The Weekly Sift

As of this morning, Republicans and Democrats in Congress still hadn’t agreed on a stimulus/bailout package for the economy. (Global markets are once again plunging this morning.) The parties agree on the need for extra government money, and even seem to agree on the size ($1.8 trillion). The remaining issues are who gets the money and what kinds of strings should be attached to it.

It’s far too easy to jump straight into the partisan back-and-forth of the issue — and we’ll get to that — but first I’d like to review why government intervention is needed in the first place.

It starts with a simple truth: Modern capitalist economies are supposed to be perpetual-motion machines. They’re never supposed to stop, and so there is no obvious way to restart them.

Right now, though, we’re in a situation where much of the US (and global) economy needs to stop. To prevent (or perhaps just slow) the spread of the COVID-19 virus, people need to stay home and stay away from all but a handful of other people. So industries that depend on gathering people together (sports, bars and restaurants, live entertainment, conventions, schools, retail malls) need to come to a halt. Industries that depend on travel (airlines, hotels, tourism) need to stop as well. If a factory employs a large number of people at the same location and and has them touch a lot of the same objects, it has to stop. Services in which practitioners touch their clients (barber shops, beauty salons, massage therapists) or enter people’s homes (cleaners, dog-walkers) or invite people to enter their homes (music teachers) have to stop.

How long? We’re not sure. Probably until summer. Maybe longer.

Then what?

There are basically two problems, or rather one problem relating to two kinds of entities: people and businesses. How do they survive until things start up again?

Our models for thinking about economic dislocations like this are natural disasters like hurricanes, floods, or earthquakes. But none of those models quite fit, because the economic infrastructure hasn’t been damaged. There are still plenty of places to live in America and plenty of foods to eat. The fields, mines and factories are still there. Nothing needs rebuilding, we just need to survive until the virus is gone and then restart. But how?

People. Long before COVID-19 got started, studies had revealed that about half of American households live paycheck-to-paycheck. Around 40% would have had trouble coming up with $400 to cover some surprise expense. Now that the economy is pulling back to just food and healthcare, large numbers of those people will be without paychecks until summer (or maybe fall).

They don’t make it without some kind of help. Some of them could rely on family or friends, but many couldn’t. And what if those families and friends are financially stressed at the same time? After all, American society is economically stratified: Rich people tend to know rich people, and people on the edge tend to know people on the edge.

The problem, as I said above, isn’t a shortage of stuff. It’s that people can’t earn money to pay for the stuff they need. Somebody needs to collect or create enough money to get them through and figure out a way to distribute it. The federal government is really the only institution set up to do that.

Businesses. If you’re a minimum-wage worker, the business that employs you — whether it’s a corner restaurant or a giant manufacturer like Boeing — seems incredibly rich. And it probably is, as long as the perpetual-motion machine of the economy keeps running. But American business, large and small, runs on debt. Debt requires interest, but in normal times a successful business generates plenty of revenue to cover that interest.

Very few businesses, though, are set up to survive without revenue for even a fairly short amount of time. Nobody has a plan for that, because it wasn’t supposed to happen. Economies don’t just stop.

But now large chunks of the economy are stopping. The problem shows up first in businesses that have a lot of debt and are supposed to generate a lot of revenue. Airlines, for example, borrow to buy their planes. (And banks or bond investors are happy to lend them the money, because an airliner is good collateral — as long as airlines go bankrupt one at a time and aren’t all looking to sell off their planes simultaneously.) On a smaller scale, restaurants rent their space, and may rent their fixtures as well.

Both Delta and Joe’s Diner have employees — pilots and cooks, respectively — they really can’t afford to lose. Restarting will be tricky if they have to go out and find new ones quickly. So even if you don’t have anything for them to do in the meantime, you really want to maintain their employment somehow.

Add all that up — rent, interest, and some kind of salary to essential employees — and a business runs out of capital in a hurry. I’ve seen an estimate that the airlines will all be bankrupt by May, and Boeing is likely to go down with them. That’s likely just the beginning. The auto companies can’t operate their factories. And if enough large and small businesses can’t repay their loans, banks will go under. We saw in 2008 how far the ripples of a banking collapse can spread.

So this crisis may have started as a health crisis, but it quickly turns into a financial crisis. And we know from 2008 how hard those are to solve.

Preserving business preserves inequality. Imagine that we get to October and COVID-19 is gone — there’s a treatment of some sort, or maybe the infection has just run its course. The government has pumped out enough money to keep everybody eating and living somewhere, so the 99% of the population that survives is ready to go back to work.

But where do they go? A few companies — Amazon, maybe, and possibly the big grocery chains and internet providers — have actually prospered. Others (Apple, for example) had big cash hoards that kept them going. But the majority of business have gone belly-up. Eventually, the market would probably sort that out. New businesses would arise to fill the demand for air travel or hotel rooms or meals out or whatever. But it could be a long painful process.

