Coronavirus Bailout Both Reparations and Stimulus

This is no ordinary recession.

The New York Times editorial board offers advice on “How to Avoid Complete Economic Destruction.” The short answer is for the federal government to spend a whole lot of money to backstop existing businesses and ensure they can pay their workers during the pandemic.

The longer answer:

The purpose of saving businesses is both to preserve the productive capacity of the economy and the welfare of workers. If all the nation’s restaurants were to disappear, new restaurants eventually would emerge in many of the same spaces. But there is no reason to incur the incalculable cost of destroying the old businesses and creating new ones. Far better to maintain, as much as possible, the fabric of the economy as it existed before the crisis.

Congressional Republicans on Friday proposed a bailout program that contains many of the necessary elements, but it lacks the necessary scale. It would provide $300 billion in funding for businesses with 500 or fewer employees. Each company could borrow up to $10 million, and any money used to pay wages would not need to be repaid, provided the company maintained staffing and wages until the end of June. That sum, however, is only sufficient to cover four months of wages, at the median wage, for 20 million workers — or less than one third of the workers employed by small companies. And businesses also need to pay for benefits, not to mention other expenses, like rent. Michael Strain of the American Enterprise Institute estimates that the amount small businesses actually need is around $1.2 trillion. [Note that AEI is a conservative think tank – ed.]

The Senate should embrace an alternative proposal by Senator Tammy Baldwin, Democrat of Wisconsin, to forgive up to $10 million in borrowing no matter how the money is used, so long as a company doesn’t cut back on staff or wages. Better yet, Congress should emulate the United Kingdom, which said Friday that it would provide companies with as much money as was necessary to meet their payrolls and preserve jobs. “There’s no limit on the funding available for the scheme,” said Rishi Sunak, chancellor of the Exchequer.

Under the Republican plan, the bailout program would be managed by the Small Business Administration and the loans would be made by commercial banks. But the S.B.A. is itself small, and banks are not staffed to handle an emergency program. The federal government’s reliance on banks to modify mortgage loans during the last financial crisis ended in disaster. In recent weeks, the banking industry’s struggles to handle a modest increase in mortgage refinancing applications has offered a timely reminder of its limitations. The Federal Reserve is better equipped to manage the process than the S.B.A., but it’s unlikely to be much faster. It has the legal authority to create a lending program, and it could create the money, too. But it would also need to create a new bureaucracy, or else rely on the banks.

That’s staggering but plausible, for reasons I’ll get to shortly. Interestingly, though, the editors have a different view of the problem for larger businesses:

Notwithstanding the urgency of action, it is important to draw a distinction between small companies, which are inherently vulnerable to major disruptions, and larger businesses whose vulnerability is partly a product of poor choices, notably the vast sums companies wasted in recent years buying back shares of their own stock to enrich their shareholders.

Boeing, for example, is seeking a $60 billion bailout — which, as it happens, is almost exactly the amount of money the company has distributed to its shareholders since 2013, in the form of $17.4 billion in dividend payments and $43.1 billion spent repurchasing its own shares.

The major airlines spent 96 percent of free cash over the last decade buying back their own stock to drive up share prices, living in the moment with little regard to the future. Among the beneficiaries? Airline executives, who sold about $1.6 billion in shares during that period.
Executives in the air travel business, which includes Boeing, should have been ready for a rainy day even if they could not reasonably have been expected to anticipate the particulars of the coronavirus crisis. This is, after all, the third time in 20 years that the industry has faced a debilitating surprise. Accordingly, the responsible course for the government is not just to provide another bailout, but to require changes in behavior.

I’m unconvinced that sending profits to shareholders is either “wasted” or a “poor choice.” It is, after all, the function of a publicly owned company to make money for its shareholders. But I absolutely agree that it goes both ways: if they cash in during good times, they shouldn’t expect the taxpayers to bail them out in bad.

But here’s the thing: the airlines aren’t in a pickle because of a normal recession or even a great one. They’re failing—as are movie theaters, bars, restaurants, and many other small businesses to which the NYT are apparently more sympathetic—because of government action.

