The CARES & Families First Federal Economic Response Package

Benefits, Detriments, Realities, and Ushering in the Age of Helicopter Money

    icon Apr 01, 2020
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Since Gov. Gretchen Whitmer followed suit with Democratic Governors in California & Washington on March 16th and issued her first Executive Order mandating the closure of bars, restaurants, and large gatherings, this publication that I started 41 years ago on April 4th has witnessed a 70% drop in revenue - as have so many other small and independently owned businesses across the nation.

Over 99 percent of America's 28.7 million firms are small businesses. The vast majority (88 percent) of employer firms have fewer than 20 employees, and nearly 40 percent of all enterprises have under $100k in revenue. 20 percent of small businesses are employer businesses and 80 percent are non-employer businesses.  

As social quarantines have spread across the country along with the coronavirus as a response to the economic disruption that has also exponentially spread, President Trump as signed a bipartisan $2 trillion economic relief plan to offer assistance for tens of millions of American households affected by the coronavirus pandemic. Its components include stimulus payments to individuals, expanded unemployment coverage, student loan changes, different retirement account rules and more.  As it currently stands, up to 37 million jobs could be in jeopardy.

As with so much about this pandemic, there is much buried within the 880 pages of this stimulus plan.  For the restaurant, bar & event industry, stimulating it is not - it contains many relief options that were needed yesterday.  

While business owners may benefit from the individual payouts and student loan suspensions (suspended until October 1st), the one-time $1200 payments to individuals dwarf those directly funneled by other countries: in the U.K. the British government will cover 80% of the wages of workers up to $2,500 pounds per month; and our neighbor Canada is paying its residents $2000 per month. Here in the USA, single adults with Social Security numbers who have an adjusted gross income of $75,000 or less will get the full $1200 amount. Married couples with no children earning $150,000 or less will receive a total of $2,400. And taxpayers filing as head of household will get the full payment if they earned $112,500 or less. Above those income figures, the payment decreases until it stops altogether for single people earning $99,000 or married people who have no children and earn $198,000.

“If you are sick, stay home,” Vice President Mike Pence said at a news conference. “You’re not going to miss a pay check.”   But that’s simply not true. Sick workers should stay home, but there is no guarantee in the emergency legislation that most of them will get paid.

In fact, the bill guarantees sick leave only to about 20 percent of private-sector workers. Big employers like McDonald’s and Amazon are not required to provide any paid sick leave, while companies with fewer than 50 employees can seek hardship exemptions from the Trump administration.

Indeed, there are many anomalies and loopholes contained within these relief measures. There is $350 billion carved out for small business in the form of forgivable loans referred to as ‘Section 7(a) loans. Eligibility is set by a business with 500 employees or less and individuals, 501 C(3)s and independent operators are also included; however, the 500 employee guideline applies to physical locations, which opens up a loophole for larger chains to grab those funds meant for small businesses. While larger than 500 employee companies were exempted from the Families First Response Act, this stipulation was allowed to stand in the CARES Act, according to an assessment received from the National Restaurant & Bar Association.

Moreover, loan proceeds must be used to pay employees, rent/lease, and utilities - they are the costs that are forgivable; plus, the business may not double-dip with other loans & grants.  Applying for the first round of SBA disaster loans should be okay, but your attorney and accountant should be consulted. One saving grace is these loans are unsecured and, as such, do not require any collateral or personal guarantees; plus they aren’t issued based on the ability of the business to repay, but on proof of impact on the business from COVID-19.

Reading Between the Lines

Shortly after President Trump signed into law the $2 trillion fiscal stimulus also known as the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which gives the Fed the ammunition to issue up to $4.5 trillion in additional debt, a "Multitrillion Dollar Helicopter Credit Drop" as Bloomberg called it - this officially launches not only helicopter money but the biggest wealth transfer in US history. Not only will the Federal Reserve balance sheet double on short notice, but it will unleash an unprecedented spending spree the likes of which not even Alexandra Ocasio-Cortez could have ever imagined would take place.

One person tried to if not stop it, then at least delay and ask critical questions that everyone else in Congress should have been asking: Why are US citizens, who are supposed to be the sole beneficiaries of this emergency bailout act, just a footnote in the gargantuan bill's deluge of electronic ones and zeroes?   That person was Republican Rep. from Kentucky, Thomas Massie, who tried to force a recorded vote on the legislation, i.e., a roll call, prompting a scramble by House members to come back to Washington to form the required quorum of at least 216 members.

Of course, Massie failed, as the vote passed and was eventually signed into law. However, Massie did at least try to bring some much needed attention to what was contained in the bill, and pose some of the key questions that so many others should have asked.

