Fence Federal Regulation And Spending Before The Next Economic Shock

Does it make sense as an ongoing tenet of public policy to regard a few weeks or months of business disruption, like that characterizing the outset of Covid-19, as capable of destroying major corporations, necessitating Cyclopean-scale government interventions that change the very nature of competitive enterprise and capitalism?

This is the third, not the first, major economic calamity of the 21st Century. Our response is something not imposed on us, but that we do for or to ourselves. So far, our policy reactions can and have expanded dependency and permanent government itself; conversely they could have and still can expand enterprise-based renewal and resiliency.

As a simple point of observation, if any entities should have been resilient with months, even years, of reserve funds and not required manmade flash-policy intervention, it would be major corporations, those among literally the richest institutions on the planet.

They are richer, certainly, than the bankrupt governments bailing them out.

Assuredly, the fears of the less well-heeled non-titans like the restaurant and bar industries were justified given the nature of a pandemic. Ditto small and medium businesses struck down, though thankfully not as many as predicted.

But it is notable to recall for our Monday-morning quarterbacking that the U.S. Chamber of Commerce and corporate trade groups lost no time in early March 2020 sending urgent letters to Congress in support of the CARES Act (“Coronavirus Aid, Relief, and Economic Security Act“) and concurrent relief appeals. A less-rattled National Federation of Independent Business was more circumspect, not to mention prescient, about differential effects the virus would have on members. The NFIB noted members’ proactive steps like stocking disinfectant and hand sanitizer, discussing sick leave and work-from-home options with employees, modifying supply chains and changing buyers or vendors. Even without the benefit of hindsight, that some information- and online-based sectors would “perversely” thrive from lockdown was apparent.

The multi-trillion-dollar CARES Act’s enablement of discretionary deployment of public funds to support individual private businesses was unprecedented. Less appreciated, and a scourge of the administrative state, is that the deeply entrenched pre-existing business and corporate regulatory environment enabled this very over-reach, with Republicans relenting to unbounded spending, loan guarantees and industrial policy. Without embrace of an alternative mentality our descendants will be rendered further unable to resist a non-government-centric response to future downturns and crises. As was apparent early in 2020, some—from Canada’s Justin Trudeau, to the World Economic Forum to the current occupant of the White House—see this as a feature not a bug, gleefully contemplating what they call “reset” and “build back better.”

The federal government in 2020 assumed great power in deciding who gets supported and survives, even while in other respects state government lockdowns were closing businesses. While companies and critical infrastructure functions have been bailed out before, then-Treasury Secretary Stephen Mnuchin assumed awesome powers, even participating in negotiations regarding their scope, over the dispensation of hundreds of billions of public funds in collateralized loans and loans to private businesses, some to be forgiven. These were powers Mnuchin was equally capable of unilaterally taking away.

Vital power of the market was transferred to government, as the Federal Reserve began allocating capital not just in the “traditional” form of its loans to banks, but of loans to individual businesses, extending credit and buying corporate debt; that is, picking winners and losers. Somewhere along the way, the Federal Reserve assumed ownership of almost a third of mortgage securities. Two professors in the Wall Street Journal referred to the swamping of private lending as “the largest step toward a centrally planned economy the U.S. has ever taken.”

These and more represent concessions from which there is no turning back without a lucid response that places top priority on advance preparation for the next inevitable crisis to befall the U.S. (perhaps globe). Instead, the steps being taken expand government, compound non-resilience and, one must conclude, deliberately induce a more dependent population, as incomprehensible as that seems. The latter debasement of the citizenry is why changes will require, among so much else, punitive measures for policymakers that exploit crises in naked fashion.

Policies to advance resilience for individuals and lower level governments (with a major part of the latter entailing restrictions on emergency powers, elevation of federalism and localized and privatized infrastructure) are vital. For present purposes, we look more at the business regulatory side regarding prospects for renewal.

In the wake of 2020’s multiple interventions, three Biden legislative proposals dominate. The American Rescue Plan has been enacted; the “Jobs” and “Families” Plans are stalled as debate is set to begin over Biden’s 2022 fiscal budget request more broadly. Yet there remains talk of still another stimulus payment even as businesses express concern over getting workers to show up, a consequence warned of at the very outset of the coronavirus crisis. One Republican after another stood on the Senate floor earlier this month calling for people to go back to work, while Democrats remained silent, seemingly internally pleased at the success of their series of experiments with a universal basic income (UBI) that Covid afforded them. Democrats appear not to regard the short-staffing situation as a problem; problems with Republicans are that they do not recognize this, and that they helped let the horse out of the barn.

