A recent article by Annie Lowrey in The Atlantic argues that governments should follow a policy of helicopter money in the current crisis. As a macroeconomist, I think this is a good idea.

First, what is helicopter money? It is a policy in which the central bank prints money and the treasury spends it or gives it away.

In most developed countries, the central bank cannot give money directly to the treasury which, in turn, cannot tell the central bank what to do. While central banks do print money, they use it only to replace worn-out bills and to buy and sell bonds from private institutions such as banks.

This policy of central bank independence has worked well over the years to keep inflation in check. In countries without it, the central bank faces pressure to print money to cover the government’s budget deficit. If this goes on long enough, the result can be destructive hyperinflation – as has recently occurred in Argentina, Venezuela, and Zimbabwe.

But in the current crisis, we face a different challenge: throughout the economy, many contracts have become unrealistic. Workers and firm owners in affected industries cannot make contractual rent and mortgage payments. Firms cannot pay agreed wages and make agreed payments to their subbies.

In principle, each contract could be renegotiated. But this is hard as one party must trust that the other truly cannot pay. Because of this, renegotiations will be rare. Many contracts will simply be violated, leading to a wave of defaults and lawsuits.

This is where helicopter money can help out. Newly printed money, broadly distributed, will help parties comply with their contracts. The massive social costs of widespread bankruptcies will be avoided.

As the economy eventually recovers, the extra money in the economy may lead to higher inflation than would otherwise occur. But in the current recessionary environment, this worry can safely be deferred until another day.

And as we return to normal times, central bank independence will once again become invaluable. Thus, its suspension must have a built-in expiration date.

A recession may be coming. Does this mean that you, a manager, should adjust your investment strategy?

In downturns, there is less lending, which may make it hard for you to fund basic operations. Obviously, one way to avoid this is to stockpile cash.

Another way is to build relationships with bankers. Beck et al (2019) find that firms with banking relationships were less credit constrained than other firms during the 2008–9 Global Financial Crisis, but not in the preceding boom times. They write:

“[This benefit of banking relationships] is stronger for young, small, and non-exporting firms, firms with no other sources of external finance, and firms that lack tangible assets.”

The last part of the quote highlights another way to help ensure access to credit: invest in tangible assets which can be pledged as collateral, rather than intangible assets that cannot.

An important example of an intangible asset is goodwill: it cannot be pledged since, if you default, the bank cannot “seize” your goodwill.

Thus, when a recession is in the winds, it is less worthwhile to build goodwill via expensive new marketing campaigns.

Rather, consider acquiring tangible assets such as other firms, machinery, and real estate – or simply stockpile cash, thus making credit unnecessary.

Suppose a recession hits and you, a manager, have to cut your wage bill. How best to accomplish this?

Recent research by Sucher and Gupta (2018) detects some negative effects of layoffs:

  • Higher turnover of remaining employees & clients/customers.
  • Lower morale, product quality, safety, and innovation.

In addition, if a worker leaves permanently, you will lose your investments in her training and any relationships (e.g. with clients) that she has formed on the job.

However, a lot can depend on the culture of your industry. If workers expect occasional layoffs, they may still be your best bet. An example is the construction industry.

If layoffs are not part of your industry culture, consider alternatives such as furloughs, cuts in hours, wage freezes, and so on.

Recent research by Sandvik et al shows that wage cuts can raise turnover, especially among your most productive workers.

To minimise this risk, hold meetings to explain your decisions. Share with your workers how painful the process is for you. Show empathy. Cut your own wage and make sure your employees know that you did.

In part 3, I will explore how you should shift your investment strategy when a recession threatens.

The market is regarded as a leading indicator, which means that steep declines as seen in the past week are a leading signal of an impending recession.

What can managers do to prepare for a recession?

First, expect demand to shift from luxury to basic brands: from the Lexus to the Toyota, etc. If you run a multiproduct firm, will you be able quickly to shift production from luxury to basic items?

Second, demand in most industries will fall overall. Thus it is a good idea to get flexible.

Hire temporary or “casual” employees rather than permanent staff. Rent equipment and real estate rather than buying it. Chose short-term rental contracts rather than long-term ones.

In part 2, I will explore the different ways to cut your wage bill in a downturn.