The *Love Letter* has a P.S.

As people start reacting to Covid-19, they are looking mostly to the larger businesses for assistance. Costco and Walmart are packed. Amazon and UPS are delivering our packages. For entertainment at home, Americans are relying on Netflix and the cable companies. For information on Covid-19, Twitter is a very useful stop. As hospitals become overcrowded, CVS and Rite Aid may become important as local health centers and sources of community information.

It turns out that the larger, more profitable businesses are the ones that have the talent, the command of public attention and the financial resources to adjust to these changing conditions.

Big business also has been ahead of the curve when it comes to prediction and adjustment. The NBA postponed its season before most politicians, including the president, realized the gravity of the situation.

Only a month ago, there were headlines mocking Silicon Valley for being overly concerned with Covid-19 and for avoiding handshakes. The tech community had a high degree of advance awareness of Covid-19 problems, and it was ready with telework and other adjustments when the time came. The tech world’s penchant for carrying what seemed to be absurdly large surpluses of cash — last year Apple had over $100 billion in cash reserves — now also seems prescient. Apple’s stores are currently closed in most parts of the world.

And this:

Larger businesses are also easier to assist if necessary. Whatever you think of the forthcoming bailout of the major U.S. airlines, logistically it will not be very difficult to pull off, since the targets are large and obvious and relatively easy to monitor. Banks are willing to lend to them, because they know the government does not contemplate a world without major airlines.

It is much more difficult to bail out the millions of small and medium-sized enterprises around the world that will demand assistance. How do you find and track them? How can you tell which have no chance of bouncing back? Government bureaucracies cannot easily deal with those problems, and in turn private banks do not perceive governments to be making credible commitments to these small businesses. By contrast, there are numerous precedents for governmental aid or loans to airlines or other major businesses.

That is all from my latest Bloomberg column, much more at the link.  One problem Italy has, of course, is a fairly high reliance on small business.

Comments

What if, instead of bailing out the airlines, the government used that money to build a modern high-speed railway network?

That sounds great. I'd love for my coast-to-coast trips to take 2 days instead of 4 hours.

Don't get me wrong, I don't support the airline bailout, but high speed rail is a joke.

+1. High speed rail in the U.S. would hugely expensive to built and to maintain.

Because we all love to bailout airlines every decade. Don't get me wrong. I don't support high speed rail but airline bailouts are a joke.

Did we collectively forget what bankruptcy is? Don't bail out the airlines, let them declare bankruptcy. The planes don't evaporate, they'll still operate.

Why let a wonderful opportunity to do neither go to waste?

The latest estimate, before most of the project was put on hold, was that it would cost around $80 billion and take 25 years from conception to completion for a 388 mile high speed rail line in California.

By contrast, currently airlines are seeking a $54 billion bailout, nearly half of which is loans. The final cost may be higher, but it's going to be orders of magnitude lower than a national high speed rail network (which would also require billions in subsidies to operate once built).

Plus, of course, a rail network is no less susceptible to disruption in a pandemic. This isn't a constructive suggestion, it's just a tired old hobbyhorse being dragged out in a new context.

..."ahead of the curve,,"
Not a very high bar considering the current administration.

Visited a number of Aldi stores in the last couple of days. None of them had any chicken. Popped into an independent Mexican market this afternoon and picked up enough chicken for a couple of meals. Their inventory had been hit hard but they still had everything I wanted.

Ethnic markets are the way to go. White people in packs of 10 SUVs can empty out half a Costco lickety split but they never go to the corner mercado.

"Costco and Walmart are packed."
It's like Black Friday except we aren't thugs fighting over a flat screen TV.

In the 4th year of the Trump Presidency, the masses seethe in anger as they fight over the last roll of toilet paper while anxiously awaiting free money from the government to quell their debt spending ways.

That is hilarious in its absolute accuracy.

You make the US sound like Venezuela.

Great a anecdote. I now totally believe a small mexican meat market is much better suited to take care of my needs over the long term. Thank you!

Sites like groupon or financial services like stripe might be well placed to plug some kind of credit to the small businesses , the delivery companies or amazon all have extensive connections to small businesses , might there be someway of reversing the channel back down from the aggregators ?

"Apple had over $100 billion in cash reserves"

Apple is dumb. They should have paid it all out in dividends and stock buybacks so when the market crashes they can get a huge bailout. Everybody knows a trillion dollar company is too big to fail.

Oh, but the tragedy of all those New York City eateries with the tattooed chefs and illegal alien staff: We can't let them fail!

What about the tragedy of middle America? They are ZMP workers incapable of inventing anything but good for just popping opioids and meth. We can't let those losers fail!

"One problem Italy has, of course, is a fairly high reliance on small business"

Why is this a problem? Are you familiar with the concept of resilience?

God, you're a whore for corporations & centralised power.

I suggest Tyler believes it a problem for precisely the reasons he gives: it's very difficult to support small businesses in a cost-effective way, because they're so diverse. Some will be fine at this point in time, others suffering, and others might be fine now but in dire straits in one week. Government isn't good at tracking those fine distinctions.

I would prefer a world in which they continue to exist, because it's a more interesting world for me.