While it’s unreasonable to expect the airlines to have planned for the greatest epidemic in over a century, I would be hard to persuade that yet another taxpayer-funded bailout was in order if the fear of COVID-19 was cutting into demand for their product. That’s just life in the big city.

But it’s a far different thing, indeed, when the President has essentially canceled all international flights and ordered millions of Federal employees not to travel even internationally. Or when governors and mayors across the country are ordering people outside a handful of essential industries to remain at home other than to buy groceries and other essentials.

Having ordered American citizens to give up their livelihoods for weeks and possibly months in order to avoid spreading a disease that could kill millions of people and overwhelm the capacity of our hospital system, the government has a moral obligation to compensate people for their losses.

Because of that, I’m on board with the NYT’s conclusion:

There is no need to choose among the various kinds of aid that Congress is considering. The abrupt plunge in the nation’s economic fortunes has no obvious precedents; it requires a massive response. Send checks to every American. Lend money to every business. Strengthen the social safety net. The risk of doing too much is greatly outweighed in this moment by the consequences of failing to do enough.

The correct answer right now is D) All of the Above.

FILED UNDER: COVID-19, Economics and Business, Government, Health
James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. OzarkHillbilly says:

    I’m unconvinced that sending profits to shareholders is either “wasted” or a “poor choice.” It is, after all, the function of a publicly owned company to make money for its shareholders. But I absolutely agree that it goes both ways: if they cash in during good times, they shouldn’t expect the taxpayers to bail them out in bad.

    As I stated the other day:

    I get that this is an “unforeseeable event” (except for all those people who did in fact foresee it) and that companies would be hard pressed to prepare for it (those same people said we needed to prepare for such an event) so whocoodaknowed, and think of all the jobs that will be lost, yadda yadda yadda….

    But I can’t help thinking back to ’08, ’09, and ’10, the last time we had a stock market crash and the construction industry was almost comatose. My union’s pension fund went severely into the red because #1 the stock market collapsed taking half the assets with it and #2 the construction industry was almost comatose and *half* the damned carpenters in the CDC were out of work, which meant they weren’t contributing to the fund. I don’t remember us getting any bailout. I do remember the PBGC sending some threatening letters. I do remember that as one of the fortunate guys who managed to have a job, I was making increased contributions to the fund for several years until our fund was back in the black.

    Yeah I know, apples and oranges and all that, and yet…

    And here we are again. Industries begging for bailouts while dumbass carpenters will get threats and have to bootstrap it. So yeah, I’m with Liz that something like this is necessary:

    * Payrolls must be maintained and companies must use funds to keep people working or on payroll
    * $15 minimum wage within one year of the end of the national emergency
    * Permanent ban on share buybacks
    * No dividends or executive bonuses while receiving relief and for three years afterwards
    * Must obtain shareholder and board approval for all political spending
    * Collective bargaining agreements should remain in place

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  2. Stormy Dragon says:

    Since we’re basically doing 2/3rds MMT, we might as well go the whole hog and see if it works or not: instead of issuing debt, just print the money we need for this and then create an income tax multiplier based on how we’re tracking against the 2% inflation target (e.g. if inflation is 3% everyone pays an extra 1% in income tax)

    4
  3. James Joyner says:

    @OzarkHillbilly: Many of those strictures seem reasonable as a cost of receiving a government bailout or loan. I’m dubious that a $15 minimum wage makes sense nationally (it’s too low in most major metropolitan areas and too high in a lot of low cost of living areas). And there are perfectly legitimate reasons for share buybacks.

    And, again, this is a different sort of crisis than 2008. Many if not all of these businesses are suffering because of government actions.

    2
  4. Stormy Dragon says:

    @James Joyner:

    Another thing to remember is that share buybacks originally started as a defense against hostile takeovers, so anyone saying they should be banned entirely is saying they want Gordon Gecko style asset-stripping back.

    4
  5. OzarkHillbilly says:

    @James Joyner:

    And there are perfectly legitimate reasons for share buybacks.

