- WSJ oped on virus policy
- Airline bailouts and capital regulation
- Unemployment insurance pandemic conundrum
- Monetary policy and coronavirus — French edition
|WSJ oped on virus policy
Posted: 18 Mar 2020 07:17 AM PDT
Why is the market going nuts? What should policy do? I put some of my recent thoughts in a Wall Street Journal Op-ed, here. As usual I can’t post the whole thing for 30 days, but if you’re clever you can find it.
This is not a «demand» recession needing «stimulus.» The policy challenge is to allow the economy to shut down, but make sure it doesn’t die in the process. The problem is — once again — debt.
If there is a wave of firing and bankruptcy,
The main focus of policy should be
This is all really hard. Economists blogging from home are full of good and creative ideas. But changing rules for who banks can lend to, to create pandemic exemptions, is much much harder than writing checks. It would be awfully nice if anyone in government had put the slightest thought into this ahead of time.
We are headed to the second huge creditor bailout. When it’s over, we need to start taking seriously that if you’re too big to fail, you’re too big to borrow. Airlines, this means you.
The Oped summarizes many ideas in condensed form. To see more, use the «pandemic» label below, or this link
|Airline bailouts and capital regulation
Posted: 17 Mar 2020 08:08 PM PDT
The airlines are about to get a huge bailout. Why are they in such trouble? Well, yes, nobody is flying so their revenues are cratering. But why not just stop flying for a while? The answer is, they have loads and loads of debt.
U.S. Airlines Spent 96% of Free Cash Flow on Buybacks writes Brandon Kochkodin on Bloomberg
Let’s be clear. It is a myth that buybacks are bad because they reduce investment. And free cash flow isn’t a very interesting divisor. But buybacks do have a downside: they reduce equity and increase debt. Fine if you and the creditors are willing to take a bath in bad times. Not good if debt means taxpayers have to bail out in bad times. Too big to fail is spreading like a virus.
If airlines were financed by equity, they would have a natural shock absorber. They could just shut down, stop paying dividends, and then wake up on the other side. But they have debts to pay, and if they don’t pay creditors will take them to bankruptcy court, seize assets, break them up and there won’t be airlines when the virus is over.
Enter the federal bailout, as always really a bailout of the creditors.
Does this all sound like banks 2008? It is.
If we are going to bail out airlines then there needs to be subsequent capital regulation. Once bailed out you cannot finance yourself on a mountain of debt next time around. Issue equity, retain earnings.
Everyone is watching. If debts lead to bailouts with no consequences, there will be more debts and more bailouts. Yes, even now we have to watch moral hazard. We are setting precedents for the next larger pandemic.
The only reason the economy is in trouble is that not enough people and businesses kept cash reserves or plans to weather a shut down. If the ants bail out the grasshoppers without consequences, we will enter the next crisis with nothing but grasshoppers.
If there is going to be a bailout this consideration makes it ever more important that the government lends money, or invests, and is paid back first before any current creditors or stockholders. Don’t just send a check.
|Unemployment insurance pandemic conundrum
Posted: 17 Mar 2020 07:48 PM PDT
Should the government make unemployment insurance more generous and easier to get in the pandemic recession? Well, yes, but it’s not ideal, and a good point on which to ponder the difference between a pandemic recession and a conventional recession.
To get unemployment insurance, you have to actually lose a job (in most cases) and you are supposed to be looking for a new job. In the pandemic recession, lots of people will be temporarily furloughed – -think airline pilots or flight attendants. But assuming, and helping to ensure, that the economy comes roaring back, we don’t want airlines to fire pilots and flight attendants, and we don’t want them walking around looking for new jobs at other shut down businesses. It would be much harder for airlines to get going again; the employees lose health insurance (!) and other benefits, and people out looking for work are spreading viruses around.
Yes, there are some open jobs now. Amazon is looking for workers, as much activity moves online. Anyone with medical skills should be helping at hospitals. And face-mask and sanitizer companies are hiring. But this cannot make up for the large number of Americans who will be sitting on the sidelines for a few months.
So, we want unemployment and other benefits for people who aren’t technically unemployed, but whose companies are shut down for the virus and can’t afford to keep paying them.
Why don’t we always have that, you might ask? Well, our social programs have a lot of rules and for good reasons — to manage the inevitable unintended consequences and moral hazards of normal times and normal recessions. Government paying salary and health benefits of furloughed workers would give companies a big incentive to routinely furlough employees instead of giving them vacations. Around the world, unemployment insurance and many other benefits are coupled with job search or training requirements, to avoid the massive overuse experienced before those requirements were put in place. But we don’t want them now.
So our problem is that a pandemic shutdown requires a different set of detailed micro rules and regulations about who get what when. Good old Keynesian stimulus and standard automatic stabilizers are completely inappropriate. Incentives matter, now as much as ever, not just cash.
Here we economists are very clever. Marginal revolution links to many clever ideas to get us through the crisis, new programs and new rules and new ways of getting money to where it is needed. I’ve blogged a few dozen clever ideas too.
But it is nearly impossible to ask bureaucracies to make things up on the fly in a crisis, and invent an implement new rules in a matter of weeks, even if politicians could agree what those programs should look like. This is the lesson of Graham Allison’s Essence of Decision masterpiece on the Cuban missile crisis. (If you’re looking for good self-isolation reading this is a great one. It also shows how important it is to have a President who can make cool decisions in a crisis, when all his or her advisers are screaming nonsense. The many pandemic books are also great reading. We have been here many times before and it’s always the same chaos.) That is the lesson of 2001, when we discovered that half the emergency responders didn’t have the other half’s phone numbers. That’s why when this is over, we need a serious pandemic economic plan, one that gets practiced and refined, and not just another big report that gets shelved and forgotten.
At the cost of repetition, there will be other pandemics.
|Monetary policy and coronavirus — French edition
Posted: 17 Mar 2020 03:31 PM PDT
Vox-Fi put up an edited version of my monetary policy and coronavirus post, in French, La politique monétaire en réponse au coronavirus
Practice your French. Read the whole thing here