Author: seansteegpierce@gmail.com

It may take genius to take the complex and make it simple, but if anyone has the resources to pay for that genius, it’s the US government. Given the size of our government, it’s inevitable that not everything will work properly. The 23 million employees couldn’t possibly all be on the exact same page. Running anything that size is a monumental task under any circumstances. Without clear operating instructions, it is an impossibility.

While we’re in lock-down, it’s difficult to see the upside. We can’t spend time with our friends or see family that is farther out. However, as this is likely the state of our lives for quite an extended period of time, it’s important that we evaluate cost and opportunity in an honest way. The risks are clear. What about the opportunities? There are two steps to a successful public response; Now and Later. Now is about helping people get through it and Later is about paving the way for the future. The Later is going to be much more successful if we spend some of the Now preparing for it.

For individuals and businesses, chaos, as Lord Baelish of Game of Thrones would say, is a ladder. This crisis is exposing institutions that previously seemed venerable to be precarious. Warren Buffett, the renowned investor, has said that when the tide goes out you find out ‘who is swimming naked.’ The tide has retreated and we are starting to see some naked swimmers. Restaurants have been the first to fall (and for a particularly interesting take on this I highly recommend this interview with Nick Kokonas of Alinea fame), but everything will be impacted. Unless there are going to be monthly bailouts, untouchable titans will be felled. It’s sad in many ways, but in that tragedy comes opportunity. New businesses will rise from the ashes. What form they take is anybody’s guess.

That process, in many ways, is natural. The market is a competition for resources in the same way that all life is a competition for food. Fire and flood are natural parts of many ecosystems. Remember the fire in the Disney classic, ‘Bambi’? With the following spring came blooms even more bountiful than before. In the same way, the fires of the business cycle downturn make way for the blooms of the next. It is for the entrepreneurs of tomorrow to decide what those blooms look like. The only thing we can do now is make sure the transition phase is as painless as possible and that the regrowth phase has the fewest obstacles we can give it.

Government response is a bit trickier. Every policy has a downside, but there are some things that we KNOW we can do better. US Healthcare, for example, leaves much to be desired. A light has been shone down on it particularly brightly by this situation and that bright light should be able to help us understand what parts are most in need of improvement. The biggest opportunity for government improvement, though, might lie in infrastructure. Our entire infrastructure is desperately in need of updating, repair, and expansion.

One of the biggest obstacles to improving that infrastructure, though, has nothing to do with the construction itself. It’s a wall of paperwork. A pipe or a railroad will be laid across many jurisdictions, each with their own set of regulations and their own set of government departments that need to be worked with. This process takes an enormous amount of time, and that’s before you even consider the effects of NIMBYism. You could have a perfectly well-thought-out plan to build a railroad, but if there’s a majority from a single municipality blocking it, the whole thing could be put in jeopardy. There are many benefits from the governmental experimentation that takes place under our federalist system of government, but building infrastructure is not one of them.

What does this have to do with our current situation? I would posit that the number of municipalities that would protest to the consolidation of infrastructure planning would be a small fraction of that of normal times and that if we included a Federal lifeline extended to cities in states in dire financial straits would bring that pretty damn close to zero. It’s one opportunity I would venture to say that is too good to…pass up.

Large franchised businesses and well-connected firms have hoovered up much of the capital of the Paycheck Protection Program (PPP) under the CARES Act. Despite its intention as a lifeline to small business, large firms have once again run roughshod over their smaller competitors. Once again, a complicated thicket of rules stood in the way for small business while large firms, armed with highly paid legal and accounting departments, slipped easily through. It’s a continuation of the misunderstanding of the relationship between regulation and power of large entities. Incumbents get what is in effect a moat in the form of paperwork that will easily overwhelm a lean start-up while their size means the costs of the regulation are often little more than a rounding error.

To illustrate, I’d like to talk about my friend Ray. He owns a small gym in Chicago which has been closed due to the stay-at-home order here. As soon as the PPP loans went live, he was trying to apply for one. He submitted his application as soon as he was able, but heard nothing from his bank initially beyond an automated email. He waited a day, then more, then a week. Finally, he went to the branch of his bank where his banker worked and knocked on the window to the man’s office. Since he knew the man personally, he was able to have a conversation outside (6 feet apart). He has not yet heard back on the status of his application, but he was at least able to (finally) get something in. Do you think Shake Shack or the Harvard Endowment had to knock on their banker’s window to get service?

Of course they didn’t. Banks are desperate for customers like that. They have enormous amounts of money to work with. Every minute spent with a Harvard Endowment likely nets as much profit as tens or hundreds of hours with small businesses like Ray’s. Why would a bank jeopardize the relationship they have with a large entity to make sure the application process was ‘fair’ for those applying for the PPP loans? Short answer: they wouldn’t.