While it is alarming than that is that there is no agenda or even the hint of a plan to assure the nation does not respond in spendthrift and opportunistic fashion to the next crisis, the phenomenon of government-expanding crisis-intervention is nothing new. Alongside the 21st Century’s 9/11 and the 2008 meltdown, eight financial crises have occurred since the 1863 National Bank Act launched federal banking oversight. Each entailed reflexively expanding government despite inappropriate “volatility suppression” that sends the dangerous signal that excess risk will be bailed out. It is more than a signal, since the fear was realized again in 2020 as even companies with questionable accounting practices received bailouts.

Speaking of bailouts, sectors issuing early relief appeals to Congress included the recording industry (given event cancellations), trucking, the gaming sector, restaurants, dentists, hotel and travel groups, theater owners, Amtrak, and of course Boeing. (“We have to protect Boeing,” said former president Donald Trump.) A rarity of the moment was the resignation from Boeing’s board of former UN ambassador and South Carolina governor Nikki Haley. She objected to its pursuit of stimulus aid, saying, “I have long held strong convictions that this is not the role of government.” In a fit of generous magnanimity (with taxpayer money, that is) over 100 CEOs, including Starbucks head Howard Schultz, Microsoft, the Chamber again, and Walmart and Facebook officers (the latter two thriving in the pandemic) wrote Congress requesting an extension and easing of the Paycheck Protection Program for small business.  

The case against taxpayer bailout of rich corporations has been made aplenty so will not be rehashed here; but major economic interventions in time of crisis implicate not just companies but the entire global economy. Top-down central steering like that noted above create thoroughly unappreciated costs of regulation and problems of distortion in the form of changing entire trajectories not just of businesses, but of business models, industries and entire economies (see the insights of W.H. Hutt and F.A. Hayek on the mangling of business cycles among much else).

The alternative is to recognize and enshrine as public policy that, like individuals (see more on resilience at the household level and alternatives to federal custodianship of adults here and here), corporations need to be “preppers” in order to talk sensibly about resilience vs. the expansion of government in crisis readiness and response. Corporations are legal fictions, such that helping the individuals who comprise them—with an “Abuse-of-Crisis Prevention Act” that fosters intergenerational wealth rather than the intergenerational taxation and debt we got during 2020-21—should assume primacy (or else).

As an example of exploitation, Sen. Elizabeth Warren (D-Massachusetts) sought to bring business to its knees in exchange for financial assistance. Her insistence upon payroll maintenance, a $15 minimum wage, stock buyback prohibitions, and labor representatives on corporate boards were appalling ideas that would expand the cronyism of government/business alliances and render moral hazard problems worse had they come to fruition. But, deeming the pandemic as affecting corporations through “no fault of their own,” even then-president Trump was open to federal equity stakes in exchange for grants. The risk of making specific entities’ failure everyone else’s responsibility is that calls for rescue and promises to provide it multiply, as firms return with new requests after the initial support.

It will take the elimination of a lot of never needed regulations to offset Covid’s top-down engagement in market mechanisms, and the regulatory effects of newly interventionist spending. Vulnerable restaurants and bars are one thing. But treatment harsher than being propped up by the Federal Reserve and Treasury are needed for the likes of airlines and others who repeatedly request crisis bailouts. Businesses may fall, but there are others with cash reserves and low-cost business models whose stance resilience policy should encourage more broadly. 

Just as individuals with no interruption in income received stimulus, some larger businesses not in financial distress were able to tap funds and deplete them, a concern raised by Sen. Ron Johnson of Wisconsin, who early on had called for the most basic of controls: “Loan forgiveness shouldn’t be granted to organizations that have the ability to repay,” he said, “A simple fix would require repayment of PPP loans to the extent a taxpaying entity has taxable income for 2020, or a tax-exempt organization has increased net assets.” Problems that came to light during 2020’s bailout drama included Trump donors, billionaires, country clubs, wealth management firms and the well-connected cashing in as beneficiaries of pandemic relief. There were alleged overpayments and bribery; questionable companies receiving aid, bank windfalls and fraud. Topping things off was a finding that over half of small business emergency funds went to larger firms.

Without bailouts, bankruptcies definitely happen. But underlying assets do not disappear; planes still fly with new owners. The pandemic setting was a unique one obviously, but in general, as economist John Cochrane put it, “Bankruptcy of a large corporation does not leave a crater behind.” Rather, where bankruptcy would serve to permit underlying resources to survive, inappropriate intervention can aggravate economic distortion and social inequalities. As investors Sam Long and Alexander Synkov described it in the Wall Street Journal, “bankruptcies among highly leveraged businesses often pose surprisingly little risk to employment. More often than not, creditors choose to keep businesses staffed even when restructuring to retain value for the long-term. By preventing these bankruptcies, the Fed is doing more for equity holders and junior creditors than for employees.”

