Where does the (economic) buck stop?

Sam Levey
10 min readMar 22, 2020


In the face of the Coronavirus crisis, the immediate focus of economic attention is, quite rightly, on relief. But after relief, we will face a vexing question that we must answer: who will take the economic losses wrought by this pandemic?

Every individual, corporation, city government, etc. has bills to pay — these are its cash commitments, or cash outflows. To make these payments, they require financing of some kind — cash inflows. A significant fraction of our economic activities revolve around balancing our pledged cash outflows with our expected cash inflows.

But the virus and our response to it are decimating cash inflows: workers staying home means businesses don’t have products to sell, and consumers avoiding the shops means that they don’t have revenue coming in. At the same time, these businesses still have their cash commitments to meet, like payments to workers, interest on loans, rent to property owners. Those in turn make up the expected cash inflows for those entities. This is the inter-connected nature of our market economy. A failure of businesses to pay their employees means those employees can’t pay their bills; if employees can’t pay the bills, then the people receiving those bills can’t pay their own bills, and so on.

What are the policy options here? Obviously there are two choices, increase cash inflows or decrease cash outflows, and we’ve seen both being put forward. Proposals for the government to act as “buyer of last resort,” or “wage-payer of last resort” are calls for the government to replace lost cash inflows to businesses. Conversely, calls for a moratorium on mortgage and rent payments are about reducing cash outflows, to ease pressure on entities whose cash inflows have fallen.

Both of these kinds of policies are fundamentally about the same thing: passing the buck. The crisis has produced a reduction in income; but when a household or business calls for the government to replace their lost cash inflows or reduce their cash outflows they are in effect declaring “I should not have to take the losses for this event. That loss should fall on somebody else.” This is the flip side of balancing cash inflows and outflows — when you face an economic loss, maintaining you ratio of cash inflows to outflows requires you to push that loss onto somebody else.

Let’s see it in action. Suppose a business was humming along nicely, until the the virus response makes coming to work illegal for its workers. With the workers not producing, the business has no product to sell, and with no product to sell their expected cash inflows fall significantly. The business obviously doesn’t want that loss, and they will try to pass that off to its workers: fire them, or reduce their hours, or cut their pay. With their cash outflows reduced, the business is in better shape, but at the expense of the workers. They now are poised to bear the economic loss, so what do they do? Perhaps they call for a suspension of rent and mortgage payments. Their bank accounts will then be in better shape, but what about the landlords and banks they owed rent and interest to? The buck has been passed to them. They will likely lobby to have the government not suspend those payments, but actually make these payments instead of workers, improving cash inflows for the banks and landlords.

So, reducing cash outflows (by lawful suspension or just by refusing to pay) directly pushes the loss onto some other private entity. But what about when the government replaces lost income instead? The government is the issuer of the currency: it creates money from thin air when it spends. That means it can increase its “cash outflows” without having to worry about its “bank account.” So by sending out government checks to replace lost revenue, the government averts a private “paper loss” — our bank statements all still look great, and the damage has been safely moved onto the government’s balance sheet.

But there’s still a thorny issue of the real loss. The economic loss. That is, the lost physical output: if workers aren’t going to work, then that means the people who would have gotten the goods and services that those workers would have produced aren’t going to get them, because those goods don’t exist.

Now to some extent the real loss of those goods is offset by a decreased desire for those goods. That is, if consumers are saving their income instead of spending it, perhaps because they can’t leave home, then it’s fine if those goods aren’t produced — there would have been no buyer for them anyway. This is what happens in a garden-variety recession: demand for goods falls, and so production of those goods also falls. (Of course, when that happens, we need to find other ways for the workers to earn income, which we rarely actually do…) But if people want money to hold rather than to spend, then there’s nothing wrong with the government giving it to them. There might not be goods to buy with that money at the moment, but that’s ok because people aren’t buying anyway; and if they change their mind later and decide to buy, then in normal times the economy can quickly expand to meet that demand, by putting those workers back to work.

But this time might not be like that. In a normal recession, production only falls because demand falls, but this time, production is falling independently of demand because workers are being told to stay home. Suppose that demand didn’t fall at all, that consumers still wanted to spend every penny. Then we’d be in for a real problem. Without a paper loss to correspond to the real loss, then consumers would be trying to spend their still-high incomes on goods that don’t exist. In fairly short order they’ll be competing against each other, bidding up prices and causing inflation. When the government stepped in to replace lost cash inflows, it answered the question of where the paper losses would stop (the government) but didn’t answer the question of where the real losses would stop.

Here we start to see the social conflict that’s inherent in an inflationary process. If demand remains high but supply falls, then consumers are still making the same number of claims but against fewer goods. They’re fighting with each other to get them. In the same way that each entity tried to push the paper loss on somebody else, trying to buy goods in the market is an attempt to push the real loss on somebody else — ” who should have to go without this good/service because there isn’t enough for everyone? Not me. I’m buying it now, and I’ll pay more than the other guy.” And as prices go up, this again hurts balance sheets, leading to more paper losses, leading to more calls for the government to replace lost incomes and for businesses to raise wages. This is how inflation spirals. The real loss is bad enough on its own. That’s goods and services that nobody will get to enjoy. But if we can’t decide who this burden will fall on, if we keep passing the buck and never let it stop, then we’ll have both the real burden and inflation.

