Coronavirus has changed our perception of risk

Once the pandemic is over, will you want to jump right back onto a crowded cruise ship?  Neither will many others.  The reason is that we now perceive cruise ships as being more risky than we did before.  We've all seen the news reports of quarantined ships with passengers forced to sequester in their rooms for weeks at a time.  Even if the risk of another pandemic is very low, why subject yourself to that risk at all?

The world is now a riskier place than it was before.  This changed perception of risk will have a long-lasting effect on the global economy and on small businesses in particular.  And much of the increased risk is not from the disease itself, but from the unprecedented government lockdown.

Lenders will look at businesses to see how they would fare under a similar pandemic lockdown.  At the least, any borrower will have to put forward a plan of action in case another pandemic hits.  But what can you do if you're a hairdresser or a local sushi bar?  The only logical response is to close the business and pay your rent out of pocket.  How many hairdressers can afford to do that for several months?

This perception of higher risk runs through the entire economy.  Small businesses like restaurants, that were already marginal to begin with, will receive even more scrutiny.  Similarly, borrowers who rely on these kinds of businesses may find it much more difficult for them to get mortgages or other kinds of credit.  Landlords will have fewer takers for their retail shops, making small towns look even more blighted.

This will be devastating for the small entrepreneur, especially those who rely on selling out of brick-and-mortar shops.

Just taking hairdressers as an example: Landlords will be more reluctant to lease to a hairdresser knowing that it might be forced to close; bankers will be less willing to lend to the business; mortgage lenders will scrutinize hairdressers more closely, knowing that their income might disappear; and suppliers might refuse to sell goods on credit.  Given all this, it might be almost impossible to start a new hairdressing shop after the pandemic.

Even the hairdressers themselves will be rethinking their options.  Many might opt to work on a commission basis for an established shop such as Supercuts rather than risk their life savings to start a shop of their own.  That way, when the pandemic hits, Supercuts pays the rent while the hairdresser loses only the commissions.  But if all of the risk gets dumped into Supercuts' lap, who would want to lend to it, or put his money into a Supercuts franchise?

This is how recessions begin, with lenders, investors, and entrepreneurs across the country cutting back, making decisions that, while they might make sense individually, have a cumulative devastating effect on our economy.

What to do?  There may need to be some kind of federally sponsored Pandemic Insurance Fund, much like flood insurance.  Ideally, the insurance would kick in only in the case of a pandemic lockdown and would be used to pay rent and basic salaries.

But the scale of this kind of insurance would be almost unimaginable.  How many trillions of dollars would be needed?  And do we really want another huge government program that would be ripe for fraud and graft?  Who would audit the millions of payments required in a global pandemic?  Even if a Pandemic Insurance Fund is fully backed by premiums from businesses, how long would it take for those funds to be diverted to other pet federal projects, much as our Social Security funds have been?

And a Pandemic Insurance Fund, even if subsidized by the government, will still be a significant net cost to society and the economy.  Either we fund it through premium payments from businesses or we subsidize it from increased tax payments.  No matter how the funds are collected, the cost of doing business just got significantly higher.  

It may be that "time heals all wounds" and after a few years, people and society in general will decide that another pandemic isn't on the horizon.  We'll be taking cruise ships again, with the images of sequestered passengers a distant memory.

But in the meantime, our perception of risk has changed, and that is not a good thing for our economy and for small entrepreneurs in particular.

Jay Latimer is an international businessman, writer and investor who has worked in investment banking for several multinational banks in New York, Hong Kong, and Beijing.