WASHINGTON, D.C. – What a difference a few weeks makes. One day the much of the country is united in bemusement at the other portion’s apparent embrace of radical socialism, the next day nearly everyone is cheering the largest redistribution of wealth in history, and asking for more lest the coronavirus shutdowns keep the economy shuttered. More significant than the headliner $2 trillion stimulus/relief/bailout bill passed in congress and the $1200 checks for some Americans, is the section that enables the Federal Reserve to leverage up that figure (at least) with another $4 trillion of unprecedented monetary policies.
Though less customer-facing, if you will, the policy changes at the Fed, and the new skin-and-teeth relationship with the U.S. Treasury, is probably more a threat to capitalism than anything else during this crisis. Indeed, as two professors at the nation’s preeminent business schools assert in an op-ed for the Wall Street Journal (WSJ), titled Save Capitalism from the CARES Act, “This is the largest step toward a centrally planned economy the U.S. has ever taken.”
Amit Seru is the Steven and Roberta Denning Professor of Finance at Stanford Graduate School of Business, a Senior Fellow of the Hoover Institution and a Senior Fellow of the Stanford Institute for Economic Policy Research. His co-author, Luigi Zingales, is a professor at the University of Chicago Booth School of Business. They both call for oversight of the funds allocated in the CARES Act, and worry this bill, with no recorded vote, maybe have been the official end of free capital markets.
“With 20% of Americans locked in their homes, nearly all air travel canceled, and the global supply chain disrupted, you don’t need to be a Keynesian to think the government should intervene. But that doesn’t mean the Cares Act—an acronym for Coronavirus Aid, Relief, and Economic Security—is wise. The last thing we need at this moment is a Keynesian stimulus. Since the lockdowns constrain supply, stimulating demand would lead only to a rise in prices.
Besides helping the medical effort, government intervention should offer financial help to people who can’t work, and it should preserve the production capacity of the U.S. economy. The greatest resource most companies have is their teams of employees. If they dismantle those teams because of the pause in the economy, production capacity will be lower at the end of the pandemic.
Only $377 billion of the $2 trillion package is directly targeted to this goal. These are loans to small firms (fewer than 500 employees), which are forgivable if the funds are spent on payroll, rent, mortgage interest and utilities. By using 2017 census data (the most recent available), we calculated the total expenditures in payroll, interest expenses and rents of U.S. small firms amounts to $258 billion a month. Unless the Trump administration introduces criteria for selective targeting, the money allocated in Cares will run out in a month and a half. Designing the conditions for such targeting isn’t easy, since every requirement will slow the money’s deployment and speed is of essence. Thus, we fear that the administration will soon come back to Congress with a new request for money.
The need to help individuals and small firms has provided cover to the largest corporate subsidy program in U.S. history. Under intense pressure from lobbyists, the Cares Act allocates $510 billion to support loans for large businesses. A small chunk of this money ($56 billion) will be used directly by the Treasury to grant loans to airlines and other “strategic” firms (read: Boeing). The Treasury will then confer the rest ($454 billion) to the Federal Reserve to absorb losses the Fed might incur in lending to firms in the private sector.
The expectation is that the central bank will leverage this money 10 to 1, enabling it to lend up to $4.54 trillion to companies. That sum is more than all U.S. commercial and industrial loans outstanding at the end of 2019 ($2.35 trillion) plus all the new corporate bonds issued during 2019 ($1.41 trillion). Thus, if this capital is all deployed by the Fed, and at rates that will surely crowd out private capital, all capital allocation in the U.S. in 2020 will be done by the Federal Reserve System, not by the capital market. This is the largest step toward a centrally planned economy the U.S. has ever taken. And it socializes only losses. Profits, when they come, remain private.
There needs to be far more transparency, governance and accountability around the Fed’s deployment of trillions of dollars in the real economy. Policy makers also should make the $510 billion program for large companies similar to that for small firms, but with tougher conditions. Again using 2017 census data, we calculated the total expenditures in payroll, interest expenses and rents of all U.S. large companies to be $392 billion a month.
Yet not all large companies are idle. Amazon is doing great, and so are Google and Facebook. Overall, large businesses are likely to be hit less hard than the U.S. economy overall. Goldman Sachs forecasts a 24% drop in this coming quarter. Even if the large companies were hit in proportion to the overall downturn, the cost of replacing their wages, rents and interest would be only $94 billion a month. So the $510 billon would last almost half a year.
The urgency of the moment facilitated a giveaway to vested interests. Now that the Cares Act is law, policy makers need to find ways to impose restrictions on how the money is deployed. It isn’t only a question of fiscal prudence; the nature of American capitalism is at stake.”
You know what they say, ‘Never let a crisis go to waste.’