Update 425— Longest U.S. Expansion Ever in Jeopardy;
3.28 Million Newly Jobless Overnight
The ink is now dry on the $2 trillion Corona III relief package, as the House has figured out how to conduct a voice vote on the massive bill today, with almost all members in their home districts, some opposed to it, some confirmed COVID-positive, and others in quarantine.
The first national economic statistics conveying the speed and scope of COVID’s effect, out yesterday, showed initial unemployment claims jumping from 650,000 last week to 3.28 million this week, the most ever for one week. Today, we examine the corporate assistance provisions in Corona III and offer a progressive set of priorities for an inevitable Corona IV package.
Good weekends, all…
Moments ago, Congress passed the largest spending bill in history. The $2.1 trillion Corona III relief bill cleared the Senate 96-0 on Wednesday. Today, House Speaker Nancy Pelosi expedited its passage in the House. It currently awaits the president’s signature.
Few had time to dissect the 800-plus page bill — itself a benefit for firms now poised to receive hundreds of billions of dollars provided for corporate assistance — and it was never debated on the House floor. The bill bails out the aviation industry, provides immense funds for unspecific corporate lending, and even manages further to deregulate the financial sector.
Late in the negotiations, Senate Republicans finally accepted Democratic demands for oversight of the funds, but questions about the $454 billion corporate support mechanism abounded. The bill set up a trio of watchdogs: an oversight board, a Special Inspector General for Pandemic Recovery, and a Congressional Oversight Commission — all good but what will these covenants ultimately constrain? How will the nearly half-trillion dollars be used?
- A $454 Billion Black Hole: The provisions for big business in the Corona III package are as large as they are opaque. The most contentious piece is a $500 billion “slush fund” in corporate assistance. The bill reserves $46 billion for a handful of industries (detailed below), leaving $454 billion for the Treasury Department and Federal Reserve to divvy up as loans, a capital backstop for the Fed’s new credit facilities. In theory, corporations receiving these loans should prioritize fulfilling payroll and other working capital obligations but the bill contains no rules for how the loans should be used.
While recipients are barred from significantly reducing the size of their workforce or using loan funds to buy back stocks and pay dividends, Senate Republicans ensured that Treasury Secretary Mnuchin had the discretion to waive these restrictions.
- Financial Institutions: With the crisis centered in the real economy, the health of the financial sector has been largely absent from the debate. But it will benefit from the Corona III bill, which appropriates $100 million to the Treasury Secretary to administer the lending program. The bill allows the Secretary to use these funds to enlist the help of financial institutions in administering it.
The financial sector is also benefiting from the bill’s regulatory changes. The Federal Deposit Insurance Commission will restart a 2008 program that guarantees new senior unsecured bank debt and all non-interest bearing accounts.
- Airlines and “National Security” Firms: The $46 billion carved out for commercial airlines, cargo carriers, and “businesses critical to maintaining national security” may result in the government taking direct equity stakes in corporations in return for cash grants. In October, Boeing bosses testified before Congress on the company’s corporate malfeasance. Now, some of the $17 billion intended for “national security” businesses may go to Boeing, although it is wary of the federal government taking equity.
- Healthcare: The bill provides $100 billion in grants to healthcare providers, helping them fight the pandemic while making up for lost revenue. Healthcare providers will also receive a 20 percent increase in Medicare payments for treating patients with coronavirus.
Yet, the bill provides no guidance on how to use the money and does nothing to ensure that funding goes where it is most needed. Rural hospitals, in particular, are in desperate need of resources. In normal times, they are understaffed and operate on razor-thin margins. During this pandemic, they are completely overwhelmed.
Who’s Next in (the Unemployment) Line?
The bill provides hundreds of billions of dollars to corporate America with little restrictions. But with small businesses, it’s a different story. Small businesses constitute 99 percent of U.S. businesses and employ over 47 percent of the private workforce. These companies operate on thinner margins than giant C-corps and have been hit hard by this crisis. But the Small Business Administration (SBA) will receive only $350 billion in emergency funds.
To help with payroll, small businesses will receive a tax credit for retaining employees and a refund for half of these wages, capped at $5,000 per worker. An emergency SBA loan paired with payroll tax relief could be a lifeline for small businesses, but few, if any, of the regional and community banks that will service these loans have the infrastructure to effectively oversee their management. Small business owners will have to make a choice, as employers who take up the tax credit are ineligible for special SBA loans.
Corona IV: Progressive Reforms
The concessions Democrats won in Corona III focused largely on negative covenants — prohibitions on how companies can use the loans the government gives them. For instance, companies cannot use funds to perform stock buybacks or boost executive compensation, unless waived by Secretary Mnuchin. But there is little in the way of affirmative covenants or policy objectives detailing how the funds should be managed. The Corona IV package must establish affirmative policies for managing the lending process.
- Ex Ante Accountability: The $100 million that Secretary Mnuchin can funnel to Wall Street for “administration” is a glaring example of Corona III’s lack of accountability. The Special Inspector General will monitor these appropriations, but there is no requirement that lending is made public and free from conflicts of interest. At a minimum, there must be clear accountability provisions set in place before the federal government contracts with any Wall Street firm. Also emblematic of the post hoc oversight is Mnuchin’s ability to waive restrictions and answer to Congress after the fact.
A better solution would be to administer the lending through an independent government corporation. There’s precedent for this — the 1932 creation of the Reconstruction Finance Corporation (RFC). The RFC lent to banks, state and local governments, and businesses.
- Lending Guidelines and Benchmarks: At the moment, except for assistance to airlines, there are no guidelines for which companies can receive funds. The Treasury and Federal Reserve will disperse the $454 billion at their discretion. Corona IV reforms must establish clear policy objectives for the loans and what constitutes success for this program. In any other new government program, these basic points would be accounted for already.
Corrections and Continuity
The economic harm of the coronavirus is unprecedented and necessitates equally unprecedented Congressional action. The response to mitigating this economic disaster should not be in the form of broad corporate assistance with lax accountability. With Corona IV, there’s another opportunity for progressive reforms and corrections to the current package.
Beyond accountability, there needs to be an immediate lifeline to workers in the form of wage continuity in the next package. Unless we can keep workers on payroll and guarantee their salaries, we will continuously hear calls for more corporate bailouts. This lifeline for workers cannot come soon enough.