יום שלישי, 24 במרץ 2020

Washington Is About to Pick Which Companies Survive

Even with the biggest economic bailout ever, a lot of firms won't make it through the coronavirus crisis. How should Congress handle the triage?

Two ugly truths about any epic economic crisis are that not all businesses will survive, and government interventions help determine which businesses will survive.

As coronavirus crushes the economy, Washington policymakers are scrambling to figure out who to bail out, a responsibility that one veteran of the 2008 financial rescue morbidly but accurately compared to the frantic triage work that doctors are currently doing in overcrowded Italian hospitals. They don’t want to waste precious resources on patients who can’t be saved, or on patients who can recover without their help. They know they can’t prevent all deaths, but they want to prevent the preventable deaths.

“You have to decide who you can bridge through this,” he said.

That kind of economic triage is happening right now. With American commerce facing an unprecedented shutdown, and just about every business other than Amazon, Costco and Purell taking devastating hits, Washington is gripped in a bailout frenzy. Nearly every industry is sending its lobbyists to ask Congress for handouts, including the private jet industry.

The coal industry wants permission to stop making payments to miners with black lung disease.

The hotel industry alone has requested a $150 billion bailout, which would help President Donald Trump endure the cancelled bookings at his resorts.

As Congress rushes to assemble an enormous stimulus package to try to slow the freefall or at least pad the landing, it’s becoming clear that a lot of federal dollars will be sent straight to American taxpayers, but also that a lot of federal dollars will go straight to the companies that employ them. Washington’s last epic bailout, the $700 billion Wall Street rescue of 2008, was wildly unpopular but ultimately quite successful—and while a financial panic is a different kind of crisis than a viral pandemic, it has some lessons for today about when companies should get help and how that help should be delivered.

These are political questions, and in the current congressional negotiations, Democrats are pushing for more aid for families, especially poorer families, while Republicans are pushing for more aid for businesses, with fewer strings attached. But there’s a growing bailout literature—including a new academic treatise, titled First Responders, produced by the architects and engineers of the last bailout—that suggests some answers are better than others.

In any case, Washington is about to send jetloads of money to American capitalists—perhaps not yet as much as the $700 billion it authorized in 2008 for the financial industry after the worst financial collapse since the Great Depression, but certainly more than the $80 billion it ended up injecting into the auto industry to soften the Great Recession in 2009. Trump’s own trillion-dollar proposal included $500 billion for businesses, and that figure seems to be growing as congressional leaders hash out a deal.

Ideally they’d be able to think long and hard about who to bail out and how the bailouts should be structured to minimize the short-term and long-term suffering. Right now they don’t have time to think long, but here are some hard problems they’ll need to consider.
The Pandemic Priority

Some of the industries begging for bailouts are truly vital to the U.S. economy. Many are on the cusp of huge layoffs that would cause awful pain. And none are responsible for the pandemic that’s destroying their bottom lines. But triage is about priorities, and Washington’s top priority is as spectacularly obvious as it has been largely absent from the stimulus debate: It needs to do everything it can to contain the coronavirus right now. The first rule for getting out of a hole is to stop digging, and that means throwing money at any business that can make more tests, masks or ventilators, provide more hospital beds or medical supplies, or otherwise help get the pandemic under control.

Trump’s two-page stimulus proposal did not specify one dime for these industries, but it’s the length and severity of the pandemic itself that will determine the ultimate fate of the airlines, the hotels and every other American business. Any aid that isn’t directed towards ending the pandemic is a Band-Aid.

It may seem unfair to send other blameless industries to the back of the line, especially after Washington approved $700 billion for too-big-to-fail banks that actually caused the cataclysm in 2008, but it really reflects the same principle. The crisis in 2008 was a financial panic, an all-out run on the financial system that props up the economy; the only way to end the panic was to assure depositors and creditors that their money would be safe in the system, and the only way to do that was to have the government stand behind the banks.

The crisis today is a public health catastrophe, and the only way to get cruise lines and hotels and factories back in business will be to stop the spread of the virus. So those industries don’t have a special claim to be first in line for bailouts—except insofar as cruise ships and hotels could be repurposed to quarantine the sick, or factories could be repurposed to make necessary medical equipment.

The financial bailout worked in 2008, and every dime the government invested in dying banks was repaid with interest after they recovered. This time, Washington shouldn’t expect to get back money it invests in the overwhelmed public health sector. But if that money helps contain COVID-19, it could save millions of businesses and trillions of taxpayer dollars.

The Critical Question

While the medical sector is the only sector vital to ending this crisis, it’s certainly possible that other industries could be deemed vital to the economy, as the auto industry was in 2009. Trump’s proposal included $200 billion worth of loans to airlines and “other critical sectors of the U.S. economy experiencing severe financial distress.” The next question in front of Washington in a time of triage is: Are any other sectors so critical to the economy that ordinary taxpayers should bail them out?

