Debt vs Government Cash Assistance

The last week or so has seen a ton of governments, central banks and international organizations crafting various plans for combating the economically damaging effects of the Corona pandemic.

Investopedia keeps a tab on policies enacted so far — here are some:

• Australia sent one-time cash payments (to veterans, unemployed, the elderly and some businesses), subsidized cost of hiring and ramped up deficit-spending.
• Germany’s state-run bank (not central bank) provided loans to troubled businesses, temporary tax breaks and subsidies for business struggling to meet payroll.
• UK government went with refunds for sick pay (usually paid by companies) and extra healthcare spending.
• The U.S. offered paid sick leave and advanced healthcare financing as well as unemployment benefits.
• Sweden delivered a hodge-podge of too little, too irrelevant by permitting businesses to relieve staff at full pay, with the government picking up half the tab, and allowing most companies to temporarily claw back their already-paid taxes.

Many countries have also delayed or canceled tax collection such as business income taxes or VAT, and Trump unsuccessfully experimented with canceling payroll taxes.

In addition to these predominantly fiscal actions, central banks around the world have launched debt purchasing programs that vary only in details; in general, they have flushed financial markets with liquidity by buying outstanding government bonds.

While the liquidity is clearly helpful, the debt isn’t.

Ben Levisohn at Barron’s concluded that

With much of the global economy shutting down as sporting events are suspended, theaters close down and people self-quarantine, credit lines are exactly what companies need to get through the next couple of months.

Looking at many of the measures above we see similar attempts to handle this crisis with debt. Markets for debt and the smoothing of revenues and expenses that they allow are epic inventions in humankind’s financial history but they seem strangely unsuited to the present situation.

Admittedly, it’s hard to act prudently in a crisis — especially when information is short, time even shorter, and many various interests are simultaneously poking at one’s attention.

But what’s so hard about simply giving people money?

What this supply shock-rapidly-turned-into-demand-shock, amounts to is — as Lawrence Summers vividly described it — a freezing of economic time while financial time moved on. Most regular economic activities (work, production, shopping, events, investment) are quickly grinding to a halt, whereas financial activities (mortgage payments, rents, financing) have not.

The Wall Street Journal’s editorial from yesterday painted the picture in clear terms:

This is a liquidity panic over how huge chunks of the U.S. economy will stay afloat while American commerce essentially stops […] This is a health crisis that government is addressing with command-and-control emergency powers. Companies can’t be blamed for missing what the government also missed, and being prepared for a pandemic is one reason Americans pay government so much of their hard-earned incomes.

The simplest measure of assistance is to put money in people’s bank accounts, allowing them to meet pre-crisis commitments. As many of the restrictions operating in most societies right now — restrictions on movement, on activities, on commerce, business and other regular feats of life — are government-imposed with little in the way of consenting individuals to circumvent, it’s more than fair that governments reimburse their citizenry for the trouble.

Besides, most countries’ government saw their financing costs plummeting, which — if done nothing — provides them with a long period of future financial windfalls. For no good reason. Take the gain that the world’s financial markets are offering up, and redistribute it to your citizens. While a handful of well-offs will also receive some financial stimulus, cash assistance policies have next-to-no wiggle room for political horse trading and provides immediate relief, including to the most needy. It’s a blanket solution relief that captures everyone.

Neatly making your bed while the house is on fire is a pretty bad idea. Just go already.

If it still seems irresponsible and like unstatesmen-like policy to simply shower (more like sprinkle some water, really) your populace in cash, think about it this way: loans create additional (future) work and trouble for everyone involved. Loans require careful deliberation of who’s deserving, who’s unlikely to repay, who doesn’t have the future cash flow to repay it. And what decisions are you going to base that on, anyway? Pre-crisis sales or balance sheets? Some estimate of how that firm, household, or individual are going to fare once all of this is over?

No thanks. Even tax relief liabilities are merely delayed financial burdens, little tax chickens that eventually come home to roost.

On the contrary, cash assistances are one-offs. Done deals. Precisely relieves and targets exactly what you want (and a whole lot more, but that’s the price you pay for successful relief). It’s not a particularly accurate aim as you cannot fine-tune it to end up with those you most want relief to reach, but what you lack in accuracy you make up for in ease, speed, transparency and overall effectiveness. And there’s no extra work or insolvency procedures or clawing them back in unwinding them.

Or try this one: if you lend your friend a sizeable amount of money, a whole range of problems emerge — on what terms? Who calculates and keeps track of the interest? When is it paid back? What happens if either of your circumstances change (you urgently need the money, the friend loses his job or gets into a car accident)? Any difference in opinion or interpretation between the two of you, and your friendship is at risk.

Giving them cash — no strings attached — avoids all those problems.

I would have hoped more governments considered that.

(Update: I just learned that the stimulus package in New Zealand contain a lot of cash payments, both directly to individuals and to businesses offsetting employment costs).