- The Big Freeze would pause fixed expenses and support businesses to temporarily close.
- Individuals would receive a Universal Basic Income (UBI) to meet their basic needs.
- This could preserve the integrity of the economy and and position businesses for a smooth market re-entry when the time is right.
The economic impact of COVID-19 is already being felt by millions of people around the world. The efforts needed to protect public health and stop the spread of the disease have hit the global economy with an unprecedented shock. Businesses have shut down, there is record unemployment, and millions have succumbed to the illness. Countries are grappling with how to strike a balance between protecting public health and the financial well-being of both individuals and businesses.
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Individuals need to shelter in place and meet their basic needs to weather this crisis. Businesses need a similar solution – to shelter in place without the threat of default, bankruptcy, or collapse. We are navigating without a roadmap or historic precedent. Instituting a Big Freeze may well provide a path through this quagmire.
The Big Freeze economic theory suggests freezing all time-related fixed expenses – such as rent or mortgage payments, health insurance – and supporting businesses to temporarily close. It provides a Universal Basic Income (UBI) to individuals, together with temporarily increasing marginal taxes for those who haven't been hurt or may even gain from the situation. The goal is to prevent debt, preserve existing economic infrastructure, protect individuals, and position businesses for a smooth market re-entry when the time is right.
A recession or depression is typically triggered by a shock to either supply or demand. What we are seeing now is a shock to both. In addition, this is very different from previous economic downturns because it is created artificially by government orders to shut down to protect public health. This provides us with an unprecedented level of control over how this shutdown should operate and what we can do to mitigate the economic fallout.
We’re at a tipping point: bills are coming due and many lack the ability to pay them. A medical solution is still a long way off, at least a year or more. Governments have provided short-term solutions. In the absence of a comprehensive, long-term economic plan, the financial hardship for individuals could spark the flames of civil unrest, as we are beginning to witness.
Economic pressures have driven some governments to discount or disregard medical advice in favour of economic reopening. How many people are we willing to let get sick or die for the sake of the economy? What we hope to show here is that it isn’t an either/or. It is possible to keep the economy intact without sacrificing people’s health. We need to let go of existing economic models, forget what worked in 2008 or previous economic downturns, and forge ahead with bold new ideas.
Instituting UBI, as many have suggested, is a good start but not nearly enough. No government is able to provide a sufficiently robust UBI for the long-term without bankrupting itself and we need a solution that will last for at least a year or two, until a vaccine or treatment is found and distributed.
In addition to the implementation of a moderate UBI, we propose freezing monthly fixed expenses for both individuals and businesses. This will help prevent revenue or income from falling below the cost of fixed expenses, the single most consistent predictor of debt.
Lending is not the answer. The current risk levels are exceptionally high for default. In a “best case scenario” based on current lending practices, when the time comes to reopen the market, everyone would be saddled with high amounts of debt preventing a swift economic recovery.
The alternative though is even worse. If people and businesses can’t pay their bills, the series of cascading events will devastate the economy for years to come. There will be massive loan and credit defaults, foreclosures, and seizures of assets. In 2008, banks and corporations that were deemed “too big to fail” were bailed out. The sheer size of the bailout needed for the current crisis would eclipse that provided in 2008. Even if governments wanted to prop up the financial industry, it is unlikely that governments would be able to provide that level of support. We don’t want to see a collapse of the market – we want jobs for people to come back to.
What would it look like to freeze fixed expenses? Governments could immediately institute a moratorium on payments for mortgages, rent, telecoms, utilities and debt repayments, including credit cards, student loans, and car payments. For those businesses and financial institutions relying on payments, government-funded assistance programmes could be created to mitigate losses.
The government cannot provide enough money to each person to cover a wide range of expenses; there is no stimulus package large enough to keep business operating without revenue. What is possible, is to temporarily shutter business and provide people with the essential needs of food, medicine, utilities, and make sure their necessities are met.
Once you have eliminated fixed monthly expenses, then the amount needed per person will fall within a range that a government can realistically be able to provide on a monthly basis for an extended period of time. Each country should calculate the expenses that households need to cover essentials and then set the UBI accordingly. That is why the Universal Basic Income is a crucial component but cannot be done in a vacuum without other economic measures.
What is the World Economic Forum doing about the coronavirus outbreak?
Responding to the COVID-19 pandemic requires global cooperation among governments, international organizations and the business community, which is at the centre of the World Economic Forum’s mission as the International Organization for Public-Private Cooperation.
Since its launch on 11 March, the Forum’s COVID Action Platform has brought together 1,667 stakeholders from 1,106 businesses and organizations to mitigate the risk and impact of the unprecedented global health emergency that is COVID-19.
The platform is created with the support of the World Health Organization and is open to all businesses and industry groups, as well as other stakeholders, aiming to integrate and inform joint action.
As an organization, the Forum has a track record of supporting efforts to contain epidemics. In 2017, at our Annual Meeting, the Coalition for Epidemic Preparedness Innovations (CEPI) was launched – bringing together experts from government, business, health, academia and civil society to accelerate the development of vaccines. CEPI is currently supporting the race to develop a vaccine against this strand of the coronavirus.
Freezing fixed expenses and providing a Universal Basic Income will not only stabilize the economy, it will also stabilize our societies. Unemployment, financial crisis, and fear create social chaos. This is a time when what we need is for people to stay safely at home and a functioning economy to exist until the worst of the pandemic has passed.
We are at a moment in time when we should pause, reflect on the long term needs of our society and the consequences of the pandemic. While the situation is frightening, the way that this plays out is up to us and we can’t let an economic depression be a forgone conclusion. This can be a few years, or this can define the rest of our lives. We’ve arrived in the “new normal” but how do we get to the ideal management strategy that takes us through this pandemic and into a new era where our world is transformed for the better.
The Big Freeze buys us time, it preserves the integrity of our economy and allows businesses and individuals to make smart decisions instead of being stuck in a crisis mindset. Our future should be built on well thought out solutions rather than stop-gap measures.