AMERICA, CORONAVIRUS AND THE BAILOUT REFUSENIKS / THE FINANCIAL TIMES OP EDITORIAL

America, coronavirus and the bailout refuseniks

Many have welcomed state support but others believe it goes against US principles. What next?

Gillian Tett


© Shonagh Rae


When the American government unveiled its so-called Paycheck Protection Program last month, Scott Galloway, a marketing professor based in New York, did some calculations — and realised he could claim about $250,000.

This was because Galloway had recently created a small company, Prof G, which provides online university courses. The PPP offers loans to companies to cover their payroll and other expenses, which are forgiven if staff are retained. But Galloway chose not to apply for the cash.

Why? Because he is a die-hard fan of the free market and believes in “creative destruction”, the concept pioneered by the economist Joseph Schumpeter, which holds that insolvent companies should go bust to enable healthier upstarts to emerge.

Galloway therefore became a bailout refusenik. “It would be so easy for us to rationalise taking the money. If a helicopter drops money, you want to grab it,” he tells me. “But if we can’t make [Prof G] work without a bailout, even in a pandemic, we don’t deserve to be in business.” A maverick view?

Perhaps. Galloway admits that it is easier for him than for most small business owners to take this route, since Prof G has wealthy backers and operates in a sector that will probably thrive in a post-Covid-19 world.

But his gesture points to a bigger question now confronting the US: are government support programmes such as PPP compatible with its claim to be a free-market, capitalist country?

Should such state support be welcomed — or shunned?

Personally, I feel torn — and so, I suspect, do many FT readers. When Covid-19 first struck, the events were so shocking it was easy to think that government intervention made sense. It seemed laudable for the US Federal Reserve (and other central banks) to use unorthodox measures stop a financial market freeze, or for the US or UK Treasury to provide aid to help businesses survive the immediate impact.

Simply letting companies go bust would have risked creating a self-perpetuating spiral of panic, as Jeremy Stein, an economist and former Fed governor told a Princeton symposium last week. It would also have heralded terrible pain for many poor households — particularly in the US, given its weak social safety net.

Two months on, I still feel that much of this logic is correct. But what is also becoming clear is that government support comes with increasingly heavy costs attached. One is an explosion in the national debt burden (which can probably only be solved through future financial repression).

Another is the fact that bailouts support not just the viable companies but also those that probably ought to die because they have spent the past decade drowning in debt, in sectors that do not have a bright future (say, bricks-and-mortar retail). You don’t have to be a full-on Schumpeter acolyte to see that this is bad for future growth.

Then there is another problem: the bailouts risk exacerbating US income inequality. Yes, they feature admirable measures to help small businesses. And, yes, they also include a cheque of up to $1,200 for individuals (which is more than some workers get paid per month) and extra for those with children.

But the Fed’s actions have also rescued bond and equity prices. That means it is not just companies that are being propped up, but capital — which benefits the rich, since they own these assets.

Of course, Treasury secretary Steve Mnuchin might argue that this is an unavoidable, temporary price to pay in a crisis. Perhaps so. As Clark Winter, a former Wall Street strategist, points out, what the government is trying to do with the economy is similar to what somebody trying to fix a computer might do. Namely, shut it down to reboot it and restore its operations without a hardware glitch. If it works, there should be no need for state support beyond midsummer.

In reality, “rebooting” an economy is not the same as rebooting a laptop. Economies always change: trying to preserve the old system risks entrenching its vested interests. And if the Covid-19 crisis lasts longer than Mnuchin and his colleagues initially predicted (to mid-June), the bailout money will run out. That will force the US government to either double down or let companies collapse.

This week, the UK government faced the same choice — and announced it would extend its furlough scheme until October.Is there a better way to do this? In an ideal world, an obvious answer would be for the US to build a stronger social safety net that gave workers access to healthcare even if they lost their jobs.

If that existed, “creative destruction” would be somewhat less brutal for ordinary workers — and easier to accept in a political sense. In the real world, however, many Republicans hate the idea of such a safety net since they consider it socialist. This means it is unlikely to fly — making it harder to impose free-market solutions.

So, for the foreseeable future, Galloway is going to remain a rarity: although few Americans like the idea of a bailout, even fewer will resist it when offered.

Therein lies the irony of US capitalism today — and a reason to expect increasingly bitter fights if the bailout money disappears before Covid-19 finally does.