Capitalisn’t: Coronavirus—the winners and losers in the stimulus bill

Apr 03, 2020

Sections Economics Public Policy

Collections COVID-19 Crisis

In order to combat the coronavirus and its economic fallout, the US Congress has passed a $2 trillion stimulus bill. It targets individuals, small businesses, and large corporations. But, from an economic point of view, who are the real winners and losers? On this episode of the Capitalisn’t podcast, hosts Kate Waldock and Luigi Zingales analyze the CARES Act: is it enough money to stabilize the tanking US economy, does it target the right people, and does it accomplish the right objectives?

Luigi: So, Kate, you are sheltering in place in New York. How is life over there?

Kate: Honestly, I don’t feel like any time has gone by since the last time we recorded a podcast. I haven’t left the apartment. I haven’t gotten any new groceries and basically haven’t moved and haven’t stopped working. So, I don’t know. I’m in a weird sort of time bubble. 

What about you, Luigi? What’s new in your life?

Luigi: Actually, it is difficult to keep track of the days, because, you’re right, they go by one after the other, and they are so similar that I started to keep a diary just to make sure that I remember which day is which.

Kate: Oh, that’s a good idea.

Luigi: But the big news is that my daughter, who seems to have gotten COVID in France, is doing better. And that is the big news.

Kate: Wait, you didn’t tell us about this.

Luigi: Yeah, I’m sorry. She came down with some fever and coughing and, most importantly, she completely lost her sense of smell. And apparently, this is a very common feature when you get COVID, especially the mild form, and now she’s on day, I think, 10. So, let’s cross our fingers and hope that everything is OK.

Kate: So, she’s better, though? She didn’t have to be hospitalized.

Luigi: Yes, she’s in the category of lower risk. Yeah. It seems that everything was just cough and fever. She did not need to be hospitalized, and she seems to be recovering. So, that’s the most important thing.

Kate: All of the Capitalisn’t listeners, our hearts go out to her.

Luigi: Thank you. That’s very important to me. But in the United States, we are going into probably what are going to be the two scariest weeks. All the forecasts are not good for the next two weeks. And then, let’s hope that we pass over the hump. 

Kate: Yes, we’re passing through a scary time in terms of the death toll. But on the economic side, we have some good news.

Speaker 3: We begin in Washington, where the White House and Congress reached a deal early this morning on the economic rescue package that dwarfs the entire national budget of the United States.

Kate: On today’s episode, we’re going to go through the CARES Act, the $2 trillion stimulus plan. Is it too much, too little? Is it just a handout to special interests? Is it going to lead to hyperinflation, or is it just a bridge loan to help us get back into good times?

Luigi: A bridge loan to nowhere.

Kate: Good one.

Luigi: From the University of Chicago, this is Luigi Zingales.

Kate: And from Georgetown University, this is Kate Waldock. You’re listening to Capitalisn’t, a podcast about what’s working in capitalism today.

Luigi: And, most importantly, what isn’t.

This is a weekly edition of our podcast dedicated to the impact that COVID has on the economy, and all the policy questions that this major shock is raising everywhere in the world.

Kate: Luigi, before we start talking about the CARES Act, we’re economists, we like to think broad and big. What is the ideal, right? What should policy makers have as their objective right now?

Luigi: There should be three objectives. The first one, which is pretty obvious, is to have enough money and resources dedicated to fighting the virus and taking care of the people who get sick. 

Then, there are two more economic priorities, if you want. The first one is redistribution. What people don’t fully appreciate is the coronavirus shock is an asymmetric shock that, left to itself, will mostly penalize elderly people. Ironically, the cost of fighting the coronavirus is mostly on younger and poorer people.

If you are forced to stay home, and if you are a retiree, you don’t lose your source of income. If you are a waiter, you do lose your source of income. But also for poorer people because, as professors, we can still teach online. If you are a waiter, try to wait online. It doesn’t work that well. So, I think there is a necessity of some form of redistribution of the burden.

The third objective is to try to kind of freeze the economy. My metaphor is, you remember when you were a kid and you were playing Monopoly, and then the evening came and your mother would say you have to go home, and then you say, “OK, let’s freeze everything in place. Nobody moves. We restart tomorrow morning.” If, by chance, your mother would fix or try to rearrange things, it’s a nightmare the next morning, because you don’t know who owes what and et cetera.

