyone a time window. Helicopter money in a context of services is a proxy for the lack of stock building(standstill of service production instead of stock build-up), but a stock that I can never sell (since services, as is well known, expire).

Sales-replacing subsidies could be a simple solution - on balance of all other claims! Maybe, and at the end of the crisis, government swap loans into sanitized equity… and just revoke from executing any associated rights. Who knows…

Find more about such an approach at https://voxeu.org/article/helicopter-money-time-now and https://voxeu.org/article/proposal-negative-sme-tax 

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