Home > Uncategorized > Corruption and the Pandemic Bailout

Corruption and the Pandemic Bailout

from Dean Baker

Neil Irwin had an interesting New York Times piece on how concerns about moral hazard in the bailout may damage the recovery. The gist of the article is that the fear that bad actors will be wrongly rewarded will prevent us from spending enough money to get the economy back on its feet. Irwin’s point is very important, but it does require some further examination.

We might agree for example, that it is silly to oppose an airline bailout because it will help shareholders if the bailout will also save tens of thousands of jobs. The priority should be to preserve jobs and, as much as possible, keep viable corporations intact through this crisis. This is not only to keep employment as high as possible during the crisis but also to preserve the basis for a strong recovery.

But let’s put some meat on the bones here. If we stay with the case of an airline bailout (which actually had some pretty good terms for workers, that were imposed as a result of pressure from industry unions), let’s imagine that the airlines planned to use much of their bailout money to pay out dividends to shareholders. Suppose that they plan to continue to pay CEOs salaries in the neighborhood of $20 million a year. And, they have plans to lay off a large portion of their workforce.

Do we still think it’s a good idea to bail out the airlines? I’m slightly caricaturing the story here, but the basic problem arises in all sectors. We absolutely should place a priority on sustaining the economy through this crisis, but we also have to ask the question of who is benefiting and how much?

That is unfortunate, but we live in a society where, for the last four decades, those on top have taken every opportunity to game the system to enrich themselves at the expense of everyone else. We see this with CEOs who take advantage of the corruption of the corporate governance process to get paychecks that are two to three hundred times the pay of ordinary workers. We have drug companies that constantly game the patent system to extend monopolies that allow them to charge prices that can be tens of thousands of percent above the free market price.

We have a financial industry that makes tens of billions of dollars annually by sneaking fees and penalties into contracts with their customers. And, we have a whole industry, private equity, that has made many of its partners incredibly rich by financial gaming at the expense of the creditors and workers at the companies it buys.

This is the world we lived in when the pandemic hit. In this context is there any reason to trust that the bailout money will serve the overall good of the economy and society?

The fact that Donald Trump has explicitly resisted Congressional efforts at oversight of the bailout hardly helps to promote trust. In fact, given his past behavior and the behavior of top officials in the Trump administration, it is reasonable to assume Trump’s family, friends, and political supporters will disproportionately be the beneficiaries of this bailout.

Furthermore, the punitive steps towards ordinary workers taken by Trump and other Republican officials also undermine any idea that we share a common interest in a bailout that keeps the economy moving. Trump has effectively required tens of thousands of workers in meatpacking plants to return to work in facilities that are unsafe, and without receiving any hazard pay.

Senate Majority Leader Mitch McConnell explicitly said that he wants to force states to declare bankruptcy so that they can default on the pensions that were part of their workers’ pay. McConnell has indicated that he also would like to see cuts to pay of current union workers, but he apparently is mostly anxious to take back the pay for work already done. Trump seems about to pull the same trick with the postal workers, who somehow got left out of the rescue packages approved by Congress. In the same vein, several Republican governors have told employers that they want to be notified of any workers who do not return to work when businesses reopen so that they can cut off their unemployment benefits.

The “we’re all in this together” spirit that might make a sprawling free-flowing bailout seem reasonable does not exist. The rich are not only acting to preserve their wealth in this crisis, but they are also using every opportunity to stuff their pockets as full as possible. In addition to all their standard scams, they are even ripping off the relief effort, charging exorbitant prices for needed drugs, medical equipment, and protective gear.

The idea that the distribution of income was simply the result of the free workings of the market was always a fairy tale, believed only by children and liberal policy wonks. But it is especially absurd as we see the pandemic wreck its havoc and the government choosing which groups will survive more or less in tack or even prosper from the disaster.

In effect, the pandemic has thrown the whole deck of cards up in the air. If we just let the market work its magic in this environment, it will ruin almost any industry or company – in addition to the airline industry, aircraft makers (i.e. Boeing), hotel chains, restaurant chains, hospitals losing payments for elective procedures, health insurance companies, department stores, and retail chains, and many others – would all be going belly up.