Here are some of his key points:

• Out of the $2 trillion in economic relief only $290 billion is meant for direct payments to families, which as a reminder, was the whole point of the bill.  Massie also pointed out that among the bill's key provisions was the even greater entrenchment of Fed secrecy, a Fed  which in theory is there to serve the people yet which has successfully defended against an open audit for over a decade.   This bill creates even more secrecy around a Federal Reserve that still refuses to be audited. It allows the Federal Reserve to make decisions about who gets what, along with how much money we’ll print. With no transparency.

Massie was referring to the fact that the bill repeals the sunshine law for the Fed’s meetings until the end of the year, or until the President says the coronavirus threat is over, which may very well be never. That, as Wall Street on Parade notes, "could make any FOIA lawsuits to unleash details of what’s going on next to impossible since it has been codified in a federal law." The bill states the following:

SEC. 4009. TEMPORARY GOVERNMENT IN THE SUNSHINE ACT RELIEF. (a) IN GENERAL.—Except as provided in subsection 8 (b), notwithstanding any other provision of law, if the Chairman of the Board of Governors of the Federal Reserve System determines, in writing, that unusual and exigent circumstances exist, the Board may conduct meetings without regard to the requirements of section 552b of title 5, United States Code, during the period beginning on the date of enactment of this Act and ending on the earlier of— (1) the date on which the national emergency concerning the novel coronavirus disease (COVID–19) outbreak declared by the President on March 13, 2020 under the National Emergencies Act (50 20 U.S.C. 1601 et seq.) terminates; or (2) December 31, 2020.

This would also mean that US taxpayer will never learn why they went into debt to the tune of $454 billion, which would then be levered 10x by the Fed to issue up to $4.5 trillion in loans to companies the Fed deems appropriate, if no records are being maintained.

Massie's final point that was the punchline:

If getting us into $6 trillion more debt doesn’t matter, then why are we not getting $350 trillion more in debt so that we can give a check of $1 million to every person in the country?

Here the Kentucky Representative hit the bullseye, as this is precisely the endgame. However, since one can't unleash the full $350 trillion overnight without classical economists admitting the truth about what the real nature of this bailout is, it will be done piecemeal with other crises, and other "unprecedented" emergencies emerging in the near future and unlocking the path to what is the real goal of this unprecedented reflationary bailout of the world's most indebted nation. 

It also indirectly addresses Massie's final point:

This stimulus should go straight to the people rather than being funneled through banks and corporations like this bill is doing.  2 trillion divided by 150 million workers is about $13,333.00 per person. That’s much more than the $1,200 per person check authorized by this bill.

The Shape of Things to Come

Having missed the opportunity to flatten the curve via testing and targeted quarantines, the U.S. has taken much more drastic steps to restrict public interactions, shutting down the entertainment, educational, and transportation sectors of the economy. These should result in temporary interruptions of the supply of these services that will bounce back when the restrictions are lifted. Some output will be lost forever (lost classroom time, and restaurant meals) but others can be recouped or at least restored to original levels (rates). Clothing and other retail items not purchased during the shutdown can be purchased later.

What the economy will look like afterward  will depend on several factors. The first is the extent to which our public behavior is altered permanently. Home movies might permanently replace some part of our usual attendance to the cinema. Teleconferencing might permanently reduce meeting travel or accelerate the existing trend in that direction, etc.

Every big firm out there is working on how they can tap some of the taxpayer’s money that government will be giving out. Those pushing government interventions into new areas on a permanent basis will exploit the occasion to slip in their favorite policies. Unfortunately, once the government moves into an area– it rarely withdraws. 

Almost 19 years later, the horrible Patriot Act, adopted when a scared public was willing to trade off liberty for security, is still largely with us.

Affected firms and individuals will continue to have expenses (food, rent, mortgages, etc.) but no incomes. They should be provided with the funds to meet these expenses in order to return to life/work when the lights go back on. The sharing of the cost of those funds must be considered politically fair and must incentivize the desired behavior. Everyone must have some skin in the game (a share of the cost). 

What about the big companies, such as Boeing, the airlines, the Hotel Chains, and Cruise ship operators? Yes, they should be included in the loan forbearance and incentive loan programs, but they should receive no special consideration beyond that. If government (partially) guaranteed loans through banks to pay wages and other fixed expenses for a few months are not enough to finance a firm’s expenses without income for a few months it is probably not viable in the long run anyway and should be resolved through bankruptcy as were GM and Chrysler in earlier financial crises. 

