Yesterday’s discussion about bailouts (for airlines and other industries) provoked some interesting feedback from readers. Some were against any aid to anyone; other wanted to drop helicopter money from the skies.
Perhaps some context will help people better understand what we are trying to accomplish with this initial fiscal stimulus (and why). It is important to understand what should – and should not – occur within an intelligent framework for rescuing people and businesses.
The U.S. and the world is dealing with a new pandemic. It is similar to, but worse than, influenza — more infectious, with a higher mortality rate. What is so frightening about Covid-19 is that we have no vaccines, no treatments, no cures – yet. While modern medicine is likely to eventually create a vaccine and separately, a treatment, the current lack is part of the reason this Corona virus is so frightening.
The most effective tool we have is avoiding other humans: We socially distance from each other, work at home, stop going out. Countries that have done a good job with this have reduced the spread and mortality rate. Even more important, we do not want to overwhelm our hospitals and creaky health care system.
But this also means that we stop spending money, and when that happens business can no longer pay their employees. Credit is starting to get gummed up. Schools are closed; Airlines have mostly stopped flying; Restaurants have mostly shut down; Retail stores other than grocers and pharmacies are shuttered. Small businesses are on hiatus. Anyone who is not providing an “essential service” is in lockdown.
If you can still service clients while working from home, consider yourself fortunate.
This becomes very ugly very quickly. The next unemployment claims data could number in the 2 or 3 million range. We could lose 3-40 million jobs over a month (although many job losses might be temporary). And unemployment rate of 27% or higher is possible. A recession is here already, and it could even get worse – a depression.
We are looking at a situation where people will run out of money very quickly – for food, rent, medicine, and utilities. It is historically unprecedented.
In response, the Federal Reserve has engaged in a massive monetary stimulus smaller but similar to that of the Great Financial Crisis (GFC) of 2008-09. We are still waiting on Congress to pass a fiscal stimulus.
The issue Congress is confronting is driven by the ideological affiliations of its members. They are mostly traditional Liberals and Conservatives, whose belief systems are not optimal for dealing with this sort of economic/health crisis. We would be best served if there were a few practical technocrats in Congress, but that’s another discussion entirely.
Given the backdrop described above, what should a bailout package hope to accomplish? I spent a few years analyzing the problems with the bank bailouts last go around, and all the problems therein. We want to avoid another panicky “just throw cash at everything” approach as costly and suboptimal. Instead, we should be more specific and targeted at the issues described above.
I would want to see Congress’ fiscal response cover both Households and Businesses
–Healthcare: People without health insurance should have their Coronavirus tests and medical care covered. The alternative is a sick person as a vector for additional infections
–Credit: Make sure people can pay their rent or mortgage payments; provide a rent, mortgage guarantee for the next 3 months. Freeze all defaults/evictions until this passes.
–Unemployment: People who have been laid off need an income to buy food and pay bills. A Universal Basic Income of ~$2-4000 per household per month for the next 3 months is a good start. Extend Food stamp coverage as well.
–Loans: Create a loan facility for companies that cannot tap the credit markets;
–Limits: Put rational limitations on companies that use the credit facility. It exists to keep people paid and the economy moving. If you tap the credit facility, you cannot issue company bonuses, management raises, pay dividends or do a share buyback for 5 years after credit is used and paid back in full.
–Retention: Encourage companies not to lay off people. Create a fund for companies to use; If Germany and Denmark can do this, we can too. (Same conditions as above).
–Medicines: Ensure vital medical supply needs are being met. If we have to use war powers acts to order the manufacture of ventilators and use the army to build temporary hospitals, then so be it.
This was the great missed opportunity of 2008-09. We should be making smarter use of bankruptcy courts for reorganizing companies that are over-leveraged, or have debt but good assets. (Airline and hotel sectors are perfect examples). Don’t rescue one sector but ignore the others, aka picking winners and losers. If you rescue airlines, what about real estate, retail, automobiles, restaurants, energy, manufacturing, utilities, mining and forestry, etc.?
Bankruptcy exists for a reason – it is a reset.
Remember the goal of this fiscal stimulus and bailout — it is to help the economy, and the people in it, get through a unique period in time. It should not be an opportunity for Congress to reward its buddies or to create the opportunity for corruption to occur.
We can accomplish this if we are thoughtful and intelligent in our approach.
How to Do Corporate Bailouts Right This Time (March 23, 2020) (Bloomberg)
How Good an Investment Were the Bailouts? (September 25, 2012)
Economics, Law and Finance Professors from Major Universities Write to Congress : “Bail Out People Before Large Corporations” (March 24, 2020)