Pandemics don’t just affect our health – they rip through our economies, too. For many people affected by the coronavirus, including those who don’t fall sick, economic survival will be a primary concern. When businesses close and workers no longer get paid, the bills for unpaid rents, mortgages and consumer loans quickly accumulate. Cities have already shut down swaths of their transport services, shops, cafes and cinemas. Mass lay-offs are on the horizon. Unemployment insurance will cover some, at least for a time. But self-employed and temporary workers, and households that live pay-cheque to pay-cheque, don’t have such buffers.

If you have some savings and only a little debt, the situation is tricky enough. But since the debt-fuelled financial crisis in 2008, household debt has grown. In the UK, total household debt stood at £1.28 trillion for the period from April 2016 to March 2018 according to the Office of National Statistics (ONS).

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UK households now owe a record average of £15,385 to credit card companies, banks and other lenders. Significantly, the UK’s total household debt was three times larger than the total wealth held by its lowest wealth decile. Similarly, the US Federal Reserve reports that household debt had reached a new high by the end of 2019: aggregate household debt stands at $14.15 trillion, $1.5 trillion higher in nominal terms than in 2008.

The 2008 crisis should have been a reminder that debt is not a substitute for income. Likewise, ensuring households can afford the basics of everyday life by broadening access to loans and credit cards is no replacement for effective social policy. But instead of heeding these lessons, governments focused on fixing the financial sector, bailing out the banks to ensure they would lend again.

Low interest rates made it seem as if the debt that households and firms accumulated would be manageable. Yet according to the ONS, households in the UK that rented rather than owned their property or had an unemployed primary earner were already experiencing debt problems prior to the 2008 crisis. To make matters worse, the management of excessive debt was privatised after the crash; Individual Voluntary Arrangements (IVAs) replaced personal bankruptcy, often at great expense to borrowers.

As a result, we are now watching two overlapping crises unfold: the coronavirus pandemic, and the economic threat it poses to our debt-fuelled economy. We urgently need debt relief – especially for households at the lower end of the income and wealth spectrum. Most interventions that governments have taken so far have targeted financial markets and businesses. Unless governments also implement measures aimed at indebted households and renters, such measures are unlikely to prevent a meltdown driven by rapidly falling demand for goods and services.

The economists Gabriel Zucman and Emmanuel Saez have called for a social insurance scheme to tackle the economic shock wrought by coronavirus. This would broaden the government’s role, making it not just a lender but a buyer of last resort. The scheme would compensate for the demand that has evaporated from the economy. With the airline industry, for example, if demand for flights drops by 80%, the government would buy 80% of plane tickets. Small and medium-size businesses, which are the least insulated against economic shocks, are most likely to benefit from this intervention. Still, on its own, this wouldn’t alleviate the stress of many deeply indebted households.

As the crisis deepens, policy makers will inevitably focus on trying to rescue the financial institutions that are central to our economic system from collapse. This is how most crises unfold. Households are usually treated as peripheral to the system. The failure of many households does not put the system at risk, and can therefore be treated as an afterthought. Crises begin at the periphery, in the absence of wealth cushions or other safety valves, and eventually ripple back towards the centre. Early interventions to stabilise the periphery can therefore help mitigate stress at the centre of the system. Even more importantly, such measures help instil trust and legitimacy in government interventions aimed at stabilising financial institutions.

Debt relief programmes have a long history. In the US, for example, debt moratoria were fairly common in the 19th century. An agricultural economy that relied heavily on debt was highly vulnerable to exogenous shocks, such as the collapse of global commodity markets. Many state legislatures temporarily suspended debt enforcement, or mandated government powers over foreclosures and asset sales. More recently, India implemented a debt relief programme in the midst of the 2008 crisis to support the agricultural sector, where a rising tide of suicides signalled the deep distress of many farmers. Empirical studies have shown that these interventions significantly lowered the rate of subsequent default among indebted households.

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To be sure, it is not easy to tailor debt relief to only truly distressed households. There will always be free riders who will take advantage of debt relief packages without needing to do so. But this shouldn’t prevent governments from intervening now. There is no better example of an exogenous shock than coronavirus. The overriding concern today shouldn’t be moral hazards, but massive default rates that will leave millions of people destitute.

To treat the economic fallout of coronavirus, governments should directly assume the debt of high-risk households. Trying to incentivise financial intermediaries to modify the terms of existing loans, as the US government did with the Home Affordable Modification Program after the 2008 crisis, will be too slow to meet the current challenge.

It’s often said that the public health of the majority is determined by the most vulnerable in society. The same logic applies to a healthy political and economic system: its stability depends on how it treats its weakest members. Hedging our bets on an economic system that has neglected these truths and instead prioritised wealth creation at the top has put us all at risk. There is still a small window to rectify these past wrongs, by urgently granting debt relief to the households worst affected by coronavirus.

• Katharina Pistor is the author of Code of Capital: How the Law Creates Wealth and Inequality