As with social policy regulation via spending, once government assumes a function, that intervention ceases being recognized as a category of regulation. So while government bookkeeping ostensibly regards regulation to have costs, benefits and tradeoffs, these are in no sense actually tabulated. The semi-nationalization of bailouts and their attendant ripple effects, much like the centralized, from-above economic steering entailed in antitrust regulation, fall off the regulatory-cost screen, lessen resilience, and set the stage for more of the same shrinkage of competitive enterprise and the wealth-creating sectors down the road.

Concerns over liability protections for reopening businesses was a legitimate issue raised in early appeals like those of the Chamber, anticipating moves like that of the Occupational Health and Safety Administration to potentially hold employers liable for adverse reactions to a vaccine jab and treat it as a work-related reportable incident. (It is directly related to the subject matter of this essay that such policy is made, not by law, nor by notice-and-comment regulation, but via guidance document or lesser announcement; this represents a decay in governance that “renewal” and “build back” programs would compound.) The liability fear, as the Wall Street Journal described, was that potentially “a huge chunk of aid money is destined for the trial bar,” which as early as April 2020 was “actively soliciting plaintiffs for cases against hand-sanitizer manufacturers, hospitals, vaccine makers [and] nursing-home operators.” No one of good intent is interested in a bonanza for the slip-and-fall lawyers, so indemnification and retroactive liability protections for reopening businesses and schools, as Sen. Mitch McConnell (R-Kentucky) had continued to press in post-CARES Act negotiations, can, I shudder to say, make some sense in crisis. But these also can and will tend to go too far, since we no longer possess a government overly preoccupied with self-restraint. Overbroad indemnification can undermine resilience, as post-9/11’s legislated indemnification for failure of safety equipment arguably illustrated. Taken to extremes, we encounter the Lloyd’s of London call for government-backed “black swan” insurance in event of shock. Such coverage, putting hands in taxpayers’ pockets, would be irresistible to some business stakeholders, and would be easily misused given the flash policy reflex and the drive to insure the uninsurable. Resilience lies elsewhere.

Private risk-management and business insurance market evolution are important quite apart from crisis-readiness, especially in emergent economic sectors that will be the wealth-creating engines of the future, and whose integration into a free society requires normal, healthy, non-politically driven evolution of contractual, immunity and risk sharing standards. Given the regulatory environment that insurance markets already marinate in during the best of times, these urgently needed innovations in insurance products and lucid liability standards will be dampened by the expectation of future bailouts. A resilience approach would be one of deregulation and liberalization to expand healthy private insurance and individual savings cushions, and a claw back of the more ambitious indemnification impulses that can worsen risk or put taxpayers on the hook. Contractually driven approaches that treat liability as an evolving relationship expand options and resilience, while regulatory approaches that either mandate liability, or conversely, indemnify companies from liability grow government and undermine resilience. Insurance instruments, like the business sectors they cover, are themselves forms of wealth, best advanced by ongoing competitive processes, including the reality that future shocks and crises that are general rather than specific (and thus more easily hedged) in nature are inevitable.

As noted, some businesses weathered the lockdown storm because of fortunate positioning. These included big tech, big box home stores, and the likes of Walmart. Some enterprises were deemed essential while others were forcibly shut down. While neighborhood restaurants struggled, some chains boomed. The artificiality and arbitrariness of some of it needs to be better understood and prepared for before future crises occur. These “lucky” ones occupied far different realities than the city bar or small restaurant, and stood to develop cozier relationships with government that could undermine others even post-crisis. While there were innovative realignments like the ghost kitchens supporting online restaurant delivery, these could not be expected to fully take up the slack (moreover it would entails a touch of the “broken window fallacy” to regard them as having done so). Covid resulted in record numbers of retailers declaring bankruptcy and small business closures. December 2020 brought out a stark contrast; while 45 of 50 of the largest companies posted profits, almost eight million Americans slipped into poverty since summer. While the Internet eased the pain for so many, enabling individual empowerment including of the disabled in so many ways, tech titans in the process were enriched relative to other businesses, and billionaire wealth set records.

So it has been lost on no one that the government, not the market, made some businesses bigger in crisis, while manmade decrees rather than virus made others smaller. But note that none of the stimulus and recovery plans proclaim a specific intent to address that unfairness before a future crisis. It is a crisis unto itself that the longer lockdowns are maintained, the better for the well-positioned such as a flourishing tech sector, but the worse for those who cannot weather them. This condition can aggravate income inequality in society. Then that very same arbitrary, unfair and in-part artificially created outcome so easily exploited by the social-justice warrior mindset via the reset-oriented agitation during Covid can be expanded to rationalize intervention in future crises.

