Wrong medicine for corona
Loans are no use when customers disappear, writes NHH Professor Victor D Norman.
The coronavirus outbreak has brought about a financial crisis for Norway and almost every other country in the world. Commentators struggle to explain the nature of the crisis:
It is not the result of people no longer wanting to spend – most of us would love to continue spending money in local coffee bars, on shopping trips to New York, weekends skiing in the Alps and sun-filled holidays in the Far East if only (a) we were allowed and (b) we dared to do so. Nor is it the result of businesses no longer being willing to sell – as both their capacity and desire to produce are every bit as great as before.
When there is neither underlying supply nor demand failure, traditional terms such as recession and depression also become meaningless. The economy is not depressed – what has quite simply happened is that the authorities have turned off the light and shut the door.
In other words, it is the authorities – and not the coronavirus – that have put a stop to production and consumption. If the virus had been allowed to spread freely, it would probably also have created a downturn, with elements of both supply and demand failure, but this is not what has happened. In order to delay and limit the spread of a new and dangerous virus, our elected representatives have unanimously agreed, on our behalf, to shut down large parts of the economy.
When a unanimous parliament has decided to take this action, it must be because the impact on the population of an uncontrolled outbreak is greater than the cost of shutting down 'Norway Ltd'. I believe that the large majority of us share this view. Closure costs, but it is worth the price.
The cost, however, is unfairly distributed. As a retired man aged way over 65, I am probably among those (hopefully, anyway) who have most to gain from the spread of the infection being reduced, and, at the same time, I am one of those who will not have to foot any of the bill. Young shareholders and employees of Norwegian, SAS and Widerøe find themselves at the other end of the cost-benefit scale. And in between, there is a profusion of large and small companies whose income basis has suddenly and unexpectedly disappeared.
Arrangements are being put in place that will, at least to some extent, indemnify employees and a number of the self-employed. Although an already lambasted social security system is struggling to process cases quickly enough, the money will eventually materialise. The Government has decided, as a general rule, not to support the rest of the business sector, however, choosing instead to make it easier and cheaper to get a loan. Norges Bank has cut the interest rate a little, and then cut it some more, while the state has promised loans and guarantees of NOK 100 billion to the business sector in general and a further NOK 6 billion specially earmarked for the airline companies.
Something is not right here.
Society has taken away the income basis of many companies, and the only thing we are offering as compensation is a loan to cover their running expenses during the period of closure – a loan they will have to repay with interest at a later date. We are not talking about a financing problem that needed solving. We are talking about income disappearing as a result of an official order.
Businesses can take out consequential loss insurance to cover fires, natural disasters and other unpredictable hazards. They could perhaps also get an insurance company to cover them for the consequences of a pandemic caused by an unknown virus. Taking out insurance to cover the consequences of sensible political decisions made in democratic forums is practically unthinkable, however.
The fact that the business sector has lost a large part of its income basis is not an unintended side effect of the closure; it’s the very purpose. After all, we do not want people to fly, go on skiing holidays in the mountains, flock to shopping centres or attend cultural events. When the purpose is to remove companies’ income basis, surely compensating them for this is the only right thing to do?
The benchmark for financial support measures for the business sector should be status quo ante: Together we should ensure that, when the period of closure is finally over, the companies’ balance sheets should be roughly the same as when all this began. We could say that the owners must cover a share of the cost themselves, for example that 20 to 30 per cent of what they need to restore their finances must come from them. The principle should, however, be that we together must cover the bulk of the burden on the business sector when it was our decision to take their customers away.