When we tell the shop to close down for a month, it can cut its variable costs (including, unfortunately, through layoffs), but not its fixed costs. When the shop isnt earning that gross margin on each cup, its fixed costs keep accumulating and can quickly overwhelm any reserves it may have saved. Support that covers all the lost revenue would be excessive; what is needed is support in proportion to fixed costs.

Note, also, how this challenge differs from that of a typical debt crisis. Interest payments on debt are one form of fixed cost, and a firm that takes on too much debt can find that even a small downturn in salesor even no downturn at allleaves it without enough gross margin to cover the interest owed. But here, with revenue collapsing to zero, through no fault of the business owner, the crisis has nothing to do with excessive leverage. Even if the coffee shop borrowed responsibly, or didnt borrow at all, other fixed costs could still become crushing.

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How to help businesses facing a total revenue collapse cover their fixed costs? A good place to start would be in the Anglo-American tradition of compensation for a government taking, best known in the United States from its appearance in our Constitutions Fifth Amendment: Nor shall private property be taken for public use, without just compensation. We recognize that government must sometimes take private property, as when it uses eminent domain for the construction of a road or pipeline. But we also recognize that when it does, it must pay.

The shutdown of commercial establishments necessitated by our public-health crisis is, in a sense, such a taking. Not necessarily in the constitutional sensea complex jurisprudence has evolved on the question of when government regulation of a propertys use might rise to the level of taking, and my suggestion here is not that current conditions necessarily qualify or that our government is therefore compelled to provide compensation. Rather, in common sense: The coffee shop owner would like to operate his business and we, the public, need him not to. He has not failed in business; to the contrary he has succeeded and, but for public need, his shop would have customers. He is paying for property, the economic use of which we have entirely deprived him. Shouldnt he be compensated?

A Public-Health Takings Fund could, and should, reimburse business owners deprived of the profitable use of their real property by public-health imperative. Thanks to the widespread existence of well-documented mortgages and leases on which businesses have made regular payments, determining the amount of compensation will in most cases be straightforward. Compensation should be available to businesses closed by local, state, or federal regulation, for the duration such rules remain in effect. It should require continued maintenance and upkeep of the property. Importantly, it should be a grant, not a loanit is not a new resource, but rather compensation for a cost incurred. If businesses are saddled with additional loans that they cannot use for forward-looking investment, they will face higher fixed costs with nothing to show for it long after the present crisis ends, leaving them more fragile and with worse prospects.

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How to Solve the Fixed-Costs Crisis - The Atlantic