We will save most of the companies in hard-hit sectors as a political decision. We will let millions of workers and their families flounder, losing homes and apartments, retirement savings, health care insurance, and other basics as a separate political decision. The idea that this has anything to do with the market is crap. The people with political power are using it to protect and enhance their wealth. And, they are using that power to kick ordinary workers in the face.

Yeah, there are very good reasons for people not to like the current bailout. They are not being irrational.

  1. ghholtham
    May 17, 2020 at 8:41 pm

    The bailout should take the form of an equity stake in the businesses concerned. No point in saddling them with debt but no reason to socialise losses and take no share of the upside. The government could create a community fund and lodge shareholdings of bailed-out companies in the fund. It should further feed the fund with a scrip tax (paid in shares) on mergers and acquisitions. The big internet-based companies are protecting their effective monopoly by buying out any potential competitor. They should make a payment each time they do so that gives the public a larger interest in their stock. Sanders might have backed such a scheme but would Biden? And what chance it gets through Congress? Well run countries like Singapore and Norway have sovereign wealth funds and the crisis provides an opportunity to start one.

    • Meta Capitalism
      May 19, 2020 at 5:45 am

      Thank you Gerald for some very meaningful and positive ideas that if we can find the social and political will are goal worthy ideals. Whether those are possible in the U.S. I cannot say.
      .
      It seems too many economists have “superabundance of ideas, but they are poverty-stricken in ideals,” (the value-neutral myth) spinning endless toy-models in the belief what “the world, confused simply by too much knowledge, needs is a better model,” in the end becoming like “people starved by having too much knowledge in their mouths so that they cannot chew, swallow , or digest.”
      .
      Perhaps economics is in need a new definition that is broader than merely looking for regularities and invariance (conserved ‘quantities’ or ‘patterns’) in nature and one that encompasses solving real-world problems facing humanity?

      • Craig
        May 19, 2020 at 6:18 pm

        Yes that generally happens with those who are stuck in the current paradigm and cannot inquire outside of it. It leads to endless critique, obsession with problems and whoring after complexity when the key to new pattern recognition is actually conceptual simplicity which seamlessly fits within aligned present structures, efficaciously resolves the old pattern’s deepest problems and enables the way to transforming “necessary” limits the orthodox think are counter to what is prudent. Like a second 50% discount/jubilee policy at the point of loan signing for human security big ticket items like homes and for any big ticket green items.

  2. Craig
    May 17, 2020 at 8:42 pm

    Excellent post. Government policies need to be both gracious to those who act in good faith and sovereignly powerful, and thus willing to “put a few heads on a pike” with those who would game such gracious system.

  3. Patrick Newman
    May 17, 2020 at 9:32 pm

    Who is the “we” here? Certainly not Trump nor Congress!

  4. Ikonoclast
    May 17, 2020 at 10:33 pm

    A serious economic illness requires serious economic medicine.

    Nothing should be done to save any business at all unless it is a strategic or essential business. In other words, non-essential, non-strategic businesses should be permitted to fail and fail completely if necessary. Non-essential, non-strategic businesses include the entirety of the tourism sector including all transport and accommodation which supports tourism, the entirety of the club, pub, restaurant and coffee shop business, the entirety of the fashion, hairdressing and cosmetics business, the entirety of the gambling business, the entirety of the racing business (cars, horses, dogs etc.), the entirety of the pet business and others which could be noted in a longer listing. None of these things are things which people can’t live without.

    These businesses should be permitted to fail or survive, as the case may be, entirely without subsidies of many kind. Instead, what must be done is to create a living unemployment benefit and all unemployed workers and former business owners without savings or assets must be eligible for this benefit.

    In the case of essential and strategic businesses, they must be saved by government money if need be. Where government money saves them, the government takes equity in the business, even nationalizing it if required. The list of essential businesses is long and they would provide a great deal of employment if properly staffed. All natural monopolies should be state owned. The vast majority of education, health and welfare institutions should be state owned. Private businesses which currently provide essential goods and services are thriving in the current crisis and do not need subsidies.