So, you would like the economy to freeze in place, OK? And, unfortunately, it doesn’t work that way. So, the third objective of an intervention is to try to basically reduce the costs that might be created by the impossibility of freezing the economy in place.

Kate: So, basically reduce the effect that your mom has by shifting the board around and trying to clean up the money and stuff. We don’t want any of those frictions in the job market.

Luigi: Absolutely. Stop the moms.

Kate: OK. So, how well does the CARES Act do this? It touches on health, it touches on hospitals and education, but I’m going to focus on the four biggest pillars, which are aid to individuals, big businesses, small businesses, and state and local governments. 

About $560 billion is going to individuals. That’s about 28 percent of the total stimulus. $500 billion to big businesses, a quarter of the total of stimulus. $377 billion to small businesses, a little less than 20 percent of the total stimulus. And then, finally, about $340 billion to state and local governments, 17 percent. 

So, let’s go through each of those categories. Let’s start with individuals. Luigi, do you want to tell us a little bit more about how people will benefit from the CARES Act?

Luigi: There is a direct cash program that is roughly $300 billion. This program is going to distribute $1,200 to each family member, as long as he or she is not making more than $75,000 a year. And then, there is $500 per child under 16. 

While the benefit of this plan is that it is easy to administer and is fast, I think it has some significant costs, in my view. The first one is that it is not really targeted. If I am one of the elderly people who has benefited tremendously, from a health point of view, by the shelter-in-place, and I keep receiving my pension, I don’t see any reason why I should receive $1,200 more.

In fact, I think I should contribute some to the economy, because remember, we need to redistribute resources, because this shock is going to shrink the pie. We are all going to be poorer, so it’s not that money grows on trees and we’re going to distribute this money to various places. We are borrowing against our future income in order to face this shock, which is a good thing to do, but there is no reason to give handouts to people who don’t need them. I see this as more of kind of an electoral move by President Trump, who gives away money to everybody, rather than a targeted program that helps the needy.

Kate: My sense is that you’re right. There are probably people who didn’t need that money who will see that $1,200 in their bank account and will be like, “Oh, I’m fine. I didn’t need it, but I appreciate that money.” But there are also people who really do need that money. Maybe unemployment checks didn’t come in time, or they’ve been unemployed for a few weeks already, and their unemployment checks are running out. So, they actually do need that extra $1,200.

I think that one argument in favor of the policy is that if you try to add other levels of means testing on top of that, to make sure that the right people get exactly the right amount of money, the amount that’s fair, it becomes this administrative nightmare. So, it’s easier to just give everyone the $1,200 and, in general, hope that it evens out in terms of use. Some people will need it and some people won’t. And just overall, it’s going to individuals who are making less than $75,000 per year. Chances are, most of them do need that extra $1,200 right now.

Luigi: Yeah, but two issues. One is, I am worried about how much this will cost overall. We already have a very large debt after this recession, and with all this government intervention, that debt will balloon way above 100 percent of GDP, and this will represent a burden down the line. This is not an excuse not to intervene, but it is a reason to be careful in not spreading out money. 

Your story that, “Oh, that’s good because they’re going to spend it,” we need to understand that this is not your traditional recession. This is a recession that is basically imposed by the government, to some extent, that limits the supply of goods. So, the last thing you want to do is increase demand at a time where there’s no supply. So, if I am the elderly person, and I’m still married with my spouse, and I received $2,400 out of thin air, what am I going to do with that? I doubt that I’m going to spend, but if I’m going to spend it, I don’t know what I’m spending it on. I cannot get out. I cannot really enjoy this money. So, this is kind of money wasted from every point of view.

Kate: But wait, I’m a little confused. The scenario that you just described seems like a demand issue. People are getting the money and they’re not spending it, so that’s problematic from a demand-boosting policy perspective. I think from the supply perspective, we’re fine. I mean roughly 10 percent of the US labor force works in manufacturing, but a lot of manufactured goods come from other places in the world. And we know that China, for example, is back online or at least close to being there.

I don’t think that many people are like, “Oh, there are goods I want to buy that aren’t being produced, because the prices are going up too quickly because the supply isn’t there.” That just doesn’t seem to be the problem, except for a couple of video-game consoles and obviously for medical supplies. But for everything else, it seems like the problem is that people are spooked.