It would have been difficult to foresee the obstacles to effectively deploying the money allocated to small business loans under the CARES Act, but that’s precisely the standard to which we need to hold our elected officials. Governing is not about posturing, it’s about creating an environment for your citizens to reach their potential and live relatively secure lives. These times are far from secure, but the federal government is uniquely positioned to cushion the fall that everyone in this country is currently experiencing.

Instead of rolling out a program targeted towards those in industries hardest hit by the pandemic, we over-complicated the response by trying to keep people on the payrolls. We spent more money on big business bailouts than small business lifelines and then big business even managed to finagle its way into the meager scraps left over for the small businesses that form the backbone of our economy.

The worst part is not the death of some businesses, but rather the uneven playing field. ‘Creative destruction,’ or the process by which inefficient or insufficiently productive enterprises are destroyed when they are out-competed by younger, hungrier ones is an essential part of capitalism. If we had bailed out carriage producers when automobiles replaced them, we would have had to wait decades longer before cars became ubiquitous. Small and young firms are often better equipped to handle a rapidly changing landscape because they are lean and able to quickly change direction; instead of providing the opening for a hungrier firm to dart into the openings left by a large business that was caught off-guard after, perhaps, spending effectively all of their cash flow on share buybacks, we have rained money down upon the incumbents while the challengers scrabble for crumbs dropping from the table. What broke capitalism in America? Corporate socialism and rent-seeking.

After the fall of the Roman empire, China became the unquestioned leader in economic and military might. In the 1400s, however, just before Columbus sailed across the Atlantic, the emperor ordered their fleet – about 3,500 oceangoing naval ships – burned. The ‘treasure fleet’ was too powerful and the emperor feared usurpation. Prior to that, they had likely colonized Madagascar and there’s even some evidence that they may have landed in South America. It was not until the 19th century that the West finally surpassed China economically. This happened because China stagnated as Europe and the US grew. Why? China, after it united, was isolated by mountains, desert, and ocean. Europe, however, was filled with nations protected by nothing but their own military might, technology, and intelligence. Europe continued to be forged in the fires of competition.

If a European leader decided that technology, ships, guns, or scientific discovery was not for them, they would be killed (quite literally in some cases) by their neighbors. China, which had established itself as the world’s greatest country and collected tribute from countries flung across the Pacific until the burning of the treasure fleet, was able to isolate itself with no immediately obvious consequences. It’s competition that creates processes, technologies, and discoveries. With competition comes pain, but from that pain comes progress.

Why, you may ask, am I talking about this right now? Competition is falling out of fashion and, with that, we are losing something essential. With respect to the current pandemic, people are asking one treatment to be ramped up before it is established as effective (Trump is calling for chloroquine treatments even as they cause heart failure and brain damage). The beauty of competition is that we have enormous sums of money being poured into research and thousands of brilliant scientists are fighting to become the ones that figure out an effective treatment. This is the power of our pharmaceutical and biotech industries (although sometimes they could use a bit more competition and less FDA prevention of generics, but that’s for another day). We should celebrate competition, not complain that someone is looking at different solutions to the same problem. Their solution may turn out to be correct!

Covid 19 has brought to the fore this conversation, but it’s by no means limited to treatment research. Many have deplored the ruthlessness of global capitalism as old manufacturing plants closed or asked outright whether the government would be better suited to running our real estate and healthcare industries (and more!). Things can always be improved, but when we remove competition from the equation, progress ends. We don’t have the luxury of isolation; if America steps aside, countries like China and Russia will take our place. The world will be much worse off for it.

Here I talk about some of the good parts of the covid 19 stimulus plan and some of the parts that could have been put together better.

There’s really only one thing on everyone’s mind right now, but the only thing we have been told we can do to help is stay home unless you are a healthcare professional. For the rest of us, it is almost sure to elicit a sense of powerlessness and loss. Human beings, after all, are social creatures who derive contentment – the longer lasting, deeper kind – from feeling valued. Two of our most significant emotional needs are not being met.

If you are one of a very select group of people, you can help shape the policy action to try to minimize Covid 19 infection rates and economic damage. Otherwise, we have to work within the rules that are set for us (i.e. avoiding others like this is The Purge). Still, we can do little things to make life better for other people. They’ll appreciate it and you won’t have to resort to unhealthy coping mechanisms to avoid falling into a pit of frustration and despair. While by no means a comprehensive list, I have a few ideas.