    Overall, this implies a great increase in dirigisme or statism. This is what is required to survive and to save our environment from the needless consumption inherent in all non-essential businesses and which is encouraged by rampant consumerism. This is tough medicine but it has to be taken or the West will collapse. It is no accident that statist China has handled this crisis extremely well but the West is failing and indeed is currently collapsing. Statism is required of necessity. Neoliberalism or unregulated capitalism has failed and failed utterly in this crisis. If we stick to neoliberalism then we will collapse almost certainly.

    China is out-competing the rest of the world by a great margin. One reason is that statism, as state capitalism, works and unregulated capitalism does not. Unregulated capitalism fails to inequality, inefficiency, corruption. plutocracy and kakistocracy. The empirical evidence is our failure to deal with this crisis and China’s seeming success in dealing with this same crisis. We do not fully know what is happening in China however as it is too opaque and secretive.

    However, China’s apparent success is not benign. The Communist Party of China is a totalitarian regime. Like any totalitarian power or superpower, China’s intents with respect to the rest of the world are entirely self-interested. China, as a nascent superpower is seeking regional hegemony first and global hegemony next. If China achieves global hegemony, it will seek to dictate terms to the rest of world: terms of trade, terms of movement, terms of statehood and even terms of existence or non-existence for other peoples and nations. However, this leads into geostrategy which is not the focus of this blog, so I will leave it there.

    • May 18, 2020 at 11:22 am

      Let us remember we are discussing the effects of corruption on pandemic bailouts.

      In one sense I agree with you, Ikonoclast, over the difference between essential and strategic jobs and the need for a living unemployment benefit and reducing the environmental effects of needless consumption, but where you talk of “government money” and “government ownership” and “statism”, I talk about the community spending its credit and needing to direct its renewal. Not by incompetent governments telling us what to do but by those who are competent at such things using their credit to observe and advise us about what we are using and what needs to be done. I disagree entirely about all the non-strategic goods being non-essential. Getting my haircut may be unessential to (long bald) me but it seems to be essential to the self-image and therefore well-being of my wife. Another such example might be a lonely widow whose only company is her cat.

      Since with proper organisation and automation only a few of already do far more than is essential, the living off credit instead of money permits (as I see it) time-sharing between doing what we must do to be a self-sufficient state community, and doing voluntarily what we need to or can see needs doing in our local community. If you think along these lines – commendment rather than commandment – I’m sure, Ike, you will be able to express the idea far better than I can.

  5. yok
    May 18, 2020 at 3:31 am

    Ikonoclast. I agree with allowing non-essential industries to fail as market dictates, and providing help to the individuals in society. Boy, some kind of capitalism, where corporations are people and the most wealthy and powerful of the people are protected from the vagaries of life. But hey, that’s why the wealthy and the powerful want to be – so they can protect themselves from the circumstances and situations the rest of us are subjected to.

  6. ghholtham
    May 18, 2020 at 2:21 pm

    Ikonoclast seems to be a true follower of Savonarola, wanting to sweep away all life’s vanities. Too puritanical for me. If the a business case can me made, take equity and let the good times roll. While we’re fantasising about the government acting rationally, they can impose a carbon tax to winnow out business with a negative social cost/benefit.

  7. Ed Zimmer
    May 18, 2020 at 5:16 pm

    I see the “essential” economy as the production-and-consumption economy that GDP measures. GDP does not include most of the rentier income derived from the FIRE economy.

  8. May 20, 2020 at 1:03 am

    I am a freelance translator with over 1100 translated articles on my website.In the last week, I translated four articles on “Housing and Corona,” “Budget 2020,” and Corona and Tenants.”  These articles are from Austrian economic researchers at awblog.at.  Please let me know if you can think of any journals or newspapers that might publish these important articles. Upon request, I’d be happy to send you copies of the translations.Sincerely,Marc BatkoPortland OR marc1seed@yahoo.comfreembtranslations.net

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