And they’re adjusting their priors about the probability of future crises, what they need to hold in terms of precautionary savings, so they’re not spending enough. They’re not investing in durables or goods that they’ll be able to use in the long run. So, to the extent that you can give people a bit of money and that will maybe get them to get out there and spend, it seems like that’s the right solution.

Luigi: But if I were 65, and I’d received $2,400 more, even if I was considering buying a car before, and even if this $2,400 might push me to buy a car, I’m not going to go out and shop for a car, because I’m afraid to be infected. And so, that $2,400 will not increase demand at all.

Kate: Yeah. That question really comes down to how many people who are getting the cash handout are young versus old. I don’t know how retirees will spend that money, but at least on the younger side, there was a survey done by Parents Together, and they found that only 40 percent, or roughly 40 percent, of people reported that they’d be able to make rent this past month without cutting back on necessities, which include food.

And so, there are those who will obviously go out and spend this money right away on things like diapers and food. Whether this balances out between young parents and retirees, I think is kind of unclear. Maybe some of those retirees will pass that money along to their kids. Who knows? But in any case, if this is a supply issue, do you think this will also lead to inflation?

Luigi: No, I don’t think that just this teeny, tiny program will have an impact on inflation. I think that if we keep pushing demand, trying to get people to spend at a moment where supply is not so flexible, that might have an adverse effect on prices, but at the moment, I think that their main consideration is deflation, not inflation.

So, I don’t see this coming anytime soon, but I don’t see any strong reason to try to push the pedal on demand in this moment, when supply is restricted by government choice, in the sense that we don’t want people to go out and shop. Short of shopping online, we don’t want them to buy. That’s basically what government policy is, and I think it’s a good policy. Any stimulus in the opposite direction is actually bad for priority number one, which is fighting the virus.

Kate: There’s another component of this, almost as big, which is on the unemployment side. And so, about $260 billion, apparently, will be dedicated to unemployment assistance. One thing that they’re doing is that they’re expanding who can get unemployment, so you’ll be more eligible relative to before, where you probably couldn’t have gotten unemployment if you were self-employed or you worked as part of the gig economy. Part of this bill is really expanding those unemployment benefits to cover those workers.

In addition to whatever you might get through state unemployment, there’s an additional $600 that you’ll get. That payment would last for up to four months. And then, overall, the CARES Act is extending the period of unemployment by another 13 weeks. Most states have a policy of about 26 weeks, and so that would increase that by about 50 percent.

Luigi: I think that this is a good move. Number one, we are very concerned about the workers of the gig economy. We discussed the gig economy on the podcast. And one of the issues is that this is increasing and difficult to classify. So, if I am an Uber driver, a full-time Uber driver, I am not technically an employee of Uber. So, I will not qualify under any of the other programs. But in this particular case, you don’t want to leave the Uber driver out to dry. And I think that this expansion is a great idea. How easy it is to implement it, I think that remains to be seen. 

The second is, while we hope that this is not going to last that long, I think having the security that unemployment benefits will last for a longer time is important, because you don’t want people to start going around and looking for a job in this moment. I think that that’s exactly the way to spread the disease more.

So, if you prevent people from looking for a job, it’s not their fault if they don’t find a job. And so, all the reasons why we have limited unemployment insurance, which is basically to push people to look for a job fast, they don’t apply. And so, extending it for this particular situation seems like the right thing to do.

Kate: To the extent that you made that Monopoly metaphor earlier, this sort of doesn’t freeze things in place, right? It works against that metaphor, because ideally we would just want nobody to become unemployed, they should just stay with their current jobs, maybe become furloughed, but still stay on the payroll, so that there aren’t any frictions. There isn’t any possibility that people will be looking around for a job. 

To some extent, that ship has already sailed. We’ve seen historic rises in unemployment claims in the past two weeks, and we can’t just pretend that this hasn’t already started to have an effect on our economy. So, to the extent that some damage has been done already, I think that unemployment acknowledges that, but as you said, also hopefully prevents people from looking around for jobs too much, potentially starting to change the nature of their employment. Hopefully, this allows them to just stay at home, and then maybe be rehired by the same place after things start to clear up.