    Yep, privatizing profits so that later they need to socialize the losses, otherwise known as “taking the money and running”.

    Many if not all of these businesses are suffering because of government actions.

    The GOP is a wholly owned subsidiary of big business and has done it’s damndest to rig the tax code in their favor and are doing the same with the courts. Life is rough all over.

    I am not so sympathetic, James. Never will be.

    I’m dubious that a $15 minimum wage makes sense nationally (it’s too low in most major metropolitan areas and too high in a lot of low cost of living areas).

    It’s above my pay grade (as to where it should be or how best to implement it) but I don’t think anyone surviving on 2 or 3 part time minimum wage jobs in the “low cost of living” rural area I live in would agree.

    ETA better phrasing

    11
  6. Kit says:

    So we are up to $1.2 trillion just for small businesses. That’s in the neighborhood of the cost of the Iraq War. Ultimately, much more likely needs to be paid. Seems that we can just never afford anything costing less then one trillion dollars.

    And isn’t there a slight similarity between share buybacks and the $200B/year tax cuts?

    2
  7. DrDaveT says:

    As I noted elsewhere, the entire premise of capitalism is that the owners of capital deserve the profits because they are the ones taking the risks. Labor gets wages, set by ownership. Ownership keeps everything else, be that positive or negative.

    If we take away the risk, so that ownership cannot lose regardless of their choices, we also take away the rationale for ownership controlling profits. If Boeing is a public utility, let us by all means treat them like a public utility.

    In the meantime, we have two different problems on two different time scales. The immediate crisis is food and rent for people who live paycheck to paycheck, be they waitresses or small business owners. The long-term crisis is keeping the economy on life support until it can breathe on its own. The correct treatments for those two crises are unrelated, and one of them can wait.

    12
  8. gVOR08 says:

    I should start a catalog of standard conservative “arguments”. In terms of frequency of use, “Liberal policy X must not pass because it’s not perfect.” would be like number two or three.

    3
  9. Kathy says:

    It is, after all, the function of a publicly owned company to make money for its shareholders.

    “There’s your problem.” Adam Savage

    The function of a company, whether it’s acknowledged or not, and be it private or public, is to produce goods or provide services. Money and profits are one of the tools required to do so.

    But when the focus is solely on money, or “shareholder value,” then that’s when companies start finding trouble. The product or service in question becomes secondary. No one, in the company, cares whether the goods they sell are good, so long as they make money. This gets you things like the 737 MAX, or the shoddy subprime mortgage-backed securities.

    It’s not that people in the aircraft industry or finance industry didn’t know the huge risks these represented, but that they were quick, cheap ways to make a lot more money.

    And I’ll steal a page from the Libertarian and Objectivist playbooks: if government then bails out these industries when they crash, they ave every incentive to keep gambling on high risk for high rewards.

    How’s this: let the US government bail out the airlines to the tune of $50-$60 billion, in exchange for $50-$60 billion worth of airline stock. Later, when the crisis passes, the government will sell the stock to anyone who wants it, except those who owned those stocks when the government purchased them.

    BTW, one big owner of airline stocks these days is Warren Buffet. He’s the second largest shareholder of United, American, and Southwest, and the largest at Delta.

    How much money does he need?

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  10. gVOR08 says:

    The purpose of saving businesses is both to preserve the productive capacity of the economy and the welfare of workers. – NYT above

    We need to preserve some continuity of employment at, say, Delta Airlines. We also need to be able to fire up our transportation system as need ramps up. But, given modest maintenance, the airplanes, gates, runways, traffic control system, hangars, fuel depots, computer systems, etc. are unaffected by the virus. The virus is a neutron bomb. Pragmatically we don’t need to maintain Delta’s current management, their share price, or even the name “Delta”. I’m thinking of the government brokered Fiat-Chrysler deal. And I don’t mean to pick on delta except as a convenient example. But you know every lobbyist in the country is lined up at the trough.

    2
  11. gVOR08 says:

    @Kathy:

    It is, after all, the function of a publicly owned company to make money for its shareholders.