At the same time, the very success of some of those companies that become richer points to the likelihood that private actors—like Home Depot supplying the chainsaws during a hurricane—can generally provide relief and charity better than government can; especially in a wealthy economy where 2000 calories a day can be attained cheaply. When the Guardian reported early in the crisis that “It is calling up 100,000 troops, extending grants to small businesses, prioritizing essential goods, and cracking down on profiteers,” it was talking, not about the U.S. government, but about Amazon.

The takeaway from the immediately preceding passages is that every business should have the best chance possible to thrive, which means not unfairly disadvantaging some businesses relative to others. So, there are a number of tasks for policymakers. Along with eliminating never-needed regulations, inconsistency in regulation causes damage and needs to be addressed. The National Association of Manufacturers pointed to this: “The issues caused by piecemeal regulation across all levels of government have become acute in the COVID-19 era as manufacturers face a dizzying array of inconsistent and sometimes conflicting guidance while working to ensure Americans have everything they need to stay healthy and maintain their daily lives and protect their employees.” The resilience remedy here is for policymakers to continue to “take all available steps to preempt state efforts to create a patchwork of regulations that burden interstate commerce, particularly where those state regulations conflict with federal ones.”

There is indeed a larger plan of action needed to transfer federal functions and spending, including infrastructure, to states rather than double down on the federal enterprise as the Biden plans do (but more on these later).

Alongside revisiting the bailout reflex and its distortions, bankruptcy policy, liberalizing the role of insurance instruments in the market, and addressing over-regulation and regulatory inconsistency, a renewal and resilience plan to expand business “wealth reserves” paralleling that needed for individuals and households should be pursued in an Abuse-of-Crisis Prevention Act. Businesses best able to survive crisis would likely be those with healthy cash reserves (32 percent reportedly have a month or less), so fostering the accumulation of resources to withstand shocks makes sense. This could entail Congress revisiting and appropriately expanding retained earnings policy to allow companies from the mom and pop to the global to expand accumulated reserves beyond current Internal Revenue Service caps and limitations on bona fide “reasonable needs of the business.”

Today, the tax regulations say, “An accumulation of the earnings and profits (including the undistributed earnings and profits of prior years) is in excess of the reasonable needs of the business if it exceeds the amount that a prudent businessman would consider appropriate for the present business purposes and for the reasonably anticipated future needs of the business.” We now know, and have known, that reasonable needs to anticipate include the weathering of extended crisis. This would be another reason Biden’s capital gains taxes would be a bad idea.  

Instead of the current “Jobs” and “Families” incarnations of “Covid” bills under debate, this means Congress should among much else explore allowances for set asides of six months or more of a firm’s highest operating expenses as a fund to tap during an emergency or shock, or to use as investment or consumption when deemed necessary (the individual or household corollary is that these funds would convert to retirement or inheritance). Whatever is done will be superior to sending the money to Washington. Building such reserves could also improve companies’ bargaining positions for negotiation with insurers over business interruptions. That in turn implies that favorable insurance innovations might be expected to go hand in hand with these resilience-oriented changes. In renewal and resilience that shrinks the state and expands the voluntary sector, all these issues discussed herein are intertwined.

Imagine an economy and population vastly wealthier in tomorrow’s United States, not more dependent on Washington as some malignant visions intend, upon the arrival of the next crisis. Imagine a business sector flush with red-cheeks and wealth, one less prone to the instinctive “letter-to-Congress” impulse to become a public charge when the next—inevitable—crisis arises.

Washington’s overly eager intervention into companies and sectors, during both good times and bad, artificially reconfigures the economy into involuntary, non-market configurations, redistributes resources, and fundamentally changes the relationship of business to the state in a way that advances collectivist ends rather than voluntary competitive enterprise. As investor Leon Cooperman put it, “When the government is called upon to protect you on the downside, they have every right to regulate you on the upside,” and, he noted, capitalism is changed.

Given their unfortunate and in today’s context obviously ill-timed support of major science and infrastructure spending, Republicans are vulnerable to a compromise on infrastructure legislation tainted with Biden’s reset and build back better stances. Instead of inextricable new spending packages, resilience-oriented legislation is needed to set boundaries on the national government; to put controls on emergency powers; and to expand the self-help capacities of individuals, families, companies and lower-level governments. A future column will look at the latter.