The economic devastation wrought by Covid-19 is already far more severe than the aftermath of the financial crisis of 2008. But it is easy to mistake the Washington policy conversations around one crisis for the other. When it comes to government relief, bailouts and how to get the economy on track, it is as if we have time-warped back a decade, into a fight in which is it once again small versus large, Wall Street versus Main Street, and populist progressive Democrat senator Elizabeth Warren versus the Treasury Department.
In late May, Senator Warren grilled Treasury secretary Steve Mnuchin over why the Trump administration had failed to stipulate that the large corporations receiving government support would have to keep workers on staff.
Early in May, she and others complained about financial giants such as Blackstone cutting the pay of doctors at private equity-owned medical companies, even as they petitioned for state support for their own portfolio firms. Democrats such as Ms Warren have also been instrumental in putting restrictions on executive pay and share buybacks at big companies receiving Covid-19 related government bailouts.
In the previous crisis, Washington bailed out the country’s largest banks. Today, it is big businesses that have been first in line for government handouts.
Their ranks include not only private equity giants, but also airlines, which spent the majority of their copious free cash in recent years on buybacks, though may not survive even with federal aid. These are joined by manufacturers such as Boeing, Big Oil, the cruise industry, hotels, hospitals, casinos, pork producers, drug companies and drone manufacturers.
Many large companies and financial institutions have received all the credit and funds they need, with no Fed time limits on payback. Large technology companies such as Uber, that employ mainly gig workers rather than full-time staff, have been able to offload the cost of unemployment benefits to taxpayers.
Small businesses that represent the majority of all job creation have been able to tap a $660bn loan scheme. But disbursements have been slow and disorganised, say some SMEs, activists and others. Many small enterprises have found themselves ineligible for loans for bureaucratic reasons, or held to higher employment standards than some bigger businesses.
There are widespread reports of fraud and abuse within the “Paycheck Protection Program”. The PPP scheme was meant to help smaller businesses which did not have easy access to credit. But according to a recent S&P Global Market Intelligence analysis, publicly traded companies have secured more than $1bn in loan approvals (though many are giving the money back under public pressure).
Individual workers are, of course, being hit hardest of all. With nearly 39m new applications for unemployment benefit from lockdown to May 16, there are now far more jobless people in the US than in the entire country of Australia.
Secretary Mnuchin and Republicans are for doling out more stimulus money cautiously, in hopes that a nascent vaccine developed by the biotech company Moderna (which has received several hundred million dollars in taxpayer support) could bring the economy back to life more quickly than most experts expect. But the approval process has been politicised by the White House appointment of a former executive at the company as co-head of the White House coronavirus vaccine project.
What’s more, even if a reliable vaccine is developed quickly, new economic research shows close to half of the jobs being lost are at risk of never coming back, as companies reconfigure themselves for a post-Covid world.
This points to the conclusion that many individuals and even some businesses will need not loans but debt relief, emergency healthcare, and state supported retraining for new jobs. That will undoubtedly require more fiscal stimulus, something that Federal Reserve Chair Jay Powell is calling for, along with Democrats.
But in advance of November elections, any new relief package will be fraught. Democrats, for example, want more restrictions on corporate behaviour, and government stakes to be taken in bailed out public companies. Republicans are aiming for limited liability for corporations in the raft of Covid-19 related lawsuits (involving everything from health and safety risks for workers, to whether universities offering zoom classes can charge full fees) that are now coming down the road.
All this smacks of the same old Washington rescue story, circa 2008/2009 — one in which large businesses and well-connected individuals get unlimited support, and others are left on their own.
This is bad economics and worse politics. It risks repeating the moral hazard problems and political polarisation after the 2008 meltdown, when banks needed bailing out to prevent a depression.
Back then, the strongest banks went on to thrive, becoming richer and more concentrated than they were before the crisis. Corporate concentration looks likely to increase amid coronavirus too. Meanwhile, millions of Americans lost their homes because they could not make mortgage payments. Many of these were in turn bought cheaply and flipped for massive profits by the same private equity groups now asking for handouts.
To avoid rehashing the mistakes of the past decade, or worse, US politicians must understand who needs protecting most: individuals and small businesses. Congress should pass another stimulus bill as soon as possible, and any big corporate bailouts it funds should be conditional on companies shielding workers first.
Where debt funding is inappropriate, Washington should consider taking preferred equity stakes. By some calculations, the US government made a profit from the 2008 bailouts. But the impression still lingers that bankers’ losses were socialised while gains were not. For the sake of US capitalism — and ordinary Americans — that cannot happen this time.
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