All right, so that’s the plan for individuals. There’s also a big part of this that is going toward small businesses. Let’s start with them first. It’s about $377 billion. And the lion’s share of that seems to be dedicated to this Paycheck Protection Program, which will encourage small businesses to maintain their workforce. Just don’t fire anybody. This money can be spent toward salary, or it can be spent on rent, covering utilities.

It’s basically just eight weeks of cash-flow assistance to small businesses, in the hopes that they don’t lay anyone off, or not too many people, at least. And if they end up maintaining a significant amount of their payroll, then these loans will turn into grants. The small businesses won’t have to pay them back. Luigi, do you think that this is a well-targeted program?

Luigi: I think it’s definitely much better. I’m concerned of a couple of things. First of all, it seems not very clear in terms of marketing, because you’re talking about loans, but in fact, those are grants. I’m afraid that a lot of people will get scared off. 

Now, the second problem is, what if you have already done that? We know that 10 million people are in the street. What happens to those companies? Yesterday, I received an email from a restaurant here in Chicago that we often go to, that communicated to us that they fired all the employees and were raising some money to survive until the city reopens restaurants. And they were offering an advance sale of tickets for that big event. And of course, we bought the tickets, but also we asked, why are you not applying to this program? Either they don’t know about it, or for whatever reason, they can’t qualify, and that’s what I would like to understand.

And then, I have a friend who has a small engineering company building bridges, and construction is essential work. So, they keep doing it from home. He applied, and I suspect he’s going to get it. The question is, did he “deserve it”? The company was doing relatively well, because it was a company that was still operating at full capacity while working from home, but they were not planning to cut their workforce. They were not receiving, at least at the moment, a decline in their revenues. Why should those guys be subsidized? 

What I see here is a lack of contingency, because people say, the moment you put in contingencies, this is going to get the administration, the program will slow, blah, blah, blah. But I would actually use an honor system and say, as long as you can prove that your revenue in March 2020 was below, by a certain amount, the revenue that you got in 2019, I will give you that amount for that declining revenue, and we are going to ask for proof only later on.

In the meantime, I will give you the money. In fact, even better, I will give you the money as a loan until you prove it to me, and then it becomes a grant. And so, that’s a pretty effective way to reduce the amount of money, because here it looks like every business, including Zoom, is going to benefit from it.

Kate: I don’t know, Luigi, you’re sounding like a real Chicago guy in this episode. So worried about people not deserving this money that the government’s handing out, and not as worried about the fact that we’re in the middle of a total meltdown.

Luigi: I’m very worried. I want to give people who need it plenty of money. I don’t want to waste the money, because money does not grow on trees. And I’m concerned about two things. One is the financial capability of doing plan after plan, but two, also, the political exhaustion. I think that now everybody is in favor of doing X, Y, and Z. But as these programs show their ineffectiveness and they show their waste, I think there will be a lot of backlash, and then this will make it more difficult to help people who really need it down the line.

Kate: Yeah. I mean, I’m giving you a little bit of a hard time.

Luigi: That’s OK. That’s your job.

Kate: Exactly. I think that there was sort of a message about financial literacy in there as well, which is that people with medium-sized businesses, in order to qualify as a small business under the Small Business Administration, you can have up to 500 employees. If you have 500 employees, that’s a pretty large business. And so, there will be relatively largish small businesses with sophisticated managers who know how to be aggressive, who know how to demand money, who will end up getting these loan/grants and will probably be able to make convincing cases that they should be turned into grants.

Whereas tiny little restaurants that are not super sophisticated from a financial perspective, that might not really have any relationship with a bank, or might not know how to borrow money, they might not apply for it at all. Because either they just won’t think that they will get it, and there’s research showing that people who believe that they’re less likely to get government assistance are much less likely to apply for it, and they’re probably the ones who need it the most.

But that aside, there will be a lot of businesses that just don’t even apply. And so, that’s one thing. And they’re probably the ones that the program was targeted towards. 

Now, a separate point is, what is the purpose of this? To me, what I’m confused about is that it kind of seems like a form of unemployment insurance. It’s called a Paycheck Protection Program. It’s designed for businesses to not fire people, to keep paying people their salaries, even if they’re not operating. And so, that’s just a veiled form of unemployment insurance. And what’s confusing to me, or maybe not confusing, but what just feels a little bit patchwork, is that some people will be on unemployment. If you happen to be working for a restaurant that closed down two weeks ago, relative to a restaurant that closed down two days ago, one set of people will be on unemployment. 

