Paul L. Caron

Monday, April 20, 2020

How To Restore Strength And Fairness To Our Economy After COVID-19

New York Times op-ed:  How to Restore Strength and Fairness to Our Economy, by Leo E. Strine Jr. (Harvard) & Dorothy S. Lund (USC):

When we cautiously return to normalcy, there will be a natural tendency to play the blame game about the reality that our economic system was not well positioned to absorb the effects of the pandemic without an enormous corporate bailout. Bluntly, why do the wealthiest institutions in our society appear to manage their balance sheets less prudently than many middle-class Americans?

When many businesses did not have sufficient reserves to pay the next month’s rent after less than a month of slowdown, and when many more furloughed or laid off thousands of workers for the same reason, it will be tempting to single out examples for shaming. But the finger-pointing will obscure a central question that must be answered if we want our economy to better endure unexpected shocks in the future: Are Americans well served by a corporate governance system that has encouraged all sectors of the economy to run their businesses on fumes?

What we mean by that is simple. Families are encouraged to put aside a reserve to pay their mortgages and bills and to feed themselves in case of an emergency. Why don’t corporations do the same? After a 10-year economic expansion that led to record increases in earnings, plus huge corporate tax relief, American corporations should have had substantial cash reserves to sustain them during a short period without revenue. But many did not, and instead were highly leveraged, lacked adequate reserves and lived paycheck to paycheck, so to speak. What happened to that cash? Much of it was returned to shareholders in dividends and stock buybacks.

At the same time, American corporations weakened the traditional gain-sharing between the workforce and stockholders that characterized the post-World War II era. During that period, when corporate profits went up, workers shared equitably in the gains. Not any more. ...

Restoring the fairness of our economic system also requires investments in infrastructure, innovation and worker training to meet the existential threat of climate change and improve the quality of pay and job prospects for American workers. Penny-pinching did not inhibit the bailout of the financial industry in 2008, the 2017 corporate tax cuts or the emergency bill to address the pandemic. And it cannot stop us from funding what is needed to get America back to work and to prevent the catastrophic consequences of global warming. Progressive approaches like a financial transaction tax, a graduated capital gains tax and an end to the carried interest loophole for hedge funds can pay for these essential investments fairly. These measures are integral to corporate governance reform because they encourage sustainable investing and put a damper on imprudent speculation.

James Pethokoukis (American Enterprise Institute), American Companies Are Struggling Because of a Pandemic, Not Shareholder Capitalism:

By “poor policy choices,” Lund and Strine do not mean Washington’s failure to ready the nation for a pandemic despite several dangerous global outbreaks from the past two decades: SARS in 2004, H1N1 in 2009, and the Ebola outbreak in 2015. They do not mean Washington’s failure to build and maintain a fully and properly stocked reserve of all the things we might have found helpful in the current pandemic: ventilators, masks, medicines. They do not mean the disbanding of the National Security Council’s pandemic response team in May 2018. They do not mean Washington’s failure to develop a COVID-19 diagnostic test that could have been mass produced and distributed so government could have better tracked the outbreak and earlier imposed quarantine measures. They do not mean America’s continued inability to do the level of testing and tracking that would facilitate a ASAP reopening of the US economy.

No, the “poor policy choices” Lund and Strine are referring to are all those buybacks and dividends Corporate America has been sending to shareholders. ... If the coronavirus pandemic illustrates the dangers of how short-term thinking is bad for workers and business, it’s short-term thinking by government, not Corporate America.

For complete TaxProf Blog coverage of the coronavirus, see here.

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