After all, just about every sector is experiencing severe financial distress. So even though more than 2 million Americans work in the hotel industry, and 15 million Americans work at restaurants, it’s hard to justify helping beleaguered hoteliers or restauranteurs through industry-specific bailouts rather than general programs to help businesses and workers. U.S. cruise lines want U.S. aid even though they’re headquartered outside the U.S. to avoid U.S. taxes. Their economic adversity is not evidently more critical for government to relieve than the adversity of shuttered barber shops or retail stores or movie theaters.

The airlines do seem likely to get a bailout, and they arguably do provide a vital economic service to a nation of frequent flyers that would be difficult to replace if they all went bust. Boeing is also seeking a $60 billion aid package, and while it might seem enraging even to contemplate helping a behemoth that was already in trouble before the pandemic because its planes kept falling out of the sky, it is America’s single biggest exporter. One lesson of the 2008 bailout, which rewarded reckless behavior but quelled a catastrophic panic, is that success should be measured by results for the nation, not by the morality of the bailout recipients.

Incidentally, another lesson of 2008 is that turbulence on Main Street—unemployed workers and underperforming businesses unable to pay mortgages and other loans—can create turbulence on Wall Street, which can then create a vicious cycle that intensifies problems on Main Street. It is unfortunately possible that if the pandemic drags on for awhile, Big Finance might need more help from Congress to stave off another panic. It would infuriate the country, especially after Goldman Sachs just gave its CEO a raise to $27.5 million, but financial markets are already deteriorating so quickly that the Federal Reserve has quietly begun to pump liquidity into faltering credit markets.

“It’s hard for markets to function when people can’t price risk, and right now there’s so much uncertainty that it’s very hard to price risk,” says Brookings Institution economist Nellie Liang, who ran the Federal Reserve's Office of Financial Stability and edited First Responders, the collection of essays by the 2008 crisis managers. “We’re definitely starting to see some dysfunction.”

This is why one Main Street solution floating around, a “Jubilee”-type mandate where the government suspends all payments on mortgages and rent and other loans for a couple months, could freak out creditors and destabilize the financial system yet again. "That. Would. Be. Crazy!" another crisis veteran told me. When governments tell creditors their secured loans are no longer secure, credit can dry up in a hurry. That’s why the Fed is starting to revive many of the lending programs it used to backstop the credit markets in 2008—including one guaranteeing private financing for creditworthy corporations outside the financial industry.

The problem, of course, is that if the pandemic drags on too long, few financial or non-financial corporations will remain creditworthy. This is why the best way to make sure there’s no need for another financial bailout, and to minimize the need for other business bailouts, would be to contain the coronavirus so that the non-financial economy can recover.

Still, it does look like the government will bail out some industries. The next questions to ask are: What kind of terms should the government impose, and what should it get in return?
Conditional Love

The three big myths about the bank bailout is that it cost taxpayers a mint, gave the banks blank checks with no conditions, and made sure no one on Wall Street lost money. In fact, taxpayers got their money back with interest, banks faced limits on executive pay—although those modest limits were lifted once the government was repaid—and most bank investors absorbed gigantic losses, while gigantic firms like Bear Stearns, Lehman Brothers and Wachovia were wiped out. And because there were real dangers to imposing onerous conditions on financial firms during a financial panic that would not apply to non-financial companies during a pandemic, Washington can be much tougher about its bailouts this time.

The first principle for any industry-specific emergency aid is that the main goal should be to get the industry through the emergency, not to bail out its investors or executives.

The government is about to blast unprecedented amounts of money into the economy, but that money ultimately comes out of the pockets of taxpayers, so it’s reasonable to ask bailed-out industries to repay the government once the emergency has passed. That means the bulk of the aid being delivered through loans or perhaps, as in 2008, government purchases of non-voting stock that avoid saddling the firms with excessive debt without subjecting them to operational control by Washington bureaucrats.

Either way, the beneficiaries of the aid should not be stockholders. There are good arguments for keeping vital industries afloat—even if they were mismanaged before the pandemic, even if they blew their cash reserves on stock buybacks. There might even be a case for government to protect their senior creditors, because financial markets can implode when it starts to look like Corporate America’s credit is no longer good. But there’s no reason to bail out their investors, who simply made bets in the financial casino that didn’t pan out. If you have money in the stock market, and you’re not a Republican senator who dumped equities after a scary intelligence briefing, you’re probably getting hammered right now; you don’t deserve special help if you happen to be invested in airlines.

Because this economic calamity is looking even worse than 2008, it’s unrealistic to expect the government to be as successful getting its money back this time. But the government actually has more leverage to impose harsh conditions on its bailouts than it had in 2008, when it was desperate for every bank to participate in the program despite the stigma.