You’re not getting a hundred percent of your salary, and that’s got limits on it. Yeah, there’s this extra $600, but it’s not clear whether that will be renewed, whereas other people will just maintain their jobs and be getting their full paycheck, in theory. And so, it creates this kind of arbitrary divide in unemployment insurance. And that seems to me like it’s poorly thought out. Even though, having said that, as you said, this is kind of a last-minute reaction, and we’re doing the best that we can, given that a lot of companies already shut down. And so, maybe this is the best that we could have done.

Luigi: So this is called the Paycheck Protection Program, but using and abusing my initial metaphor, this is the Monopoly freezing program, because it’s not only targeted to have people employed and paid, it’s also targeted to help businesses pay their rents and their interest payments. In fact, even their utilities. And the idea is very simple. Even if I could somehow take care of all my workforce, if I am a restaurant and my rent is due, if I am a small business and I have to pay my utilities no matter what, I might end up being unable to do so, and so, I file for bankruptcy.

Bankruptcy is far from a speedy and efficient process, especially at a time where everybody is in serious distress. So, the courts would not be even able to go through all these things. The idea here is not just to protect the workforce. The idea is to keep businesses in place, especially in light of the fact that these businesses have been shut down by government order. So, if my restaurant is not selling, it’s not because I’m not a good chef, or because I don’t treat my customers well. It is because the government told me not to open my doors and not to have people in my rooms.

So, I see this as potentially a very good program. My biggest concerns, one, as I said earlier, abuses, but the second is how fast and effective this is. However, I have to say, what is the alternative? Imagine that you were Nancy Pelosi, and you have to decide on a plan at this point to help all the small businesses. We can’t just criticize against an ideal world. If you want to deploy a lot of money fast to a lot of people, how do you do it?

Kate: Let’s move on to a part of the act that you seem particularly concerned about, Luigi, which is the $500 billion, a quarter of the total money being dispersed in the CARES Act, to large corporations. These are ones we typically think of that have over 500 employees. 

The way that it’s set up, a small part of that, $46 billion, is direct assistance. Most of that direct assistance is in the form of payroll grants to airlines, predominantly passenger airlines, but some cargo airlines. As well as $17 billion that’s set aside for companies that are critical to maintaining national security, whatever that means. It’s a little bit unclear.

Luigi: It is basically called Boeing.

Kate: Well, it’s unclear. I think that it’s worth having that conversation. It wasn’t lined up. It’s not like Boeing is named specifically in the act, and so now we’re thinking that Trump is going to give all that money to the oil and gas industry. Who knows? But the other $454 billion is going to be a lending program that’s sort of jointly administered between the Treasury and the Fed.

We’re not sure exactly what that looks like, but it seems like it’s going to be a low-interest-rate program for relatively large companies that aren’t in bankruptcy, that’s really targeted towards their maintaining operations and making sure that they don’t cut their employment below 90 percent.

Luigi: So, do you understand whether these loans are pure loans or forgivable loans?

Kate: I don’t think anybody understands. The Treasury is supposed to be coming out with frequently asked questions, which is a little silly, because they haven’t told us anything about how it’s going to be administered. And so, I don’t know how the questions can be that frequent, but they’re supposed to be coming out with them soon. I think we were hoping by today, but we don’t really know.

Luigi: That’s my concern, number one. Here we are, we allocate half a trillion and we don’t even know how, and this is completely at the discretion of Treasury and a few people at the Fed. I heard Larry Summers say, at the Fed there are a lot of people who know very well how to calculate the natural rate of unemployment. But if you ask any of them how to cash in accounts receivable, they don’t know how to do it. So, it’s not exactly the right administration to make business decisions.

And just to get a sense of how huge this is, it’s not just that $450 billion is going to be given to the Fed. The Fed is allowed to use this to cover the losses in lending. So, normally, the Fed can only extend loans to financial institutions or to buy securities like Treasuries or agencies that are not at risk of defaulting. Now, with this program, they can lend directly to firms that are at risk of defaulting, but their risk of default will be covered by this $450 billion.