And the useful future competitors of the big corporations are currently small businesses. What will be the effect of their demise in one year, five years or ten years?

How about an employer-side EITC? Subsidize wages up to some low limit on the employer's side. So, for example, 30% of paid W-2 wages up to $1,000,000.

@Hoover How about a direct bailout to INDIVIDUALS, as in a monthly UBI or a one-time bulk payment. Take the trillions with which you were going to bail out Big Corporate, and divide it up with individuals per their social security #.

(A Big Corporate World is more interesting to you): Actually, a quality, local independent restaurant is more interesting to me than a Panera Bread or Olive Garden. And I'd rather play tennis at a local park or health club than watch Netflix.

"Take the trillions with which you were going to bail out Big Corporate"

It won't be trillions. It probably won't make the $330 billion amount that Romney is pushing. That being said, I think the $1,000 per individual (Who is 18+,has a SS number, and isn't current drawing SS)would probably work better than corporate bailouts.

Small businesses are known at the local level. What about channeling small business assistance through local governments or the Chamber of Commerce? One objection I can envision is that in some (most) jurisdictions corruption would be rife.

In a world where everyone has by necessity grown accustomed to remote work and teleconferencing, and where the planet is segregated into green zones like China and South Korea where the virus is extinct and red zones where the virus is endemic and recurrent... airlines may be a lot less necessary than a globetrotting foodie might imagine.

Pretty hard to manufacture ventilators by working online, much less deliver, install, and then operate them.

The same applies to pretty much the entire food industry.

Sure, but workers in those industries don't need to fly to do their jobs. Most of the profit of the airline industry comes from business-class passengers having unnecessary face-to-face meetings.

The rest is mostly family-related travel, vacation tourism, or millennials curating life experiences. Nice but hardly essential. In the swamped ICU for critically ill businesses, airlines will fail triage.

Crowded sardine seating is incompatible with social distancing; uncrowded seating is incompatible with financial viability. Flight-shaming climate change activism will only be stronger now. Rapid global travel itself is incompatible with containing future contagions: patient zero of every country but China was someone who flew in on a plane.

*everyone* is not able to work from work. In fact, most people can't.

Now would be a good time for China to invade the world since they just got over the pandemic and everybody is getting started. They also make most of the world's medical supplies and could hoard it all for themselves. It's some evil genius stuff to infect your own citizens first but there is some crazy Dr. Strangelove logic to it.

China hasn't gotten over the pandemic. It has infected .01% of their people, and the other 99.99% have not magically become immune. They can drastically slow the spread as long as everybody stays home, but...

Hubei cases continue to drop 10 days in a row, the people have been back to work for weeks now and they just eased travel restrictions. Shanghai will reopen on Friday. If this herd immunity theory has any legs, Hubei will be its ground zero.

The world doesn't have herd immunity to SARS either. It just went away.

China will eradicate COVID-19 within its borders the same way that polio and smallpox were eradicated. No cases, no disease. Testing and isolation upon arrival will permanently restrict international travel to and from "red zone" countries.

"The world doesn't have herd immunity to SARS either. It just went away"

I'm puzzled that I've not seen any explanation offered for that. I suppose it's a sign that virology and epidemiology contain mysteries.

Put not thy faith in mathematical models. Or at least not all thy faith.

No mystery. Control measures reduced R0 to well below 1.

Accepting the overall premise of Tyler's Bloomberg column, shouldn't the government encourage citizens to run up large credit card balances, most of which will become receivables of the major banks, and perhaps even encourage Amazon, Walmart, et. al. to sell goods on their own credit as well like in the old days of dry-goods stores? Then to the extent a massive government bailout is needed, the government can just deal directly with the relatively few Big Businesses that carry those receivables, e.g. by assuming the receivables or subsidizing them.

"Banks are willing to lend to them, because they know the government does not contemplate a world without major airlines.....It is much more difficult to bail out the millions of small and medium-sized enterprises"

Tyler is in general correct that Big Business is unfairly maligned. However, the first sentence quoted above just says that some large firms get effectively government-subsidized credit because they are too big to fail. That's a bug not a feature (from society's viewpoint). Small and medium sized enterprises, in contrast, don't need to be bailed out because new ones can easily be formed when the crisis is over (provided regulatory barriers don't get in the way). Harsh, but good for society (creative destruction). That's a feature, not a bug.

Under free market capitalism economic shocks such as are likely now will weed out the weakest members of the business community first, which is as it should be. When times are good and money is rolling around even ill-managed and under-financed companies can survive, if not prosper. Now that the economic environment has changed many marginal companies are up against it. They should be allowed to die a quick death. That's how capitalism works.

Enjoy the 30% unemployment.

Not mentioned is the fact that the unique brand of damn-the-torpedoes globalism demanded by these multinational corporations is precisely what got us into this mess in the first place.

Would have still happened in a less globalized world. The Black Death started somewhere in Asia.

You forgot to mention it spread along the Silk Road, my friend. Apparently this isn't the first time the West has been bent over a barrel thanks to their need to buy Chinese goods.

In any case, the US has natural borders that Europe does not (or at least, that they are willing and able to use). You don't hear much about the impact of the Black Death on pre-Columbian America.