“The banks had a gun to our head,” another former financial first responder told me. “That’s somewhat less true when the bailouts are of, say, airlines.”

Now that Washington can force bailout recipients to meet just about any demands, what should those demands be?

At the very least, Congress has leverage can demand full transparency and powerful oversight over every dollar of federal aid. The Trump administration is reportedly pushing for a $500 billion bailout fund that would not even require immediate disclosure of the bailout recipients, which ought to be a non-starter.

Meanwhile, the airlines have already volunteered to rein in executive compensation, stop paying dividends and refrain from stock buybacks over the life of their loans, a good indication that Congress could ask for more, like limiting those activities even after the loans are repaid. America’s top five airlines indulged in $45 billion worth of stock buybacks that drained their reserves before the pandemic, and it makes sense to ensure that any industry “vital” enough to get bailed out is also required to take its own survival seriously. Senator Elizabeth Warren has called for a permanent ban on stock buybacks for any bailed-out firm, as well as a $15-an-hour minimum wage and a worker representative on its board. Trump’s proposal suggested that bailed out airlines should face “continuation of service requirements.”

But it’s worth thinking about when punitive conditions can be too punitive, since the goal is to make sure these vital industries are healthy in the future. Trump’s notion of service requirements sounds like a plan to force airlines to keep flying planes with hardly any passengers, a recipe for bigger losses and bigger bailouts. Warren and other Democrats support a $15 minimum wage for everyone, but until they can pass it in Congress, does it make sense to saddle vital industries with higher labor costs than non-vital industries? Even limits on executive compensation, while clearly sensible as long as firms remain wards of the state, could make it harder for them to attract better leaders after they repay their loans.

Then again, requirements that bailed-out companies keep their workers on payroll can be onerous, too, but it’s unlikely that Washington will hand out hundreds of billions of dollars to businesses again without some kind of limits on layoffs. Bailouts aren’t only supposed to save vital industries. They’re also supposed to help the people who work in those industries.
Bailouts for the People

The easiest way to get money to ordinary Americans in an emergency is for the government to give it to them. The Republican and Democratic stimulus plans all envision sending checks to taxpayers. Democrats are also pushing for major increases in antipoverty payments like unemployment insurance, which many Republicans seem willing to accept. But there is also a powerful argument for giving aid to businesses, especially small businesses, if they use the aid to keep paying workers who would otherwise be laid off.

“We don’t want millions of people dropping onto the unemployment rolls, because once they’re on it’s hard to get off,” says one GOP congressional aide. “It’s important to keep people connected to their employers, and there’s also inherent dignity in having a job.”

That makes sense, and it would be great to limit the disruption from a near-total shutdown of the economy. But it would also be extremely difficult to do in a triage moment.

A gym, a café, a store, or any other business depending on customers who are no longer leaving their homes won’t be able to pay its employees until the virus is contained, and probably won’t be able to pay back a loan even after the virus is contained. This is why the leaders of the small business committees in the House and Senate drafted a bipartisan $300 billion plan to have the government guarantee loans covering payroll costs during the crisis, understanding that it might eventually cost much more. Americans make about $1 trillion a month, so a lot would depend on the boundaries set by Washington: Would all businesses be covered, no matter how big? Would all salaries be covered, no matter how high?

Again, there’s what Liang calls an “adverse selection problem” in essentially forgiving loans like this during a crisis; businesses that need them probably won’t be able to pay them back, while businesses that can pay them back probably don’t need them. And once the government decides to stand behind a business, there’s a natural tendency to do whatever it takes to keep it afloat. The Senate Republican stimulus proposal included that bipartisan payroll idea but expanded it to cover lease and mortgage payments for small businesses as well. And Democrats have said the latest GOP version would only require bailed-out businesses to maintain their workforce “to the extent possible,” which these days could be a pretty minimal extent.

This is all uncharted territory, because Washington is really dealing with two crises. One is the current nightmare of a nation in lockdown, a situation that is going to make it just about impossible for any bricks-and-mortar business that isn't selling groceries or hand sanitizer to stay afloat for long without government help. And then there’s the question of what the economy will need after the lockdown is over, which is even harder to answer when nobody knows how long the pandemic will last, or which kinds of businesses will be best suited to survive in a post-pandemic economy. That’s why ending the pandemic is almost infinitely more important than any other economic priority.

Keeping businesses alive is important, too, even though some of the firms that receive government medicine are going to die anyway. But that’s why the triage analogy only goes so far. Government doesn’t have the power to save every business, just as the Italian doctors don’t have the power to save every patient, but government does have the power to make sure every American has enough cash to buy essentials during the crisis. And as they spend that cash, they’ll help lay the groundwork for a recovery.

Before Washington even thinks about giving the Trump Administration a $500 billion bailout fund for businesses, it can start by bailing out the ordinary taxpayers who send money to Washington every year. Even if they aren’t too big to fail.

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