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Republican bailout package is finance's Patriot Act

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By Lewis McLellan
24 Mar 2020

There is a plan to rescue the US economy with a $500bn corporate bailout. At the time of writing, that plan is held up in the US Senate. While the country's president Donald Trump is griping about the delay, it’s a fight worth having. The Republican Party's proposal is woefully short on oversight.

Many politicians, particularly on the left, bemoan the very concept of a corporate bailout — and it’s easy to see why. Every dollar spent on a corporate bailout is a dollar not spent on securing testing kits or giving citizens holidays from utility bills, mortgage repayments or taxes.

And the beneficiaries? America’s big companies do not enjoy a good reputation. They have been reluctant to offer sick leave, their tax contributions are frequently laughable, and their penchant for stock buybacks has enriched shareholders but left them without cash on hand to weather a crisis.

Airlines, for whom $50bn has already been carved out, have been particularly keen on stock buybacks. Data from FactSet indicates that, over the past 10 years, 96% of airlines’ free cashflow has been spent on their own stock. Coincidentally, their free cashflow in that time was $49.1bn.

The problem is that punishing companies for imprudence eventually means that their employees lose their jobs. Like them or not, corporate bailouts are a crucial part of protecting the economy and the lives of ordinary people.

But there are bailouts and there are bailouts. The Republican proposal creates a $500bn fund to be disbursed at the Treasury’s discretion, with little guidance as to its methodology, and the ability to delay reporting of what measures it takes for up to six months. The Treasury secretary will have enormous leeway over who gets loans and at what terms and will operate without the scrutiny of an oversight panel to ensure fair and equal treatment.

It also provides only the weakest protection of employment, requiring maintenance of existing employment “to the extent practicable”. It makes only the scantiest limitations on executive compensation and stock buybacks and places no limitations on the uses of funds, including as dividend payments.

A bailout should not be a gift. The government should receive an equity stake and/or appropriate debt instruments. This is not about government profiteering, but about a fair return on the investment of taxpayer dollars.

More importantly, bailouts must come with strict terms. As GlobalCapital suggested here, the appropriate quid pro quo for a corporate bailout package is that companies do not fire their employees and offer full sick leave. While they’re at it, maybe bailouts could be conditional on signing up to environmental protection rules or repatriating earnings…

We are about to head into the first ever services recession. Even during the 2008 and 1987 financial crises, personal consumption of services continued to grow in real terms. That will not be the case with huge swathes of the population in lockdown. With services comprising around half of the US economy, millions are at risk of unemployment.

Personal spending will drop off a cliff and hasten the situation unless drastic steps are taken to give people confidence in their employment situation. If a corporate bailout does not provide this, it will have failed.

Perhaps even more importantly, the disbursement of the bailout must be properly overseen by trusted, independent officials working from a transparent and thorough methodology.

Government credibility is as scarce a resource as capital, and something with which this administration can ill afford to gamble. A bailout that is regarded as opaque, partisan crony-capitalism could easily cause civil unrest, particularly at a time when American citizens are struggling for basic resources and its hospitals are devastatingly over-stretched.

Emergencies are dangerous times for civil liberties and government oversight. We trust the government to impose otherwise unpalatable measures in our best interest. This bailout proposal smacks of a financial version of the Patriot Act – a knee-jerk grab of power by the state, justified by the presence of a unique threat.

A bailout is an ugly necessity. We should not allow the fact that it comes in response to a crisis to justify overlooking the standards of governance and probity that we have a right to expect.


By Lewis McLellan
24 Mar 2020