    “There’s your problem.” Adam Savage

    There is something very wrong with corporate governance in this country and it revolves around that. There’s also something very wrong with anti-trust policy which revolves around Robert Bork’s The Antitrust Paradox.

    2
  12. DrDaveT says:

    By the way, has anyone yet heard a reporter ask the President or Veep how they intend to pay for these interventions? Which taxes they will increase or implement? For once, the “economic growth will cover it” argument can be laughed at on its face, even by ordinary reporters.

    It would be useful in one way to have them announce that there is no free lunch and taxes are going up. It would be sad, but useful in a different way, for them to announce that they do not intend to pay for any of it.

    7
  13. James Joyner says:

    @DrDaveT:

    If we take away the risk, so that ownership cannot lose regardless of their choices, we also take away the rationale for ownership controlling profits.

    We agree. I was in favor of letting businesses go under during the Great Recession and simply targeting those who lost their jobs and were unable to pay their mortgages. If was in the “Too big to fail = too big to exist” camp.

    But, again, this is a very specific circumstance: many of these businesses are going under because they’ve been either directly ordered to close by the government or because government has ordered people to stay home. We owe them recompense.

    @gVOR08:

    “Liberal policy X must not pass because it’s not perfect.”

    I’m not making any such argument. I’m agreeing with the bulk of the argument but against specific exemptions being proposed.

    @Kathy:

    The function of a company, whether it’s acknowledged or not, and be it private or public, is to produce goods or provide services. Money and profits are one of the tools required to do so.

    Well, no. The prospect of generating profits are why businesses produce goods and provide services.

    That said, I largely agree with@gVOR08:

    There is something very wrong with corporate governance in this country and it revolves around that

    To wit: Corporations shouldn’t be managed around short-term goals or quarterly earnings but rather long-term sustainability. There’s a fiduciary responsibility to invest in the long-term viability of the enterprise that outweighs paying out dividends and the like. But there’s obviously a balancing act there.

    (All of my stock holdings are in index funds and the like and most of that is college and retirement savings.)

    2
  14. Kathy says:

    @James Joyner:

    To wit: Corporations shouldn’t be managed around short-term goals or quarterly earnings but rather long-term sustainability.

    How do you get people to do that when 1) the focus is on making money and 2) the government will bail out the company (meaning the shareholders) provided their screw-up is spectacular enough?

    3
  15. DrDaveT says:

    But, again, this is a very specific circumstance: many of these businesses are going under because they’ve been either directly ordered to close by the government or because government has ordered people to stay home. We owe them recompense.

    I’d be curious to hear why you think government action is somehow a totally different category of risk, not to be compared against other risks.

    3
  16. de stijl says:

    @DrDaveT:

    It is standard, boilerplate, Republican 101 to reduce tax revenue while also increasing spending while in power, then go Tea Party deficit hawkish when out.

    2002, Cheney. “Deficits don’t matter.”

    They manufacture the crisis they later decry. They create the hammer which with which they will bash the Ds with later after the electorate has had enough of their mismanagement.

    Transparently, in the open.

    1
  17. de stijl says:

    @DrDaveT:
    @Kathy:

    Corporatism is endemic in certain circles that our host recently identified with. Water he swimmed in. (Swam? That is a crazy verb.)

    You can take a man out of identifying as Republican, but you cannot remove core thought processes immediately. Defaulting to corporatism is not unexpected.

    Be patient. It is a process.

    3
  18. Sleeping Dog says:

    @Kathy:

    How’s this: let the US government bail out the airlines to the tune of $50-$60 billion, in exchange for $50-$60 billion worth of airline stock. Later, when the crisis passes, the government will sell the stock to anyone who wants it, except those who owned those stocks when the government purchased them.

    In part, this is how the auto industry bailout under Obama functioned.

    In the specific case of Boeing, Covid-19 has nothing to do with their current straits and to use the virus as an excuse to bail them out is unconscionable.