1. Volunteer at a food pantry. Much of the volunteer staff at food pantries across the countries consists of retired people. Obviously, they are no longer able to do so because of the high vulnerability of the elderly to Covid 19. Meanwhile, with 10 million people claiming unemployment over the past 2 weeks, the need has never been greater.
2. Adopt a grandparent! The elderly of our communities are particularly isolated and scared (with good reason). Even before the outbreak, many long-term care residents and other elderly people were lacking the personal contact they need. Now, they are intolerably alone. Many nursing homes have established new policies that allow people to contact their residents or “Adopt-a-Grandparent.” It’s not just your friends who need to talk. Give them a call!
3. Learn a new language to become closer to that friend or family member who is just more comfortable in a different one. Duolingo is a free language-learning software that gamifies the whole process. Alternatively, if you want to make your own way into a crash course, this article gives you the tools to become conversational in record time.
4. Foster an animal. Strays aren’t social distancing and springtime is when the stork brings all the new puppies and kittens. Animal shelters are not able to bring in the stream of volunteers and potential adopters as before, so the animals will need to be taken care of in a more distributed fashion. You can save the life of an animal and keep yourself busy at the same time.
5. Create an instructional video. Mayor Lori Lightfoot has done a humorous one on staying home. Perhaps you have some sort of skill that you’d like to show off; I’d love to see what everyone is doing. Shoot me an email or a message on social media to share yours!

We are in a crisis the likes of which will almost certainly end the lives of stolid businesses, so obviously it’s a great time to talk about the benefits of that. In the short run, job losses are, of course, terrible. In the long run, creative destruction plays an important role in the evolution of the economy and society as a whole. When unproductive firms continue to shamble along, the capital available to innovators is wasted on life support for laggards.

Economic data point to a close relationship between declining productivity and a rising portion of capital being allocated to what are colloquially referred to as ‘zombie’ firms. It’s consistent across time and countries. It’s estimated that employment is 1% lower per standard deviation of the zombie share of capital and that the productivity of zombie firms is more than 10% lower than the average non-zombie firm. The problem was exacerbated by near-zero interest rates, which made it easier for banks to continue rolling over questionable debt, and more stringent capital requirements, disincentivizing poorly capitalized banks from taking losses on bad debt. In other words, banks will often refinance bad loans to low-productivity firms using cheap money rather than take losses on the loans and face the accompanying decline on paper assets. This cocktail of cheap capital for inefficient incumbent firms helped zombie firms nearly double in capital share from 2009 to 2013.

The endgame: zombies are eating our brains! That is to say, low productivity firms are crowding out younger and more innovative firms, thereby stifling productivity growth and expanded employment rates. The difficulties, both in firm productivity and jobs, have expanded as the share of the economy taken up by zombies has increased. Think of it as a garden; if we do not prune the unhealthy bits, growth will be stunted for young, healthy plants. Sickly firms are sucking up too much of the available nutrients and preventing sunlight from reaching newly emerged sprouts.

The problem, of course, is that we are talking about people’s livelihoods. In theory, the end of old firms can help propel new ones forward. Practically, many will be out of work as an immediate result. This is why politicians’ first instinct is to throw a lifeline. However, rather than keeping a firm afloat, we should be thinking of the governed. Expanded unemployment benefits could ease the pain while not interfering with the market; providing people with income also helps keep demand steady in communities relying on a single industry or company.

Typically, downturns in business cycles result in the cleansing of weak firms. The last downturn, however, was combatted with unprecedented monetary support. Actions taken by the Federal Reserve likely averted another long spell of 20% or higher unemployment. They also may have set the stage for the anemic productivity growth we have faced over the past decade. In a world awash in capital, low-performing firms are having little difficulty refinancing or rolling over debt. We now face an entirely different kind of crisis; a pandemic is damming the river of economic activity. Zombie firms will once again struggle to find the cheap money they need to survive. As our lawmakers continue to work on fiscal stimulus, I would urge more focus on individuals and less on highly leveraged legacy firms.

Read more of the series here.

People all over the world are dealing with sudden and unprecedented (in modern times) hardship. A virus that was first discovered in December has caused thousands of deaths and will likely cause millions before all is said and done with many more caused by knock-on effects and poor responses by global governments. The hardest hit will be the poor who cannot afford to miss work and service-industry folks who suddenly find themselves without a paycheck. Social safety nets can help stem the bleeding, but some countries (such as the US) lack a sufficiently robust system to cope with a situation such as this without taking new and drastic action. As a result, we are seeing competing stimulus packages getting rammed through both houses of Congress. Some measures are good ideas while others are wasteful or miss the mark. Ideally, we would look at who needs help to get by (and when I say who, I mean human people, not corporations), and then we would find ways to most efficiently help them.