A few bullet points to consider:

• Injecting liquidity via new lending facilities and international swap lines, as the Fed is now undertaking, is the correct response. If lenders allow their borrowers to delay repayments for a few months, they need to replace that missing income somehow (rather than calling in nonperforming loans and bankrupting the borrower). The Federal reserve should substitute for that income by lending to banks freely against the good collateral of government debt or government guaranteed debt.

• The vital need of everyone in the economy, from the corner drugstore to the local transit authority to the mightiest multinational, is liquidity: credit to meet payroll and other key obligations so as to remain solvent until the end of what we all must hope is a finite crisis.

• Treading water for power and pork leaves a delay we absorb, not them. They never suffer do they.  Those who aren't outraged are mostly government employees or work for an "essential" business. Nothing has changed for them, they are unscathed financially.

Is the Solution More Dangerous Than the Virus?

As Charles Hughes Smith notes, The collateral supporting this global mountain of debt is crumbling as speculative bubbles deflate.

That households experiencing declines in income need immediate support is obvious, as is the need to throw credit lifelines to small businesses. But beyond those essentials, the open-ended nature of Helicopter Money has unleashed a frenzy of political favors and giveaways that have little to do with helping households and everything to do with rewarding favored cronies, cartels and interest groups.

Indeed, a strong case can be made that the short term relief of Helicopter Money won’t cure the financial disease of our economy, but rather act as a catalyst for longer-term disruption and decline because it doesn’t address core causes of our systemic financial situation, such as erosion of real-world collateral supporting ever-growing mounts of debt & leverage.

This can be seen in the diminished returns from monetary stimulus injected into the Co-Vid 19 Wall Street bailout - all that low-interest cash liquidity offered like financial cocaine by the Federal Reserve no longer generates euphoria; and we have seen a stagnating purchasing power from the worker & labor sector, as witnessed by the use of debt to keep up with soaring costs of essentials such as rent, healthcare, and services.

The abuse of money-printing--creating currency to benefit bloated, inefficient, parasitic, predatory institutions, cartels and monopolies--is further eroding already-decaying confidence in monetary and fiscal authorities and policies.

This can be seen right now in the real estate market. What happens to margin debt when the $300 stock falls to $100? What happens to the $1 million mortgage when the decaying bungalow's value falls from $1.2 million to $400,000?

Booms and busts have always been normal in a capitalist economy, but in recent years this has been a feature which has been exacerbated by and involves that part of the economy indicated by the acronym FIRE (Finance, Insurance and Real Estate) and its growing importance in the economy in both qualitative and quantitative terms. 

Financialization is a process whereby financial markets, financial institutions, and financial elites gain greater influence over economic policy and economic outcomes. Financialization transforms the functioning of economic systems at both the macro and micro levels. Its principal impacts are to:

  1. elevate the significance of the financial rent-seeking sector relative to the real value-producing sector
  2. transfer income from the real value-producing sector to the financial sector
  3. increase income inequality and contribute to wage stagnation 

Since 1970 this part of the economy has grown from almost nothing to 8% of US Gross Domestic Product (GDP).  This means that one dollar in every ten is associated with finance. In terms of corporate profits finance’s contribution now represents around 40% of all corporate profits in the US. This is a significant figure and, moreover it does not include those overseas earnings of companies whose profits are repatriated to their countries of origin. 

Financialization operates through three different conduits: changes in the structure and operation of financial markets, changes in the behavior of nonfinancial corporations, and changes in economic policy. Countering financialization calls for a multifaceted agenda that: 

  1. restores policy control over financial markets
  2. challenges the neoliberal economic policy paradigm encouraged by financialization
  3. makes corporations responsive to interests of stakeholders other than just financial markets
  4. reforms the political process so as to diminish the influence of corporations and wealthy elites

Before the rise of financialization firms made stuff – goods and services – which had a value, which was then sold on the market at a profit. Given the competitive nature of the system, firms invested in increased capital formation and output which increased productivity, surplus value and ultimately profit. 

With regard to Investment banks like Goldman Sachs and the commercial banks - they do not create value; they are purely rent-extractive. For example, commercial banks make a loan out of thin air, debit this loan to the would-be mortgagee who then becomes a source of permanent income flow to the bank for the next 25 years.

Goldman Sachs makes year-on-year ‘profits’ by doing – what exactly? Nothing particularly useful. But then Goldman Sachs is part of the cabal of central banks and Treasury departments around the world. It is not unusual to see the interchange of the movers and shakers of the financial world who oscillate between these institutions. Hank Paulson, Mario Draghi, Steve Mnuchin, Robert Rubin … on and on it goes. 

