Opinion: Coronavirus bailouts are coming: here’s the smart way to help businesses and workers
With major cities closed, all trips canceled, and the global supply chain disrupted, the U.S. economy is expected to experience the biggest contraction since the Great Depression. The political question is therefore not whether the government should intervene, but how.
Precisely because the political response to the pandemic will be massive, it is important that the government does not just spend a lot of money on the problem. Rather, it must focus on the most important needs: stopping the pandemic and ensuring that businesses survive the lockdown phase.
Here is a short list of effective, but financially prudent steps to achieve that goal.
First, federal money should be deployed to help deal with the health crisis. Even in the most optimistic scenario, hospital capacity will be severely strained for some time. The government should create economic incentives to increase this capacity in the short term, for example by increasing Medicare reimbursements for newly added hospital beds.
In addition, we still have time to order and produce ventilators to meet hospital needs which are expected to peak over the next month. Private companies (especially small ones) cannot afford to expand their capacity if they are not assured that their output will be purchased in full. This is where a federal purchase order can make the biggest difference.
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Second, we need to help workers as jobs disappear in the name of social distancing. The fastest way to achieve this goal (helping workers survive) is not only compulsory sick leave (more extensive than that approved by Congress) but also wage replacement for wages up to a certain point. amount.
In addition to facilitating compliance with restrictions, this policy would have two additional benefits: 1) it will reduce the financial uncertainty workers face, containing the surge in precautionary savings, which will squeeze demand; 2) This will ensure that production capacity remains in place, so that supply can resume as the pandemic subsides.
The cost of this policy is that it will put a strain on businesses, especially those that have seen their revenues disappear. The third step is therefore to help them cope. The first measure should be a delay in paying their financial obligations in proportion to the drop in their income, whether those payments come from mortgages, leases or rents. Thus, restaurants that saw their income in March disappear could see 100% of their rent due in March postponed.
The same principle should apply to individuals, who see their income falling, with the same degree of proportionality.
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Homeowners will not be badly affected as they will see both their rents and mortgage payments postponed. The banks will not lose the income, but will only postpone it. In a world of near zero interest rates and abundant Fed liquidity, this shouldn’t be a major problem.
While this would help businesses meet their financial obligations, it does not help them pay their payroll, especially if they have no income. To help them do that, I would offer an instant refund of the taxes that every business paid in the last year, in proportion to the drop in revenue the business is currently experiencing.
So if a small restaurant that made $ 100,000 in profit last year (and paid $ 21,000 in taxes) experiences a 90% drop in revenue, it will receive an IRS check for $ 18,900. (21,000 x 0.9). The same logic would apply to the personal income of all self-employed workers.
This system would prevent abuse and sort out profitable businesses which should survive and businesses which have not and should not survive. It also rewards businesses and people who have paid their taxes.
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Assuming a 10% drop in GDP, we can expect a rebate equal to 10% of the corporate tax paid last year, or $ 39 billion.
I would avoid measures targeted to benefit specific groups, such as oil purchases. Apart from defense considerations, there is no reason to favor an industry. The big risk is that it could disproportionately benefit the most politically connected industries.
What about Boeing BA,
Today, Boeing looks like General Motors GM,
in 2008: a company on the verge of collapse not because of the current economic downturn, but because of ten years of mismanagement. Using taxpayers’ money to save it would be tantamount to socializing the losses. If one wants to save its production capacities for strategic reasons, it must be treated like GM in 2008: the existing shareholders are wiped out and the government temporarily takes over the company.
Read:Airlines and Boeing want bailout – but look how much they spent on share buybacks
Opinion:Any corporate bailout should wipe out shareholders first
After ignoring the threat posed by the coronavirus, President Trump has become the chief “smuggler”. There is no transfer, no bailout, no intervention too important for him. After all, he wants to be re-elected and he will spare no tax dollars to achieve that goal.
While massive intervention is needed, it is important that public money is not wasted. Any waste will strain both political will and fiscal capacity, jeopardizing future interventions. Unfortunately, this crisis risks necessitating several more. Trump – if he is not re-elected – doesn’t care to keep that option open. We do.
Luigi Zingales is a professor of finance at the Booth School of Business at the University of Chicago and co-host of the Capitalisn’t podcast.