The essential first step is making sure that everyone is able to weather the storm. Most importantly, that means giving everyone the security to take off if they are sick. This is why the bulk of the plans making their way through Congress include some form of extended paid sick leave guaranteed for everyone. It also means giving people a helping hand that suddenly lost work because we are closing or reducing capacity for public spaces including bars and restaurants. Waitstaff, chefs, bartenders, and all other service-oriented professions are feeling the squeeze more than any other. They are not the only ones, though. A poll completed a week ago (a lifetime ago in terms of this virus) found that one in five American households had lost work due to the coronavirus; they either lost hours or lost their jobs. This is why Congress is talking about simply cutting checks to every American. We can deal with the ramifications later by clawing some back via income taxes for those who did not need it, but we do not have the time to waffle around on who doesn’t deserve it and why. The speed of this crisis does not allow it.

After we have secured help for people who are immediately impacted, the next step is securing the future. We will get past this whether it is 6 months from now or 18 months from now. When we do, the economy will need to be rebooted. If businesses are all left in ruins, we might not like what sprouts up from the ashes. Small business is the backbone of our economy and we need to treat it as such; our diverse restaurants, bars, and cultural sites may become extinct if we do not help them. Nascent businesses building our future may die off before they ever get a chance to show us what they have to offer. Large corporations forming the backbone of our economy may struggle to bring people back to work. If we want to avoid these scenarios, we need to determine where the government needs to step in to prevent the utter devastation that would otherwise come about. Nevertheless, corporate policy should be more subtle than that impacting individuals.

Restaurants, bars, cultural venues, museums, and other businesses relying on customers to come into their establishments will be the hardest hit. They would not be experiencing this difficulty in the absence of this particular form of crisis or government responses to it and, as such, could reasonably be expected to be prepared for it. Offering long-term 0 percent interest loans to such businesses or grants that help them stay in their leases or mortgages could prevent closures negatively impacting communities. This cannot be open-ended, but keeping them afloat will give people a place in which they can return to work when this is all over and it maintains cultural sites for happier days.

Meanwhile, new businesses just getting off the ground will not be able to find new customers and will struggle to find funding with the inevitable cash crunch that will come as financial institutions batten down the hatches. There is no productivity growth without innovation and innovation cannot take place without the help of entrepreneurs. This does not mean that every business that has recently been founded deserves funding, but proposals such as that of Amy Klobuchar would allow the government to invest side-by-side venture capital in places such as the Midwest, which have historically struggled to find funding. If private money feels comfortable investing, public money can come in alongside it.

Finally, we can turn our attention to large corporations. They have the funds to wait it out a bit longer, so approaching that last allows us to better assess what is happening. If they are not able to withstand the hit after just a few weeks, they were probably overleveraged and the virus likely only accelerated the inevitable. Industries likely to be hardest hit by this crisis include travel and durable goods. Some, such as the automotive industry, can retool their production lines to temporarily create things we need more of right now including ventilators and other life-preserving medical technology. Others, such as airlines, will not be able to do much beyond waiting it out, so some form of assistance will be necessary (although it should probably come with some strings attached as they have spent the vast majority of their free cash flow on share buybacks during the good times).

A broad-strokes policy is inappropriate and we do not have space for me to discuss all of them here, but I will say that, in the case of large corporations, staying within our means is better than overdoing it. We are still dealing with ramifications of extensive low-cost financing today in the form of shambolic firms that continuously roll over their finances without creating any positive cash flow. In an ideal world, such firms would cease to exist and we could restart productivity growth. Open-handed financing of these ‘zombie’ firms can only contribute to an extension of the era of low productivity growth.

Further, there are many policies being put forward with which I believe we should immediately dispense. Proposals of funding payrolls to keep people working that would not otherwise be is a gross mismanagement of government funds. It is regressive in that it gives more money to people who are already better off. Payroll tax breaks do nothing to help the millions of Americans who are about to be out of work; those breaks are essentially turning a sprinkler onto a field that is filled with water. Cancellation of student debt is not in any way related to this current situation and even talking about it wastes valuable time that should be spent on more productive ideas. Corporate tax breaks are ineffectual when most economic activity is suspended by design.

Relief required also depends on the scale of restrictions placed upon normal economic activity. Extreme positions such as full lock-downs are especially onerous on wage workers and, as such, more focus for relief needs to go towards them. Here I should mention that I believe lockdowns to be unsustainable given the timeline we are looking at for this crisis, but, after our local leaders hit the panic switch, the federal government needs to step in to alleviate some of the damage such policies have wrought. That aside, this will all change as the situation develops. There is simply too much we do not know. The speed of this economic onslaught has been faster than anything else in history (including the Great Depression). To wit, the stock market has gone from peak to bear market faster than at any time in history. Responsible leadership has never been more important.