How to craft a better coronavirus bailout
Congress has produced a bailout bill that’s full of mistakes. We just don’t yet know what they are. In those 900 pages of dense legalese we will find sections where the language is sloppy and the intent is unclear. There will be embarrassing unintended consequences.
As annoying as those mistakes will prove to be, they’re ok. You can’t create a flawless emergency plan to spend $2 trillion — especially if you’ve only got two weeks to do it. A bill needed to be passed.
The mistakes aren’t what’s wrong with the bill. What’s wrong with the bill is that Congress didn’t know what it was doing.
And I mean that literally. The individual representatives — mostly smart, decent people — all had a clear idea of what they wanted. But the bailout bill they produced is a mashup of provisions at war with other provisions. This thing we call Congress acted like a creature without a clear idea of what it wanted.
That’s especially frustrating because in this crisis, it was obvious that congressional action should have been targeted at two distinct goals.
The first thing Congress needed to do was to act like a gigantic insurance company. The enormous costs of the pandemic aren’t evenly distributed. Some people are dying. Some are losing vast amounts of money. Others are profiting — quite legitimately, by the way, by working and earning overtime pay.
In a fantasy world of perfectly functioning markets, private insurance would have spread the losses among the entire population. That’s what happens when we insure our houses and cars. But for all kinds of reasons, private insurance won’t work for pandemics. The alternative is for the government to help out the victims. Government needed to pay out on a kind of social insurance policy.
The other thing Congress needed to do was to set in place policies to help smooth the transition back to normality. In the past few weeks economists have been talking a lot about “organizational specific capital.” By that we mean the things — usually intangible — that are essential to a business but only to that business. A bartender who knows your name and remembers what you like to drink can make a huge difference to the profits of the bar. But if you move that bartender to another place across town, that valuable intangible asset vanishes.
When businesses shut down in a panic, they risk losing organizational specific capital. That’s true for businesses of all sizes. An airline may have a different kind of organizational specific capital than a bar, but they have it and they can lose it.
Fortunately, the government can do things to help businesses preserve these valuable assets. Unfortunately, in this bill Congress confused the need to provide insurance with the need to help businesses maintain themselves through the crisis. This means the bailout bill will be less effective in achieving either goal.
Here’s an example of what I mean.
Congress changed the unemployment insurance system by adding 13 weeks to the length of the benefit, making more workers eligible and offering a substantial greater dollar benefit. Nothing wrong with any of that; the government needs to be the insurer of last resort. And remember, in this crisis we don’t want people going to work.
Congress also designated almost $350 billion to help small businesses keep going. Nothing wrong with that either; the government wants to help business preserve organizational capital.
The problem is that the changes to the unemployment insurance system make it much harder for the $350 billion small business support plan to work. That’s because the small business support comes in the form of loans that will be forgiven as long as the business keeps most of its employees on the payroll. We know that a huge number of small businesses have laid off workers who are now applying for unemployment insurance. If these businesses apply for the support money, they’d need to hire those workers back or face having to repay the loan. Some firms will do this; many will not.
Had Congress been thinking clearly about the twin objectives, they easily could have designed a better system. Instead of offering loan forgiveness only to those firms that maintained pre-crisis levels of employment and payroll, they could have made it contingent on the one important thing unemployment insurance doesn’t do: provide health insurance. It turns out that about two-thirds of small businesses offer some kind of health plan. Requiring these firms to extend health coverage would have been a simple, elegant fix.
We can hope this is the last bailout bill but if this crisis proves as terrible as many are forecasting, there will be another. Let’s hope, then, that the next bill reflects a real understanding of what’s required. Sure, $2 trillion is a lot of money but given the enormity of the problem, we can afford it. We can’t afford to waste it.
Michael Davis, Ph.D., teaches economics and global strategy to graduate-level students at Cox School of Business at Southern Methodist University (SMU) in Dallas.
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