Economies Aren’t Built to Stop and Restart

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.

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  • mfidelman  On March 23, 2020 at 10:28 am

    Seems to me that it’s an awfully good time to start thinking about the NEW economy we want to build when we come out of our cocoons in a few weeks, or months. It’s long past time to get started on a Green New Deal, more resilient infrastructure, and so forth. I say that COVAID-19 is forcing us to take the time for a global “management retreat” – we should use it to good effect. It could be our last, best shot for saving the planet & life as we know it. (Let’s get to work defining the NEXT normal.)

  • Donna Victor  On March 23, 2020 at 10:52 am

    While you might argue one or all of the Warren principles you have to agree that neither Trump or Mnuchin are trustworthy necessitating very tight controls and oversight on the distribution of bailouts,

  • frankackerman0617  On March 23, 2020 at 11:17 am

    Doug, there is presently no shortage of stuff (e.g., toilet paper in warehouses) and food, but as factories shut down won’t shortages start to appear? Growing food may continue, but what about processing?

    Also, as a torrent of newly printed money flows into the economy, won’t inflation start?

    • weeklysift  On March 23, 2020 at 5:10 pm

      An awful lot of food production is automated, and I think governments will make whatever compromises they can to keep food processing plants open. Inflation is probably a real worry, because it’s not just that we’ll be printing more dollars, it’s that we don’t have as many things to spend them on (like plane tickets).

      • Gini Von Courter  On March 23, 2020 at 9:42 pm

        Was talking with a family farmer a couple of days ago. He’s concerned about the availability of farming inputs. Some of the things he needs are not available and may not be when it’s time to put in crops. Tom also noted that last year was a poor harvest in the upper midwest, so the farms themselves have less in stock than they normally would. A lot to think about.

    • Dale  On March 24, 2020 at 1:46 am

      Fairly easy to “retool” and these types of businesses and those that supply them will almost certainly be labeled as essential and continue running.

  • Ed Blanchard  On March 23, 2020 at 11:23 am

    Tom: We thank you for your thoughtful insights, particularly today’s. Excuse the “We”- it is an attempt to refrain from using “I” as a sentence opener because we are all in this together, whether we like it or not.

    No one can predict the outcome of this radily expanding socio economic medical crisis. However, knowing exactly what is on our collective plates is paramount in making any kind of rational decision as to how we can keep it filled with our individual needs. Your piece today goes a long way to helping me understand not only what is hapening on “stage” but, most important, what is going on in the “wings”, especially the West one and most important: How does this drama unfold.

    Please keep your thoughts coming. They help keep me in my seat (and not running out in panic). I shall do my part to help family and friends keep their seats also. I am not rich in money but I am blessed with family and friends.

    -Ed Blanchard Queen Creek, AZ

  • frankackerman0617  On March 23, 2020 at 11:26 am

    People, get real! The Senate can just (eventually?) get it together to push funds into the existing political and economic structure. Is there a larger than zero chance of making any reforms?

  • Bill  On March 23, 2020 at 11:49 am

    Regardless of what gets implemented, more pain is on the way. We, (our government) spend more than we take in. There are no free lunches, only delayed payment. At some point, we face the music, or more likely, the currency gets devalued in a big way. Our current creditors will likely not continue lending money to us at the same pace if they’re payed back in eroded buying power $.
    Our days of being the primary reserve currency of the world may be numbered. If that happens, there will be a lot more wailing and gnashing of teeth. We’ve made a pretty messy bed. Bailing out businesses without super strict terms, is just kicking the can down the road. The last bailout to the auto companies was termed a success with all the money paid back with interest. NOT TRUE. The government ( we taxpayers) lost billions when the government bought and sold GM stock. A stealth “grant”. So my tax dollars went to fund, among other things, all the inept management and obscene compensation packages to the auto execs that drove the car into the ditch in the first place…..and now we’re likely to do it again. Sad thing is, since then, GM could have paid all those billions back….but didn’t. It’s time we started being honest with ourselves, and our government, honest with us. SMH

    • weeklysift  On March 23, 2020 at 5:17 pm

      People still argue about whether the auto bailout was worth it. A good summary is this article at MarketPlace.

