Eric Herr: Next bailout should be more than 'show me the money' exercise

To The Daily Sun,

In little more than a decade, and through two bailouts, the federal government will have provided over $3 trillion to businesses, households, not-for-profits, and state and local governments via debt, grants, financial market liquidity, and other benefits. In each bailout, urgency short cut any longer-term considerations. “Show me the money” was the order of the day. And in those conditions, speed was critical.

In the years between those crises, we went back to normal, minimizing future risks, failing to build savings and financial reserves, spending on consumption, stock buybacks, and executive bonuses. So when coronavirus 19 came ashore we were/are ill-prepared and in urgent need of that second bailout/fiscal stimulus package.

If the C-19 threat persists for any length of time, as seems likely, the current bailout will not be the last this year. So policymakers will an opportunity to take time and thoughtful deliberation to craft a next bailout that is both a stimulus package and a strategic investment in our future. It would be a tragedy to just repeat past practices. Let’s not let that next bailout be just another “show me the money” fiscal exercise. To that end, it should:

1. Provide appropriate fiscal stimulus,

2. Make investments that stimulate near-term economic activity and incomes and address long-term needs, e.g., badly needed investments in infrastructure, climate change resilience and amelioration, and high-speed internet access, and

3. Address the distribution of the bailout’s benefits and costs across the distribution of income, between capital and labor, and across generations.

Finally, business-as-usual and household financial management-as-usual aren’t working to prepare us for economic disruption. That we periodically, in fact regularly, endure negative surprises should come as no surprise at all. And yet we don’t act on that knowledge. Or perhaps we do because we have all been acting with the near-certain knowledge that the federal government will bail out households and businesses in times like these because the record has been that that is what the federal government does.

Effectively, our actions are creating an externality, as we spend at the expense of building financial reserves, putting the need for bailouts to the federal government and whoever pays for that. Policymakers need to begin to break that pattern. Households need to build stronger financial positions. And businesses need to build financial reserves, rather than pour cash into share repurchases and executive bonuses.

The next bailout round should soften economic distress, invest in the long term, and provide incentives that reshape our behavior. I don’t know the answers. But I do know that if, looking back in 2050 one observes a pattern of persistent, massive government bailouts to offset macroeconomic distress that our approach to bailouts will have been a failure.

Eric Herr

Hill