Kate: There is also almost $50 billion that’s definitely just going to be spent in direct assistance, just cash that’s given to certain sectors. And it seems like that sector is overwhelmingly the airline sector. Is this ust a result of a bunch of successful lobbyists? Is it a result of a bunch of people realizing that they’re canceling their travel plans and they want to be able to get those refunds? It’s not clear to me why airlines are being so heavily favored in this, and whether or not this is a good sign for what’s to come. Is this just pork that’s a result of special-interest groups, and is that sending a bad message?

Luigi: I understand the desire to protect the people here, but I don’t understand the desire to protect the equity holders in these companies. If the shock was positive, they would get all the proceeds. If the shock is negative, they are to absorb the losses. You can’t have a system in which profits are privatized but losses are socialized, because that’s a very unfair system and a system that doesn’t work. 

So, if there is a need to save manufacturing capability in Boeing, I am not against the idea that the government might intervene with some equity at the end, but not before all the existing equity holders are wiped out. The idea that we can give them help and at the same moment tremendously benefit the equity holders, it’s a big mistake to me, especially for companies like Boeing that seemed to be in the situation they are because they were badly managed to begin with.

In a sense, the COVID crisis is just the kiss of death for a company that that has made so many mistakes over the years that you wonder what the management was doing and what the equity holders were doing. The equity holders should be in the position to fire that management, and I think that the administration should expect the managers to be gone and the equity holders to be wiped out before even touching it.

Kate: I think there’s two separate issues in what you just said. One is, what is Boeing? Boeing is not an airline, it’s an airplane manufacturer. And so, if I understand this correctly, they’re not benefiting from the direct payroll grants that are going to airlines. They might be considered a critical industry, but that hasn’t actually 100 percent been determined yet, as far as we know. And so, that’s one thing. 

The second point, which deserves a little bit more exploration, is this idea of, should we be wiping out the equity holders first, which is basically what happens in bankruptcy? Should we have been letting the equity holders just take the loss, giving some junior debt holders the remaining equity in the restructured firm, and then letting the airlines continue on, maybe with some form of government assistance throughout the bankruptcy? 

One concern that’s been raised is, who are the equity holders and who are the bond holders? To some extent, the equity holders might be more representative of regular people than the bond holders. This goes way back to a couple of years ago, but when we were talking about common ownership in one of our very early episodes, we talked about how the groups that end up holding most of the equity of these large companies are just pension funds, asset managers that manage the money of regular US citizens. And so, if we let the airlines fail and just wipe out their equity, wouldn’t this just be hurting retirees even more?

Whereas if it’s the distressed hedge funds who own the bonds of these distressed firms, then maybe they’ll end up benefiting the most. And so, there’s a little bit of a strange, I guess, ownership issue here that, combined with many other reasons, make this idea of bankruptcy for the airlines a complicated one.

Luigi: I’m sorry, Kate, but I don’t like this idea that there are good owners and bad owners. At the end of the day, some of the hedge funds may have your pension money in them, as much as your 401k has your pension money in it. What you want to do is look from the point of view of risk and reward. If you are an equity holder, you are getting the upside when things go well, and you will have to go to the downside when things go poorly. And if you are an individual investor and you invested in Boeing, tough luck.

If you are an individual investor and you invested in Zoom, Zoom skyrocketed in price the other day. So, why are we allowing these guys to get the upside? Because we are in a free-market economy, where you take your risk, you are rewarded for your risk, you must also be penalized for your risk. So, if Boeing is a bad company and is doing poorly, I think that its shareholders, whether they are hedge funds or widows and orphans, they should be penalized because they got the upside. They need to get the downside.

Kate: And I specifically set Boeing aside, because I agree with you, they were poorly managed, they were making faulty planes before this. They were already very distressed before the COVID crisis hit. And so, they’re kind of a separate issue, right? The question of whether large distressed companies are trying to ride on the coattails of the COVID programs in order to help out their shareholders a little bit more than they normally would have been, is I think a fair and separate point.

But if we’re just thinking about the airlines, right? Like American Airlines, Delta, it’s not clear that they were distressed immediately prior to the coronavirus crisis. And it’s also not clear what their value is. And this is another point when it comes to how we restructure these companies. If you want to wipe out the equity holders and then give some of that new equity to bondholders, you have to have a sense of what the company is going to be worth later on.