It's too bad using our natural borders to our advantage is racist, or else we could have avoided much of this mess.

But IFF the Fed were doing NGDP targeting (enough QE to achieve a >2% inflation) it would create the environment in which most small businesses would be able to repay the negative real interest rate loans that banks, with no IOR would be trying to peddle. Whatever the length of the yoyo string, this would at lest minimize the economic damage.

"Only a month ago, there were headlines mocking Silicon Valley for being overly concerned with Covid-19 and for avoiding handshakes. The tech community had a high degree of advance awareness of Covid-19 problems, and it was ready with telework and other adjustments when the time came. The tech world’s penchant for carrying what seemed to be absurdly large surpluses of cash..."

Meanwhile Tesla's Elon Musk have said the coronavirus panic is dumb, posing as virology expert, and currently fighting to keep the Fremont car assembly plant open. I think the realization day arrived today, Tesla is a car company, not a tech company. I laughed at the absurdly large surpluses of cash remark =)

Elon says a lot of stupid sh*t. That makes him qualified for the highest office in the land by today's standards.

"...last year Apple had over $100 billion in cash reserves — now also seems prescient. Apple’s stores are currently closed in most parts of the world."

But Tesla assembly plant will open. No beta bureaucrat in Sacramento or Washington DC will tell the world savior what to do ;)
https://www.cnbc.com/2020/03/17/tesla-keeps-fremont-factory-open-amid-covid-19-shelter-in-place-orders.html

And yet, the county disagrees with his attempts at an exception, and I expect them to force it closed anyway.

This all just boils down to who needs to deal with customers in person versus who doesn't.

Maybe in a post-industrial society like America's. But in the countries that still manufacture things like respirators, ventilators, pharmaceuticals, latex gloves, etc, the workers need to be in the plant. In similar fashion, those who work in the food growing and processing industry tend to work in groups, not by themselves.

Larger businesses are also easier to assist if necessary. Whatever you think of the forthcoming bailout of the major U.S. airlines, logistically it will not be very difficult to pull off, since the targets are large and obvious and relatively easy to monitor. Banks are willing to lend to them, because they know the government does not contemplate a world without major airlines.

So again we have socialized losses and privatized profits. If this is fact, and it seems to be, then shouldn't these TBTF companies be paying insurance premiums, in the form of higher taxes, say?

Insurance companies themselves direct their policy holders in mitigating risk. Workmen's comp carriers insist on safety programs. Transportation liability coverage includes restrictions on equipment. Sprinkler systems provide fire protection for buildings. While much of this is mandated by regulation, those regulations were created by the insurance industry, itself.

+1 We should also look at how we can create insurance products for these types of events so we do not have to rely on government.

For example, paid sick leave. We could use the workers comp system to add a feature that would cover payment to employees if there were a national or local health emergency declared and they were told to stay home. The precondition--a declared national or local health emergency--would be rare, and the additional premium would be small, and it would cover folks, like restaurants, which currently do not have this type of program.

We could similarly have commercial insurance have disruption coverage for national health emergencies.

We do not have to socialize business losses every time when they are insurable events. We just have to make sure they are required to be in all policies.

The first example is confined to paid sick leave. Unemployment insurance takes care of becoming unemployed.

Maybe as a precondition to a loan to a restaurant would be requirement that they purchase sick leave insurance of the type mentioned above. Insurance is usually paid over time, and there could be deductibles for those who want to self insure.

The same requirement could be for loans to businesses being required to business disruption insurance for health emergencies as a condition for the loan.

Maybe, but there are two problems with private insurance here.

First is the size of the liability. An insurance policy that doesn't pay because the insurer goes broke is literally worse than useless.

Second is covariance. My car accident doesn't make you more likely to have one. But when a national health crisis hits there are going to be lots and lots of claims. That makes the diversification that insurance companies depend on difficult, at best.

It sucks there isn't a process where insolvent firms can have debt forgiven and restructure so we don;t need government bail outs. Another great win for corporate socialism! Creditors and stock holders get a bailout while the rest of us fight over toilet paper.

Dr. Cowens big business book is also a prescient and pretty good

Seems to me very little of what's written here is accurate or insightful.

Larger businesses seem totally slammed and unable to keep up with demand. Bread and meat aisles at the chain grocery stores are picked bare. Meanwhile, the local Latin American market my neighborhood has plenty of meat (and tortillas!). The 2 LA bakeries in the area are popping out fresh bread, rolls, and galletas daily.

The NBA postponed its season because of some very high-profile, controversial infections. Give thanks to social media before NBA executives. Many politicians whose supporters are not infected with the virus of virulent anti-government, libertarian rhetoric realized earlier that swift, decisive government action was necessary to curb infection rates.

Easy to work remotely in the tech industry, simple as that. Probably no one better positioned to do so for a host of reasons. Try waiting tables or washing dishes from home.

There are lots of government mechanisms for providing assistance on a micro level. Most of it involves ramping up FEMA and SBA relief and market stabilizing mechanisms to the Nth degree. True, not as easy as throwing money at the capitalists, but let's give it a try, shall we?

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