To limit mass unemployment, the government needs to provide companies with the money they are temporarily unable to earn.
By The New York Times
The federal government has a chance to save millions of Americans from unemployment as the coronavirus spreads, but policymakers must act decisively.
Employers, facing a revenue drought, are laying off workers at a record pace. Preliminary data indicates that more people filed for unemployment benefits last week than in any previous week in the nation’s history, shattering a record set back in 1982.
The mass layoffs are depriving families of income and, what is perhaps more important in the middle of a pandemic, leaving many without health insurance, too.
The necessary solution is a grand bargain: The federal government provides the money that companies are unable to earn, and companies use the money to keep workers on the payroll.
Time is of the essence. A unique feature of the current recession is that the government is determining the depth of the economic damage in real time, through its actions and inaction. To stanch job losses, policymakers need to announce that help is on the way, and that it will be retroactive to the beginning of March. Then they need to deliver that help as fast as possible.
Businesses already facing a steep drop in revenue have been placed in an induced coma by federal, state and local restrictions. In a Goldman Sachs national survey of small business owners, more than half said that under current conditions, they would be forced out of business in less than three months. The only practical way to limit mass unemployment, and to preserve previously viable companies, is for the government to pump money into the private sector.
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.
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.
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.
The Fed already is backstopping short-term corporate borrowing, and it may need to provide similar backing for long-term corporate debt. The Republican plan would provide for an additional $208 billion in loan guarantees — including $58 billion for passenger and cargo airlines — for companies unable to tap capital markets even with the Fed’s assistance.
Businesses would pay interest, and the legislation allows the Treasury to take an equity stake in the companies it saves, so taxpayers benefit from the recovery. It also imposes temporary limits on executive compensation. But that’s not good enough. Big companies, too, must maintain payrolls and wages. And they must eschew stock buybacks.
Any bailout plan will come too late to avoid a large increase in unemployment. The federal government’s failure to prepare for the arrival of the coronavirus, particularly the lack of large-scale testing, has forced policymakers to shut down many kinds of commercial activity. California and New York have ordered most workers to stay home.
A proposal to send $2,000 to every American would help, but the government needs to do more for those who lose jobs by expanding unemployment benefits. In most states, the benefits cover about 45 percent of lost wages for low-income workers, and a lot of workers don’t qualify. Congress can get help to those who need it most by requiring states to raise the minimum benefit and to expand eligibility, both at federal expense. The government also should offer partial unemployment benefits: Companies could shift some workers to part-time arrangements, and the government could supplement their salaries.
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.