And economists call this Knightian uncertainty. Other people call it just ambiguity or unknowns, but part of the issue is that we don’t know what they’re going to be worth afterwards, because we don’t know how much air travel will be restored. Maybe it’s going to go back to 100 percent, maybe we’re all used to our Zoom conferencing now, and we’re not going to travel around as much later on. And so, in order for that to be a fair recapitalization, we need to know value, and we just don’t know what that is in this moment.

Luigi: Actually, I deeply disagree here. First of all, I agree with the fact that it is not their fault that travel has gone down, but it’s also not the government’s fault. The government has not prohibited travelers within the United States. But a lot of people don’t want to travel anyway. So, I think that that is part of the business risk that equity holders are bearing. 

It’s not true that you cannot resolve the issue. There is a very nice paper by Lucian Bebchuk at Harvard Law School that many years ago made this point very clearly, that if you simply do what we call in jargon a debt-for-equity swap, if you make the debt holders the owners of the company, you don’t need to determine what the company is worth. You give them this possibility, with the possibility for the equity holders to buy back at the value of the existing debt. 

In financial terms, it is like an option. If you think that the company is worth more than the debt, you can buy it out at the value of the debt. If you don’t, then the debt holders become equity holders, but the equity holders can buy back this right at the value of the debt.

Kate: I’m a fan of that paper, Luigi. And so, I’m not necessarily going to argue against it, but things get complicated, right? There’s many different levels of debt holders. So, at what level of debt holder do you actually end up giving them the equity? And, in terms of giving the equity holders these rights to purchase these, let’s say, options, that’s not in the bankruptcy code right now, that’s not at least the way things normally go.

And so, we’re talking about an entirely new system, one that’s pretty complicated that we would be implementing in a time of extreme uncertainty. So, I don’t think that this is a bad idea, but your prior recommendation was just “wipe out the shareholders.” And I don’t think that that’s fair, either.

Luigi: Actually, I was advocating this idea in the previous crisis in 2008. There was plenty of time since then to implement it, and nobody wanted to implement it. So, I think there was a huge resistance to that. I don’t think it’s that complicated to apply. And historically, the United States has changed bankruptcy law at every major recession. So, it’s not something that cannot be changed. It can be changed relatively quickly. Certainly, if that saves you hundreds of billions of dollars, it is probably worth thinking about. 

So, Kate, is the CARES Act a capital-is or capitalisn’t?

Kate: I don’t think that it resembles the perfect response from the government. Had we been able to come up with this package maybe two months ago—I know that’s highly unrealistic—but had we come up with the package two months ago, I think it would have looked different. I think it would have done a better job of freezing things in place rather than just filling in a bunch of holes in a patchwork sense. I don’t think that this act is perfect, because it favors some groups over others.

Certain types of unemployed workers are going to get much less than, say, people who are working for the airlines. If you are an airline employee, you might end up just staying home for the next four months collecting your full paycheck, collecting all of your benefits. Maybe even having some of those benefits strengthened, as well as getting that $1,200. Maybe your spouse gets $1,200. If you have kids, you get even more.

And so, there are some people who really make out well, whereas if you were fired a couple of months ago, chances are you’re going to be struggling even if you’re getting a lot of these benefits. And so, it seems like it favors some groups over others, but given where we were and given the fact that this crisis already started by the time that the CARES Act was passed, I think it does a decent job of trying to get money to people who need it. A lot remains be seen about the big corporate end. I think that that’s the open question.

I’m a fan of the small businesses component, even though I think that it’s mostly just unemployment insurance. But on the big corporation side, as you said, is this going to be the Fed levering up this money, or is it going to be the Treasury exchange program, which has no experience doing this, making loans to medium-sized corporations? We need to wait and figure that out. But there’s definitely scope for this part of the CARES Act to be a huge component of total spending, and it’s worth being a little bit concerned about.

Luigi, what’s your final take on the act?

Luigi: So, one of the secrets in politics is to frame the debate between only two possibilities, one that looks awful and the other that, by comparison, looks great. I refuse here to be framed into either this or nothing else, because both alternatives would be terrible. My view is, roughly half of the act is pretty good.  It could be done much better, but it’s pretty good. The other half is pretty horrible. And there was no need to be that horrible. And I think that we should make our representatives accountable for these choices. This is a bipartisan deal, and it was a bipartisan disaster. There has been so much waste of money that they are back to phase four of their response. A new plan is already in the making, and guess what? It would be in the trillions, too.