    2
  19. Just nutha ignint cracker says:

    I’m not sure that I see the correlation between

    I’m unconvinced that sending profits to shareholders is either “wasted” or a “poor choice.” It is, after all, the function of a publicly owned company to make money for its shareholders. But I absolutely agree that it goes both ways: if they cash in during good times, they shouldn’t expect the taxpayers to bail them out in bad.

    and

    The major airlines spent 96 percent of free cash over the last decade buying back their own stock to drive up share prices, living in the moment with little regard to the future. Among the beneficiaries? Airline executives, who sold about $1.6 billion in shares during that period.

    But I’m just an ignint cracker and often can’t see the “big picture” aspects of all this finance and bidness stuff.

  20. gVOR08 says:

    @Kathy:

    How do you get people to do that when 1) the focus is on making money and 2) the government will bail out the company (meaning the shareholders) provided their screw-up is spectacular enough?

    3. their absurdly generous compensation is tied to stock price? 4. They have a golden parachute if it all goes south?

    2
  21. Kathy says:

    @Sleeping Dog:

    In the specific case of Boeing, Covid-19 has nothing to do with their current straits and to use the virus as an excuse to bail them out is unconscionable.

    It does have a bit to do with the pandemic.

    Yes, it’s mostly losses due to the MAX fiasco, but also as airlines are cutting back capacity, some are cancelling or delaying orders. This is hurting Airbus as well.

    The odd part is airlines are doing this even as they also retire some planes early.For instance, KLM is speeding up retirement of its 747 fleet to march 26th, rather than January 2021. American seems to be taking their last 757s and 767s out of service.

    This is sensible, as these older planes cost more to maintain and operate. But taking them out of play early means they expect demand to be lower even after things return to normal.

    Back on point, Boeing is America’s largest exporter, and does provide a lot of well-paying jobs. I don’t see how any government can let it go out of business, or let it get taken over by, say, Chinese investors.

    So they’ll get bailed out. But the shareholders, the directors, and the executives who had anything to do with the development of the MAX should not be.

    2
  22. James Joyner says:

    @DrDaveT: Because it’s coercive and uninsurable.

    If people stop flying because there’s a recession and they can’t afford it, that’s tough. If they can’t fly because government won’t allow it, we’re essentially drafting the airports (and restaurants, bars, and other closed businesses) into public service.

    2
  23. An Interested Party says:

    Back on point, Boeing is America’s largest exporter, and does provide a lot of well-paying jobs. I don’t see how any government can let it go out of business, or let it get taken over by, say, Chinese investors.

    In other words, they’re too big to fail…a pity that individuals who aren’t wealthy can’t get in on that same kind of action…

  24. DrDaveT says:

    @James Joyner:

    Because it’s coercive and uninsurable.

    Life is coercive. Markets are coercive. Earthquakes and tsunamis are coercive. Lawsuits are coercive. There’s no difference between governments and other forces in this regard, other than that the government is (usually) acting for the general good.

    As for “uninsurable”, you know that’s nonsense. The insurance is to not leverage yourself to the brink of ruin. Keep some cash on hand. You know, savings. Prudent companies have done that since forever.

    If people stop flying because there’s a recession and they can’t afford it, that’s tough. If they can’t fly because government won’t allow it, we’re essentially drafting the airports (and restaurants, bars, and other closed businesses) into public service.

    Every business in America is born into public service. They pay taxes; they provide health insurance; they comply with laws and regulations that reduce their profitability for the general good. This is normal and appropriate. In exchange, they get law and order, freedom from foreign invasion, functioning markets, transportation networks, a supply of skilled and educated labor, access to credit, and all of the other “blessings of liberty”. The idea that business is somehow apart from government and only harmed by it is a pernicious myth. The idea that business owes nothing to the polity that makes it possible and profitable is worse than a myth; it’s a calumny against the social contract.

    2
  25. Just nutha ignint cracker says:

    @An Interested Party: Yes, it is unfortunate, but it comes back to the old adage:

    If you owe the bank $10,000 and can’t pay it back, you have a problem. On the other hand, if you owe the bank $10 million and can’t pay it back, the bank has a problem.

