There are three basic inputs to any economy. Land, Labor, and Capital. This crisis is a massive economic shock. So who takes the hit? Land? Labor? Capital? That is the un-stated question driving the whole “re-start the economy” debate.
81% of Americans (the Labor) think Capital (and Land) should take the hit.
Per this Politico poll.
“eight in 10 voters, 81 percent, say Americans “should continue to social distance for as long as is needed to curb the spread of coronavirus, even if it means continued damage to the economy.” Only 10 percent say Americans “should stop social distancing to stimulate the economy, even if it means increasing the spread of coronavirus.” Nine percent of voters have no opinion.” https://www.politico.com/news/2020/04/15/poll-dont-stop-social-distancing-coronavirus-spread-187290
Lets say a quick “wow” about the 9% who have “no opinion.” Then move on to guess at what 10% who put the economy first. They probably map pretty tightly to the top 10% in…
- …Income, especially passive income (real estate rental and dividend checks)
- …Asset ownership – especially commercial and rental real estate.
- …Personal freedom to work from home and thus self-isolate until 2021.
Reading on, lets all remember the top 10% (the elites) isn’t particularly beloved by the bottom 80% (the deplorables).
Why is the the other 80% putting health and safety over “the economy?” These folks all work paycheck to paycheck anyway. Their non-existent stocks of wealth/capital aren’t going to take a hit. They are also probably starting to figure out that…
- …the unemployment checks will keep coming
- …they can hang on OK on that for 6-12 months – especially if they don’t pay their rent/mortgage/credit-card bills.
A Collectively Declared Debt Holiday is the Real Motivating Fear.
The non-payment bit is what really gives the top 10% the heebie jeebies. 31% of America’s renters didn’t pay their rent in April. It’ll be 40%-50% in May. By June, even people who can afford to pay will be asking themselves “why am I being a chump? No-one else here at Slumlord Towers is doing it!”
If enough people stop paying, there is no way that top 10% can ever go back and collect. Nor will it negatively impact credit reports because “everyone” is going to have the same non-payment history at the same time. Same goes for credit card bills and most other debts.
That growing wave of non-payment helps us work back to answer this question;
What dark fate is so threatening that 10% of Americans polled would see a higher death rate as preferable?
Capitalism Red in Tooth And Claw Working its Magic On “Us,” Not “Them.”
The threat is clear and, to my mind. highly likely. A major, permanent write-down in the value of wealth-creating assets (especially commercial real estate). Martin Luther King frames the issue better than I can.
“We all too often have socialism for the rich and rugged free market capitalism for the poor.” ― Martin Luther King Jr.
Except, this time around, capitalism is likely to eat its own. The poor will have it tough. But they will eventually go back to living paycheck to paycheck. The rich, however, will suffer a permanent loss of wealth.
A Long Partial Shut Down (Official Or Informal) => A Massive Un-Rented Real Estate Glut => Massive Rent Reductions on Re-Start => Massive Wealth Destruction.
Think about commercial real estate in particular. There is about $6 Trillion of it in the United States. It underpins a LOT of wealth. But no spin-meister on earth is good enough to make Landlords into a sympathetic class deserving of a bailout.
- The immediate crisis is the mortgage note is still due, but the rental income isn’t coming in. In a few months, that lands most landlords in bankruptcy.
- If you survive that, commercial landlords will find themselves with largely empty strip malls, malls, hotels, and other buildings that are incredibly hard to re-purpose. In other words, a MASSIVE SUPPLY GLUT. That will take years to work down. When the economy re-starts, prospective businesses owners will have their pick of locations and all the negotiating leverage on rent. Even if all the old tenants just come back, they’ll do it having negotiated lower rents by threatening to NOT come back. That is a permanent write-down of wealth.
- Residential landlords will probably do better out of it. There will still be a supply glut (all those service industry types who moved back home etc…). So they won’t be able to collect back rent. Better to keep the tenants you have and just try to get them back to paying. But that supply glut also creates downward pressure on rents. People will shop around, upgrade, etc…
Don’t Kid Yourself, We Will Have A Long Partial Shut Down (And So a Write-Down).
Even if people “go back to work,” they don’t have to go out to dinner. Or go to Disney. or go to a movie. Or fly. Or go to a hotel.
Until we have a vaccine, they won’t. Or they won’t do it as much.
That means a lot of service industry businesses (which occupy much of that commercial real estate) will stay shut down. Which means a lot of service workers (disproportionately renters) won’t get re-hired. In other words, we’ll stay partially shut down.
Those closed service business won’t be sending in their rent checks. Those service industry non-workers won’t either.
Medical Advances Make a Partial Shut-Down MORE Likely Until a Vaccine in 2021.
The usual retort here is some hopeful medical claim. “But I hear trials of XXX are going well! J&J says a vaccine will be approved by 1Q 2021…” That is all good news, although you and I probably don’t get anywhere NEAR a vaccine shot until mid-2021.
But stop and think for a second. If we are really going to be OK in 6-12 months, then why go out and risk your life in the meantime? If the virus is a long-term fact of life, you might take the risk. But if it isn’t a risk by 2021, you’re an idiot to NOT hunker down and wait for the vaccine.
So the “positive medical developments” arguments just reinforce the likelihood of a (self-declared) partial shut-down.
Capitalism Probably Comes for the Capitalists This Time Around.
In the last crisis, the bailout got bent in favor of the top 10%. There are a lot of really smart people working overtime to figure out how to do that again this time.
SO far, all they’ve come up with so far is the thin gruel of “consider the emotional toll of all those people out of work! The suicides! The alcoholism!” That transparently self-serving concern isn’t going to change a lot of minds.
The poll above suggests that messaging battle has already been lost. That 81% seem to understand that “getting the economy re-started” means “me and mine might end up dying for no good reason. We’re a rich country. We can just keep writing them trillion dollar checks. They’ve been doing it for years to line their own pockets. And I ain’t never seen it coming to me. So its our turn now…”
The problem is that logic is entirely correct. We can keep writing those unemployment checks. We will.
That means someone will take a massive loss. But absent a massive bailout, that loss will mostly hit the landlords, bosses, and the bosses’ bosses. In a normal year, Congress could be counted on to figure out some sort of bailout. Congresscritters own a lot of that commercial Real Estate themselves. The President does too.
But it isn’t a normal year, its an election year.
All the 81% has to “do” is make sure the politicians keep sending the
bailout unemployment money to them (Labor) and not the top 10% (Land and Capital). With an election coming in November, they have the means to enforce that. And punish any bailout of Capital big enough to make a difference. Especially as a bailout of landlords and REITS and Debt Investors will be much harder to hide behind smoke and mirrors vs 2008’s bailout of the banks.