Thatcher, Reagan, the ‘Big Bang’ had set the scene and there was no going back: neoliberalism and globalization had become the norm.  It would ‘spread the wealth’, give a person that couldn’t afford to own a home opportunity to stake claim in the American dream; and let products from the farm grown in Michigan flow to China and vice-versa.

The run-up to 2008 was floated on a sea of cheap credit. The price of stocks pushed property prices to vertiginous heights until – pop, went the weasel. 

The reason was quite simple. Any boom and bust has an inflexion point where boom turns to bust. This is when buyers incomes, and borrowers inability to extend their loans could no longer support the rise in the price level. Euphoria turned to panic as borrowers who once clamored to buy were now desperate to sell. 2008 had arrived. 

The strange thing, however, regarding the property price boom-and-bust was that it was based upon pure speculation. Prices went up, prices went down. Some – a few – made money, quite a few lost money. Investors were wondering what had happened to their gains which they had made during the up phase. Where had all that money gone? 

The short answer is – nowhere. It was never there in the first place. It was fictitious capital. Gains which had appeared and then disappeared like a will ‘o’ the wisp. As opposed to physical capital – machinery, labor and raw materials, and money capital which enabled through purchase the production of value to take place, we have fictitious capital which is a claim on future production. 

Fictitious capital is a by-product of capitalist accumulation. It is a concept used by Karl Marx in his critique of political economy. It is introduced in chapter 25 of the third volume of Capital. Fictitious capital contrasts with what Marx calls “real capital”, which is capital actually invested in physical means of production and workers, and “money capital”, which is actual funds being held. 

The market value of fictitious capital assets (such as stocks and securities) varies according to the expected return or yield of those assets in the future, which Marx felt was only indirectly related to the growth of real production. Effectively, fictitious capital represents “accumulated claims, legal titles, to future production’’ and more specifically claims to the income generated by that production.

The moral of the story is that it is not possible to print wealth or value. 

And what has all of this to do with Coronavirus? Well, everything actually. 

I take it that we all knew that the grotesquely overleveraged world economy was heading for a ‘correction’ but that’s a rather a soothing description. “Massive correction” would be a better description. That is the nature of the beast. The world was a bubble of paper money looking for a pin. Now it’s found one. 

Inevitably, the result of creating currency in excess of the creation of goods and services is a decline in purchasing power which we experience as ‘shrink-flation’ - getting lower quality and less quantity even though the price has remained the same.  We experienced this phenomenon after the last 2008 financial meltdown - prior to that we called it inflation.  

As the Helicopter Money trillions flood through the economy and global supply chain disruptions cause prices to rise, the usual bag of tricks will no longer be enough to hide the higher costs and declining purchasing power - not to mention the psychological impact of the reverse wealth effect - as households and enterprises see their net worth and income dropping. 

The confident euphoria required to borrow and spend freely has evaporated and will not be returning, regardless of how much currency is created and distributed.

• What will the business of America be after Covid-19? If we’re lucky, it will be growing food and working at many of the activities that support it: moving it, storing it, selling it, making an order of smaller-scaled farm machinery, including machines that can be used with horses and oxen, breeding the animals. 

Contrary to the globalist paradigm, growing food happens in the countryside, where the fields and pastures are. There are towns there, too, associated with the farming, where much of the business of farming and the activities that support it transact. We’ll see impressive demographic movements of people to these places. There are opportunities in all that, a plausible future. The scale of agriculture will have to change downward, too. AgriBiz, with its giant “inputs” of chemicals and borrowed money, is not going to make it. Farms have to get smaller too, and more people will have to work on them.

• If we want to get around this big country of ours and move food from one place to another, we better think about fixing the railroads. Try to imagine what six trillion dollars might have done for that crucial venture. And I’m not talking about high-speed and high-tech; I mean the railroads that were already here. 

Time IS of the Essence

Compared to nothing, small-business aid contained in these financial relief laws is good. But the $367 billion that Congress has allocated to the program is almost certainly insufficient to keep every eligible small business alive for the duration of the crisis, or so many conservative economists have argued. Meanwhile, it is unclear how quickly the Small Business Administration will be able to get these loans to the myriad enterprises that are currently on the brink of insolvency.

• States will get desperately needed (but woefully inadequate) federal funding.

The legislation doubtlessly features a wide array of unseemly provisions. Given the dire necessity of getting immediate aid to individuals and small businesses, however, one might forgive a bit of small-bore tribute to the gods of K Street. But $4.54 trillion is a little much.

No, the legislation does not directly award large corporations (and their well-heeled shareholders) exponentially more aid than it affords ordinary workers or small businesses. But in practice, there’s reason to think that it will.