    2
  26. James Joyner says:

    @DrDaveT:

    Every business in America is born into public service. They pay taxes; they provide health insurance; they comply with laws and regulations that reduce their profitability for the general good. This is normal and appropriate. In exchange, they get law and order, freedom from foreign invasion, functioning markets, transportation networks, a supply of skilled and educated labor, access to credit, and all of the other “blessings of liberty”. The idea that business is somehow apart from government and only harmed by it is a pernicious myth. The idea that business owes nothing to the polity that makes it possible and profitable is worse than a myth; it’s a calumny against the social contract.

    On this, we likely differ only on the margins.

    For example, I don’t think businesses have a societal obligation to provide health insurance to their employees. They do so because, unlike every other civilized country on the planet, society doesn’t pick up the cost and people have come to depend on their employees to become part of group plans.

    But, sure, businesses have an obligation to follow the law, including paying taxes, in exchange for licensing and protections. Just like citizens.

    But, oddly, you seem to be making a libertarian argument here:

    The insurance is to not leverage yourself to the brink of ruin. Keep some cash on hand. You know, savings. Prudent companies have done that since forever.

    But nobody in this thread is saying that restaurant owners and their workers should have been more prudent in this regard. Everyone agrees that we should bail them out of a crisis not of their making—especially since society has asked, if not ordered, them to cease earning a living for the foreseeable future.

    Nobody seems to be saying, “Well, not profitable restaurants. And not front-of-house workers at high-end joints bringing in six-figure incomes. No, fuck them. They should have put money away for a rainy day.”

    1
  27. DrDaveT says:

    @James Joyner:

    But nobody in this thread is saying that restaurant owners and their workers should have been more prudent in this regard. Everyone agrees that we should bail them out of a crisis not of their making—especially since society has asked, if not ordered, them to cease earning a living for the foreseeable future.

    You raise an excellent point. This is related to your comment about health care above. If we as a society are going to be so heedless as to create a working underclass with no financial security and no effective short-term safety nets, then we owe them relief when the Trump hits the fan. If we were an equitable and efficient society to begin with, it would be true that the wastrel waiter and the greedy CEO (and the selfish corporation) would deserve equal treatment. However, that’s not who we are — we have (on average) given the CEO and the corporation every advantage and unlimited credit, while telling the waiter to pull himself up by his bootstraps. (I also think that, collectively, the waiters and their economic siblings are more important to the economy than the current incarnation of Boeing is, but that’s a separate argument.)

    One place where liberals and conservatives differ fundamentally is in their willingness to treat societal patterns (crime, wealth distribution, economic growth, etc.) as predictable outputs of the system as it is designed and implemented, rather than as choices made by individuals independent of their context. To overgeneralize, liberals want (primarily) to tweak the settings on the system to get better outcomes, while conservatives would rather reward moral choices and punish immoral choices, for certain values of ‘moral’. In this current emergency, I think it is reasonable to focus aid on those whose vulnerability is mostly a product of lack of opportunity to do better, and less on those whose vulnerability is due to squandering advantage. That said, one of the reasons I favor direct blind payments to individuals is that it avoids the entire issue of what people deserve. And I oppose immediate bailouts to publicly-traded companies because, frankly, they can wait — they don’t need to eat, and their shareholders are already provided for.

  28. DrDaveT says:

    @James Joyner:

    On this, we likely differ only on the margins.

    Just wanted to add that I was intrigued by this statement. I would be delighted and intrigued to explore where we do and don’t agree, since you incline libertarian and I incline toward viewing government as the ambient context of all human endeavor. For example, I believe there is no commerce without government, so that “government should not interfere in markets” sounds to me exactly like “get the government out of my Social Security”…

    If it wasn’t clear in my previous reply, I do see the force of your comment and I think it leads to a fundamental question.

  29. James Joyner says:

    @DrDaveT:

    To overgeneralize, liberals want (primarily) to tweak the settings on the system to get better outcomes, while conservatives would rather reward moral choices and punish immoral choices, for certain values of ‘moral’.

    I think that’s generally speaking fair but note the irony that we seem to be in a reverse position vis-a-vis the current crisis.