      • bill  On March 23, 2020 at 10:01 pm

        Thx…good link. As an aside, I supported the auto bailouts but thought it was conditioned on being paid back in full,…. with interest. Such was not the case, thus my skeptical view on this round of bailouts that appear to lack even the pretense of requiring full repayment. It’s this kind of thing that erodes the publics confidence in capitalism. I’m afraid this doesn’t end well.

  • frankackerman0617  On March 23, 2020 at 12:46 pm

    Isn’t it obvious that both companies and individual need government support?

    Really, can all corruption be avoided? Look at existing Medicare fraud.

    Sure, some companies are going to be rewarded for bad behavior – in the present emergency is Congress really going to be able to come up with conditions that only reward good behavior?

  • Gini Von Courter  On March 23, 2020 at 4:27 pm

    A great post, Doug. I look forward to being sifted weekly. Reagan’s economic policies that were based on models that never panned out as predicted in actual economies have turned out to be gifts that keep on giving, including allowing companies to buy back stock. The “trickle down” theory is the foundation on which a lot of GOP economic strategy is built. Unfortunately, it doesn’t.

  • Michel S.  On March 23, 2020 at 4:44 pm

    I like Warren’s idea, and think stock buybacks are often just a way for executives to reward themselves at other stakeholders’ expense.

    *But* if we have a complete ban, I wonder how companies that issue RSUs to every employees are supposed to do instead? Perhaps having that exception would be useful.

  • Anonymous  On March 24, 2020 at 12:23 am

    Not a stimulus. That is exactly the wrong way to think about it. We don’t want to stimulate the economy, we need to shut down the non-essential economy for a bit. What we require is a safety net so people and businesses can get going again afterwards.
    May seem like a bit of a nitpick, but please don’t call it stimulus.

  • Dale  On March 24, 2020 at 1:52 am

    “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”

    Nah. The most efficient way to distribute whatever cash the government sets aside for bailouts is to: have blanket policies which do not need checking or enforcing.

    Specifically we could:
    1) Give everyone the same amount of money
    2) Halt payment of rents and loans and prevent interest from accruing on said loans
    3) provide sufficient liquidity to banks to hold them over

    Businesses cannot go bankrupt if they do not have current liabilities. People will not lose their houses when they do not have to pay their mortgage. When its over those businesses that are still there because they did not fail because they did not have current liabilities can continue as before.

    And, importantly. Everyone feels the pain in the same way

    • Guest  On March 24, 2020 at 5:05 pm

      Sanders looks like the only prominent democrat who agrees with this direction, Dale. It’s been sad seeing republicans like Romney outflank the dems from the left on this. Even Warren and her principles seem focused on businesses rather than working people who are in need right now. Biden emerged from hiding only to give a hollow and somewhat embarrassing recorded message. I guess the pain is not equally distributed (yet)!

  • amyhouts  On March 29, 2020 at 2:59 pm

    My 89-year old mother and I always read your blog and often discuss them. We both think you are brilliant. This week, she said you should run for office. I think that’s a great idea. If you do, I suggest you start putting your name on your blog under the title. We call you “The Weekly Sift Guy,” because we often forget your name or need to look it up.

    • weeklysift  On March 30, 2020 at 6:34 am

      Thank you for the compliment. But over the years I’ve written too many outrageous things to successfully run for office. (Opposition researchers would have it easy.) I also don’t remember people’s names and faces, a necessary political skill.

      As for my name, no one pronounces it right anyway. (Mudder is what I usually hear. MOO-der and MEW-der are both acceptable.) And occasionally spellcheck causes somebody to refer to Doug Murder.


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