Whose America?

The Senate has passed a $2 trillion economic stimulus — the largest in American history — on a vote of 96-0. It now goes to the house. What to think about it?

To solve a problem, you must first understand it. So ask, what is the economic problem the Senate is solving — or attempting to solve?

Do we have a previously healthy economy temporarily stalled because of coronavirus, with a resulting market crash? That’s the view of many, summarized here by Charles Lane in the Washington Post:

The situation now, however, stems not from a catastrophic failure in the economy, which was actually in good shape as of early March...

Or do we have a market crash that was a long time coming, just waiting for a trigger? That’s the view of Steven Pearlstein: A market crash was coming, even before Coronavirus (also in WaPo). Pearlstein blames central bankers for decades of cheap money:

… they took the easy political course and allowed all that excess liquidity to be used by banks, hedge funds, private equity funds, companies and households to inflate a new round of financial and economic bubbles. And now that a real-world shock to the economy and the financial system has hit in the form of the novel coronavirus, what might have become a short but significant market downturn looks to be turning into a full-blown financial rout.

I think Pearlstein is actually being unfair to central bankers, they kept interest rates low for so long because Austerians around the world blocked fiscal stimulus, which was the tool that would have done the most good. With governments refusing to act, easy money was the only alternative to another recession. But I agree that easy money has inflated the stock market and created many other bubbles along the way, with the gains mostly going to the rich. This market was destined for a fall. The arrival of coronavirus meant the crash would be big.

Starting last summer, I researched our economy extensively and found ample evidence of dire market conditions, not just in stocks but also in housing and farmland. I wrote up my findings in an economic essay on Medium called Dr. Strangelove economics: or how I learned to stop worrying and love the crash.)

The Senate bill was crafted under the assumption that Charles Lane is right, that our economy was fundamentally sound before coronavirus, and help to coronavirus-struggling corporations will therefore save jobs — that’s the lgic behind the $500 billion bailout of companies, states and cities, with another $50 billion targeted for airlines. Small business will get $367 billion. A lot will go to medical care to fight coronavirus, unemployment safety nets will be beefed up, and ordinary folks making under $75,000 will get a one-time check for $1200. Details as to how everything will work are still sketchy.

Given the catastrophically high unemployment numbers — with 3.3 million filing for unemployment last week — something big had to be done, and there are a lot of necessary things in the package. Or as Greg Sargent writing in WaPo puts it:

… the consensus among progressive economists and fiscal watchdogs is that the package’s expansions to unemployment insurance, its paid leave provisions and its direct cash payments really could cushion the blow for millions.

But that doesn’t mean we shouldn’t ask questions about the corporate bail-out portion of this bill, which will be huge. What if I’m right and many of these corporations were in fundamental trouble before coronavirus hit?

The biggest market weakness I found during my research was a massive pile of corporate debt. Which is the primary reason why stocks fell so hard and so fast. Large US companies owe their creditors $10 trillion — one-half of GDP. Overall business debt-load is $15.7 trillion when you add small, medium and family businesses. Much of this debit — $2.2 trillion worth — is highly leveraged according to the Bank of England. That’s comparable to the highly leveraged CDO debt (collaterized debt obligation) that sank the housing market in 2005. Even worse, corporations around the world are up to their eye-balls in debt as well — $127 trillion of according to this 2019 report by the Institute of International Finance. Total world debt load including consumer and government debt, as well as corporate debt, is $253 trillion.

Even before coronavirus, even before the crash, a shockingly large number — over 20% — of U.S. companies were zombie firms, meaning current earnings are not enough to cover interest payments.

So back to the problem, what is it?

If this market was headed for disaster before coronavirus, doesn’t that change what we should be doing? If 20% of our companies are zombies, can they even be saved? Should they be saved? And if saving jobs is the goal, isn’t bankruptcy law a better route for an over-indebted company?

Catherine Rampell argues forcefully in the Washington Post that the Senate is making a mistake in throwing $50 billion at the airline industry.

… the relevant questions are: (1) Is the failure of any of these individual businesses likely to spill over to the rest of the economy? (2) Are there more effective ways to resolve a company’s financial problems than a taxpayer-funded bailout? For airlines, the answers are no and yes, respectively ... there’s a better option than a taxpayer bailout for airlines. It’s bankruptcy ...

Chapter 11 Bankruptcy law allows for a business to restructure and continue operating while protected by the bankruptcy court. Shareholders lose, and bond-holders lose, while suppliers may get some or all of what they are owed and many workers keep their jobs. Rampell points out that all the major airline companies have gone through previous bankruptcies and yet here they still are. Meanwhile in the last ten years U.S. airlines spent 96% of their free-cash flow buying back their own stock in order to inflate its value to the benefit of both shareholders and executives. The cost? Over $49 billion. Roughly the amount in the Senate airline bailout. Wouldn’t another Chapter 11 bankruptcy be better for the public interest? As opposed to shareholder and CEO interests? If Chapter 11 bankruptcy isn’t viable and a vital company is headed for Chapter 7 liquidation — where the corporation will disappear forever — then the 2009 auto bailout offers a good model; the government stepped in to save Chrysler and GM from liquidation while taking an ownership stake. Chrysler was then sold to Fiat in a shot-gun wedding; while GM was restructured — its CEO was fired and its stockholders took significant losses in exchange for the $80 billion bailout. Millions of jobs were saved, Detroit continued as a hub of technological innovation and both auto companies remain viable a decade later. A clear success story.

The Senate bill is vague about how much of that $500 billion pot will bail out companies versus what will go to states and cities. But we do have reporting in the Washington Post that says $17 billion has been carved out to support Boeing.

The devil is always in the details, and this Boeing detail is a devil for sure. Boeing is the epitome of an irresponsible company, hell-bent on profit at all cost, and thanks to their reckless behavior they hit the hard times early, well before coronavirus. Over the last ten years Boeing spent more than $43 billion buying back its stock, which used up 74% of its free cash-flow. Meanwhile, Boeing was building a flawed airplane, the 737 MAX, because it took engineering shortcuts to save money. As a result of this negligence Boeing killed 346 people in two crashes. CEO Dennis Muilenburg, however, parachuted free of the wreckage with $4 million in salary and benefits for 2019, a $15 million pension and up to $39 million in stock incentives.

So explain why Boeing deserves a bailout? Chapter 11 bankruptcy would also allow it to restructure and continue its critical defense missions that are supposedly the reason for a bailout. And if Chapter 11 doesn’t work, the federal government could always do a GM-style rescue.

It’s worth noting that Boeing used to be an excellent company, run by its engineers and known for the quality of its airplanes. That was before it was taken over by McDonnell Douglas in the late 1990s; it was called a merger at the time and the new company kept the Boeing name. But the new management was from McDonnell Douglas and the new company retained the old McDonnell Douglas approach of downgrading quality in the service of increased profit. Everyone thought the new Boeing was high-flying because of its name and its high stock price. We now know different. Boeing may or may not be a zombie, but the new CEO, Dave Calhoun, says he wants government help but only on his terms. He says he’ll turn down a bailout if it means an equity stake by the government:

“If they force it, we just look at all the other options, and we’ve got plenty of them.”