The alternative is that the government could keep businesses going the same way that it kept people going. It could float big low-interest loans or buy stock or just write checks. So all the businesses survive, and are ready to rehire people at the same time that people are ready to go back to work.

There are two problems with that scenario. First, it’s an awesome amount of money, and (since we don’t know when the pandemic ends) nobody has a good estimate how much we’re talking about. And second, the government would not just be preserving the workplaces of workers, it might also be preserving the fortunes of rich people. There’s good reason to want the economy to be in a position to restart, but why does it have to restart in the same place?

That was what was so unpopular about the bailouts of 2008-2009. Government money didn’t just save the financial system, it saved the banks and the bankers who arguably had crashed everything to begin with.

This time around, you can already see the problem with the first bailout candidates: the airlines and Boeing. The airlines go into the crisis short of cash because they spent it all on stock buybacks. Robert Reich isn’t having it:

The biggest U.S. airlines spent 96% of free cash flow over the last decade to buy back shares of their own stock in order to boost executive bonuses and please wealthy investors. Now, they expect taxpayers to bail them out to the tune of $50 billion. It’s the same old story.

Boeing entered the crisis in a weakened state because of safety problems with the 737 Max. The company cut corners and airplanes crashed. If they’d won that gamble, the profits would have stayed with the company and its shareholders. But they lost it, and now they need to be bailed out with public money.

And those are just the companies that need help right away. Once we establish the pattern of bailing out big companies hurt by the virus, how do we say no to the companies that run out of money in June or August? How much will that take?

There’s also a too-big-to-fail problem again. The main proposal for helping small business is via government loans. The proprietor of a dog-walking service in Philadelphia doesn’t see the sense of that:

We have no idea what sort of landscape we will return to when this is all over. Will we come back to 90% of our previous business if this ends in two months? If this goes on for four months, will 50% of our clients be laid off themselves and unable to rehire us? If this goes for a year, will we have any clients or employees left? Will we have to start from scratch with nothing but our reputation?

Two weeks ago, a bank would not underwrite a loan without a clear business plan. Right now, none of us can do any sort of business forecasting for what our revenue is going to look after this Covid-19 pandemic recedes, but we’re being told to take out loans. That is not sound business advice. It’s the government passing the buck to the very job creators that employ millions of Americans.

But a major employer like Boeing will probably get free money, not just a loan.

The corruption problem. The most efficient way to distribute whatever cash the government sets aside for bailouts is to have a simple process overseen by a single person. In the current proposal, that person would be Treasury Secretary Steve Mnuchin.

The problem, though, is that a streamlined process is open to corruption. Maybe WalMart gets bailout money because its owners support conservative causes, and Amazon doesn’t because Jeff Bezos owns the Washington Post. Or maybe Amazon does get money, but not until after the Post starts covering the Trump more favorably. (That’s a bad example, because neither WalMart nor Amazon is likely to need bailing out, but you see the point.)

That would be a disturbing possibility in the best of times, but it’s particularly troublesome with the current administration and its history of self-dealing. The gist of the Ukraine scandal was that Trump is willing to use the powers of his office to gain unfair political advantages. How can he (or a Treasury Secretary who has shown no ability to say no to him) be trusted to dole out large sums of money?

And while we’re at it: If the hotel industry ultimately gets a bailout, won’t a chunk of that money go straight to the Trump Organization? How can we trust the Trump administration to judge fairly the amount of public subsidy the President’s business needs?

The Warren principles. That’s why Senator Warren has put forward eight principles that would control bailouts:

• Companies must maintain payrolls and use federal funds to keep people working.
• Businesses must provide $15 an hour minimum wage quickly but no later than a year from the end
• Companies would be permanently banned from engaging in stock buybacks.
• Companies would be barred from paying out dividends or executive bonuses while they receive federal funds and the ban would be in place for three years.
• Businesses would have to provide at least one seat to workers on their board of directors, though it could be more depending on size of the rescue package.
• Collective bargaining agreements must remain in place.
• Corporate boards must get shareholder approval for all political spending.
• CEOs must certify their companies are complying with the rules and face criminal penalties for violating them.

The legislation Majority Leader McConnell is trying to push through the Senate doesn’t fulfill those conditions. In particular, it includes $500 billion for Secretary Mnuchin to distribute with very few strings attached. Paul Krugman had already criticized such a proposal in advance:

as Congress allocates money to reduce the economic pain from Covid-19, it shouldn’t give Trump any discretion over how the money is spent. For example, while it may be necessary to provide funds for some business bailouts, Congress must specify the rules for who gets those funds and under what conditions. Otherwise you know what will happen: Trump will abuse any discretion to reward his friends and punish his enemies. That’s just who he is.

According to Politico:

the language drafted by Senate Republicans also allows Mnuchin to withhold the names of the companies that receive federal money and how much they get for up to six months if he so decides.

So if he were to simply hand a few billion to the Trump Organization in mid-May, no one need hear about it until after the election.