Officially, the bill devotes $500 billion to shoring up the corporate sector, with a fraction of those funds earmarked for airlines and firms critical to national defense (and/or the military-industrial complex) like Boeing and General Electric. But $454 billion of that total will go toward backstopping new Federal Reserve lending programs that principally benefit big business. 

To elucidate this point in plain English: It is normal for private banks to maintain a 10-to-1 ratio between the amount of money they’ve loaned out and the amount of capital they actually have on hand. The Fed has not yet specified the exact leverage ratio that it will apply to that $454 billion Congress appropriated, but some officials have indicated that 10-to-1 is about right. Which means that Congress’s appropriation is (potentially) sufficient to supply corporate America with more than $4 trillion in subsidized financing.

There remains ambiguity about exactly how this giant pot of money will be distributed. Officially, that $454 billion won’t support loans exclusively to large corporations but also to select, creditworthy small businesses, along with state and local governments. That said, the common understanding among legislators and reporters is that the bulk of this money will go toward supplying credit to big firms (which is why there are separate sections of the legislation devoted to supplying loans to municipalities and mom-and-pops).

Some may find the disparity between the scale of financing the bill provides to big business — and that of the relief it directs to everyone else — objectionable, in and of itself. But the most offensive aspect of the corporate-aid package is its dearth of conditions

Progressive Democrats had proposed requiring corporations that accept public financing to forswear layoffs for the duration of the crisis, adopt a $15 minimum wage for their employees, give workers representation on their boards, swear off stock buybacks, and give the public an equity stake  in exchange for assuming the risk of investing in their enterprises.

None of these conditions seem to have made the final bill. According to leaked drafts of the legislation, bailed-out companies will be barred from laying off more than 10 percent of their workers for the next six months (better than nothing but not great). And entities personally owned by the Trump family will not be eligible for the Fed’s loans (though they will be eligible for other forms of corporate welfare). 

Meanwhile, Treasury Secretary Steve Mnuchin will have the power to forfeit any gains the public might earn on its investments and to give subsidized firms the freedom to transfer the public’s funds to their (overwhelmingly wealthy) shareholders in the form of dividends.

Some progressives have tried to answer this objection by suggesting that large corporations wouldn’t need any bailout if they hadn’t squandered their record-high profits on payouts to CEOs and shareholders. As the American Prospect’s David Dayen writes:

It’s not a bailout for the coronavirus. It’s a bailout for twelve years of corporate irresponsibility that made these companies so fragile that a few weeks of disruption would destroy them. The short-termism and lack of capital reserves funneled record profits into a bathtub of cash for investors. That’s who’s being made whole, financiers and the small slice of the public that owns more than a trivial amount of stocks.

But this seems misguided in two respects. First, it does not seem realistic to expect corporations to maintain capital reserves large enough to survive an economic shock as vast and unprecedented as that which the coronavirus has unleashed. And second, it would be undesirable for corporations to hoard cash at that scale, anyway. The problem isn’t that corporations haven’t been sitting on enough money to survive a pandemic,  but that they’ve been spending their savings on executive compensation and dividends instead of on wages and productive investment.

To put this point in more expansive terms: The reason why the government should force corporations to accept stringent pro-worker terms on any bailout funds is not that those firms brought financial calamity on themselves through profligacy. Rather, the government should demand such terms because they are good in their own right — and corporate America’s collective misfortune creates an opportunity to force such terms down their throats.

The United States has become a grotesquely unequal society in which the top 0.1 percent of the population has commandeered as much wealth as the bottom 90 percent combined. 

This vast inequity in asset ownership compounds itself on an annual basis as corporations toss off dividends to those rich enough to own their shares. And economic inequalities inevitably translate themselves into political ones.

For these reasons, it is very difficult to rewrite the plutocrat-friendly rules of our market economy in ordinary times. The lobbying prowess of big business, combined with our legislative system’s myriad veto points, conspire to frustrate all attempts at structural change. 

But the pandemic has temporarily shifted the balance of power between our society’s public, semi-democratic governing institutions (a.k.a. Congress) and its private, authoritarian governing institutions (a.k.a. corporations). 

If economic crises have historically provided rare opportunities for advancing egalitarian reform, they’ve also facilitated the consolidation of plutocracies. In the coming months, large, creditworthy firms will be in a position to buy up smaller, struggling enterprises — or else their assets — at a steep discount, setting themselves up for windfall profits and greater market share when good times return.

Whether congressional Democrats could have forced a Republican president and Senate majority to exploit corporate America’s vulnerability is a question each of us will ponder in the days and weeks ahead.  

But the fact that the relief package appears more likely to fortify American plutocracy than to undermine it is the legislation’s greatest failing.



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