A few thoughts on economic assistance and bailouts in the Covid-19 era

Our federal government needs more imagination in the crafting of legislation and regulation to protect the citizenry and the economy, and both parties need to give up on their cranky ideological preferences. The bill that passed earlier today leverages employers with new unsustainable obligations (for which they get tax relief) — this being an old trick of the progressives going way back — rather than focusing directly on the critical issue, which is providing relief to people who voluntarily or otherwise lose their incomes in the fight against the novel coronavirus.

So what do people need? Housing, basic utilities, and food for the next two or at most three months.

Why “at most three”? Because we will not, as a society, tolerate the confinement of the current period for longer than that time. Something will give, and it may just be writing off their grandmother or Willie Nelson. That, however, is a different post for a different day. Suffice it to say that we cannot shut down the country for 18 months, even if it is wise to do for two or three (as we believe). Please take that as our assumption for the purposes of this post, even if you do not agree with it.

Our “just-spitballing” proposal to provide people with these means does not burden employers, at least not directly. Rather, we propose putting the burdens on landlords, mortgagees, and utilities, and backstopping them with tax subsidies.

Our proposal for housing:

• A sixty (60) day moratorium on the payment of residential or business rent by any individual or pass-through entity with less than $2,000,000 in annual revenue (which would cover most local restaurants and other truly small businesses).
• The foregone rent would be a fully deductible expense against ordinary income for the landlord. In other words, the federal government would pick up roughly a third of the foregone rent, and the landlords would eat the balance. (We are a landlord, so we are putting our money where our mouth is on this one. We believe most landlords could give up the equivalent of 40 days of rent, which is about 11% of the year, in the nation’s service. In rough terms, it would mean giving up all their returns for the year, but not damaging their equity.)
• All mortgage payments would be suspended for 60 days. Mortgagees (including the trustees of pooled mortgage-backed securities) would be required to recalculate the amortization of such mortgages starting in the third month after the suspension. Given that interest rates are virtually zero, rendering the cost of capital virtually zero, this should be a reasonable sacrifice for mortgagees to make. After all, they made the existing mortgage loans assuming rates would be much higher than they are, so giving up a couple of months of interest is largely just giving back a windfall.

That deals with housing expenses in the next 60 days with no disruption of long-established employment arrangements.

What about utilities (by which we mean electricity, gas or oil for heating, water, and basic internet for your phone, which is now a virtual necessity)?

• The nation’s electrical utilities should provide electricity for the next sixty days for free. The government should pick up 75% of the lost revenue for the year, less the regulated rate of return. We use about 4 trillion kilowatt hours in the United States per year at an average cost of $0.132 per. Call it $88 billion for two months of free electricity, split 75/25. Chump change. The shareholders of the utilities should pick up the balance, because shared national sacrifice is part of fighting this pandemic.
• The heating bill is going to fall rapidly in the next two months, because spring is coming and oil and gas are dirt cheap, but let’s go for the same 75/25 split between the government and the shareholders of the providers. Small local purveyors of heating oil get a deduction on their taxes for their share just like the landlords.
• The federal government should pay all household water bills, subject to a cap, for two months. Just what a family needs for cooking, cleaning, laundry, and so forth. Lawns and your pool are a luxury, not the taxpayers’ problem.
• Order every cell phone provider to give every subscriber a 50% reduction in their contracted cell phone bill for the month, and pay them for it. (The aggregate wireless revenue in the United States is about $180 billion per year, or $15 billion per month. Half of that for two months is $15 billion. Again, chump change.)

That pretty much deals with the utilities, again no major upending of employer-employee relationship. Are you still with me?

For food, send every adult with adjusted gross income last year under $150,000 a check for $300 per month for the next two months, and $300 per month for every minor child in residence. Is that enough? Sure, because it will only infrequently be the only money that a person has available to spend on food. Is it possible to live on that? Absolutely. Learn to love Ramen noodles, rice, beans, and Spam, which was basically my diet during law school.

What if this lasts more than 60 days? Well, it depends what this is. If this is the virtual shutting down of the American economy and enforced social distancing such that many businesses cannot operate, we do not believe it will be sustainable under any circumstances beyond 90 days. We will need and get a new plan. So make all of the foregoing extendable for 30 days by presidential fiat, after which we will need a Plan B regardless.

If, however, this is a merely shitty economy that persists for a few months, we know how to deal with that. We have done it many times before. No need to restructure the employment relationship or anything else in an atmosphere of crisis, the very worst time to enact these things.

As for bailouts, it needs to be said: The government should not lift a friggin’ finger to bail out the equity (stock) owners of public companies. We write this as somebody who has invested in public companies for more than 50 years. To bail out the common stockholders would be the worst sort of crony capitalism. What about our all-important airlines? Remember, they were delighted to go bankrupt during the 1980s to break their unions, and they still flew their planes. The airlines will fly, the only thing that will change is that their creditors will become their owners.

The same rationale can apply to virtually every other industry that is in particular pain, including hotels, cruise ship lines, casino companies, restaurant chains, and the like. The current stockholders will lose a lot if not all of their money, and the creditors will end up in charge.

There is nothing wrong with that. It happens during every national economic crisis. That is why stockholders get much higher returns than creditors during normal times, to compensate them for the risk that catastrophe strikes, as it does every 10-40 years, depending on the industry. It does not matter, as President Trump constantly says, that it is “nobody’s fault.” That is an intellectually dishonest rationale for the worst sort of crony capitalism.

Along these lines, the Congress should authorize a significant increase in the number of federal bankruptcy judges and the courthouse capacity to manage a much larger caseload, because we are going to need them very soon.

Finally, here is what we should absolutely not do, but your Editor fears that we will do: Concede major changes in the American system of capitalism to the left in order to save the equity of the current stockholders of public companies. Elizabeth Warren, for example, has proposed a laundry list of “reforms” to be imposed on “bailout” recipients that would, by and large, be very bad news for the long-term health of American capitalism. Any business corporation that accedes to or lobbies for Warren’s regulations in exchange for rescuing current stockholders, who already cut their deal for higher returns in order to bear this risk, is a traitor to the American future. There is no other way to say it.

Will President Trump protect the American future? Whether he does, or not, will be the measure of the man in history.