One “positive” is that demand has fallen as well. The reduction in demand represents dollars that consumers are happy to sit on rather than spend their dollars, which makes it easier to distribute the remaining real loss. In effect, people who have cut back their spending have ‘self selected’ to receive the real loss. This means that the paper loss can be smaller than the actual real loss, because we can always give money to people who aren’t going to spend it. But if the fall in production is larger than the fall in demand, then we’re going to have to take measures to distribute that real loss by bringing demand all the way down to match.

The brutish way to do this would be to simply stop letting people pass the buck on paper losses, eg. if the government simply allowed the paper losses to fall on workers (or whoever workers declare bankruptcy on). When a person’s balance sheet deteriorates like that, they’re liable to reduce their purchases of goods as well. But “leaving it to the markets” in a case like this a) really means “leaving it to the bankruptcy laws” and so the government is already involved, b) is liable to shunt the burden onto the already-struggling, and c) would mean that businesses that we know will still need to exist after the crisis ends, like airlines, will be firing workers and selling their assets unnecessarily. It also would probably provoke social chaos.

Really what we should do is make a collective decision about who the real losses should fall on, and then distribute it to them. That’s the conversation we need to have.

Below I’ll share my thoughts on the question, but first, how do the mechanics of this actually work? The obvious mechanisms for distributing losses are actually the indirect methods: the tax code, the bankruptcy laws, and the provisions of any bailout packages. I say indirect because what they actually do is distribute paper losses, with the expectation that this will translate proportionately into real losses. The direct method would be something like rationing, where we simply announce who gets what goods. It’s also worth mentioning loans: whereas government grants reduce losses for the recipient, loans don’t reduce the loss, they merely push the ‘day of reckoning’ into the future.

And before we even start the conversation we’ll need to figure out what criteria we’re going to use to make decisions. On the one hand we have criteria based on economic sector or class: we can talk about losses accruing to “workers,” or “landlords” or “investors” or “the retired,” or “the music industry.” On the other hand, we have more individual criteria like income and wealth. These are the terms of debate.

With that, here are a few of my thoughts about who should bear the real burden:

  • Workers (as a systematic class, apart from individual factors) should not bear the loss. They should be protected.
  • If a large publicly-traded business fails, the shareholders should get wiped out. Granted, a pandemic isn’t the corporation’s fault, but, that’s the risk they take when investing. Shareholders get to take unexpected gains, so they should take unexpected losses.
  • For the same reason, small businesses shouldn’t be relieved of all of their losses, but small businesses are good for communities so we shouldn’t let them get wiped out either.
  • Since workers as a systematic class should not bear the loss, but investors should, that means that our strategy should be to provide grants to workers, but loans to large businesses. Small businesses should receive a mixture of grants and loans.
  • (For those interested in democratizing the economy, this is a good opportunity: offer to write off some of the loan if businesses sell to their workers. Or just gift the business to the workers after it fails.)
  • However, while investors should get wiped out, what we don’t want is for these businesses to actually shut down — we’ll still need airlines when this thing is over, just under different ownership. That probably means that we need to take control rights away from current owners long before the business is actually bankrupt. Otherwise, seeing the road to ruin before them, the businesses will have incentive to fire workers and sell physical capital to stave off the loss. At minimum the loans should be conditioned on them not doing this. Perhaps the loans would also stipulate that once they reach a certain size (some percent of assets perhaps), then the government becomes the sole owner.
  • What about landlords and creditors? These are some of the most parasitic sectors in the economy these days (alongside intellectual property holders), and so it would probably be well and good for them to eat some of these losses as a class. One tactic for this would be, if the government replaces rent and interest payments, it could do so only at less than 100% of their previous amounts.
  • These previous points will probably do bad things to the income of the retired, as many elderly depend on investment income to live. But we probably don’t think that “the retired” as a class should bear much loss, so this income will need to be replaced, likely by expanding Social Security.
  • “The sick” as a class also shouldn’t bear the loss. If we place exorbitant bills on people who get the disease, that will just discourage others who need treatment from coming in, which will hasten the spread of the infection.
  • Other than this, probably the next most logical determinants are by income an wealth. Those most able to lose should bear the most loss. That’s an argument for using progressive taxation as the primary tool to distribute these losses, to prevent inflation.
  • And finally, since the working class has been increasingly squeezed for the last generation, it’s better to err on the side of bigger rather than smaller. That means we should both replace workers’ lost cash inflows and look to reduce their outflows.

The best case scenario is that the supply disruption is small and short-lived compared to the fall in demand. If that happens, it’s a garden-variety recession. The worst case scenario is that the supply disruption is large and long compared to the fall in demand. If that happens, then in addition to crushing shortages of everyday necessities we’ll face the serious question about where the buck stops. If the buck stops with nobody — if each group is able to continually and successfully press its claim to being the group that shouldn’t lose — then we’ll see high- or even hyper-inflation.