tag:theconversation.com,2011:/us/topics/bailout-1829/articlesBailout – The Conversation2023-03-16T12:10:23Ztag:theconversation.com,2011:article/2017242023-03-16T12:10:23Z2023-03-16T12:10:23ZUS regulators avoided a banking crisis by swift action following SVB’s collapse – but the cracks it exposed continue to weaken the global financial system’s foundation<figure><img src="https://images.theconversation.com/files/515941/original/file-20230316-2480-ewng07.png?ixlib=rb-1.1.0&rect=65%2C245%2C3928%2C2185&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The cracks in the financial system are growing. </span> <span class="attribution"><span class="source">John Sommer/E+ via Getty Images</span></span></figcaption></figure><p><em><a href="https://www.nytimes.com/2023/03/14/us/politics/inside-silicon-valley-bank-rescue.html">U.S. regulators’ swift reaction</a> to the <a href="https://theconversation.com/why-svb-and-signature-bank-failed-so-fast-and-the-us-banking-crisis-isnt-over-yet-201737">collapse of Silicon Valley Bank</a> and two other lenders partially restored calm to markets, but concerns remain over the stability of the global financial system.</em></p>
<p><em>The government on March 16, 2023, <a href="https://www.bloomberg.com/news/articles/2023-03-17/banks-toss-first-republic-lifeline-with-yellen-dimon-s-cajoling">orchestrated a US$30 billion rescue</a> of First Republic Bank by the nation’s largest financial institutions after the California lender’s shares plunged. Meanwhile in Europe, <a href="https://www.nytimes.com/2023/03/15/business/credit-suisse-shares-saudi.html">Credit Suisse borrowed about $54 billion</a> from Switzerland’s central bank after investors, spooked by the U.S. bank failures, feared the Swiss lender would run out of money over its own financial woes.</em></p>
<p><em>To better understand what U.S. regulators did, the impact of their decisions and what problems remain, The Conversation turned to two finance scholars, <a href="https://scholar.google.com/citations?user=VxWst50AAAAJ&hl=en&oi=ao">Brian Blank</a> of Mississippi State and <a href="https://scholar.google.com/citations?user=FKJSqjEAAAAJ&hl=en&oi=ao">Brandy Hadley</a> of Appalachian State.</em> </p>
<h2>What did US regulators do?</h2>
<p>The program introduced by the Federal Deposit Insurance Corp., the Department of the Treasury and the Federal Reserve on March 12, 2023, essentially amounts to life insurance for U.S. banks. </p>
<p>The biggest concern from the <a href="https://theconversation.com/silicon-valley-bank-biggest-us-lender-to-fail-since-2008-financial-crisis-a-finance-expert-explains-the-impact-201626">sudden collapse of Silicon Valley Bank</a> on March 10, as well as Signature Bank two days later, was the tens of billions of dollars in deposits that would otherwise go uninsured. While the <a href="https://www.fdic.gov/resources/deposit-insurance/">FDIC insures deposits up to $250,000</a>, anything above that is at risk of loss in the event of a bank failure.</p>
<p>So the <a href="https://www.fdic.gov/news/press-releases/2023/pr23016.html">FDIC agreed to provide a backstop</a> for all SVB and Signature depositors no matter how much they had deposited. And the <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312a.htm">Fed created a new lending facility</a> to <a href="https://www.reuters.com/business/finance/regulators-urged-find-silicon-valley-bank-buyer-industry-frets-about-fallout-2023-03-12/">protect other small- to medium-size banks from the same issues that caused bank runs at SVB and Signature</a>. </p>
<p>Notably, this protection for depositors does not extend to management, lenders or investors, including many institutional investors, pensions and large index funds. In addition, the program will be funded by an FDIC fund that comes from a tax on member banks. Taxpayer dollars aren’t at stake, Congress approval wasn’t required and, most importantly, only customers’ claims are protected. This is why the Biden administration insists <a href="https://www.vox.com/money/2023/3/13/23638417/svb-bank-bailout-signature-fed-fdic-treasury-janet-yellen">this is not a bailout</a> – even <a href="https://www.nytimes.com/2023/03/13/business/economy/svb-bailout-questions.html">though some critics call it that</a>.</p>
<p>Nonetheless, the government did intervene to stop the fallout from failing banks, even if done differently than in the past. </p>
<figure class="align-center ">
<img alt="people stand outside a bank" src="https://images.theconversation.com/files/515785/original/file-20230316-16-cfes47.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/515785/original/file-20230316-16-cfes47.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/515785/original/file-20230316-16-cfes47.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/515785/original/file-20230316-16-cfes47.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/515785/original/file-20230316-16-cfes47.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/515785/original/file-20230316-16-cfes47.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/515785/original/file-20230316-16-cfes47.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The collapse of Silicon Valley Bank touched off anxiety about the entire banking sector.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/SiliconValleyBank/691205f194044eb289c19c578065db6a/photo?Query=bank%20collapse&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=809&currentItemNo=71">AP Photo/Benjamin Fanjoy</a></span>
</figcaption>
</figure>
<h2>Why did the government act so quickly?</h2>
<p>When the bank run on SVB’s deposits began on March 8, the lender initially sought to find a buyer. <a href="https://www.cnbc.com/2023/03/10/silicon-valley-bank-financial-in-talks-to-sell-itself-after-attempts-to-raise-capital-have-failed-sources-say.html">When that failed</a>, regulators stepped in quickly to limit the risk to the financial system.</p>
<p>This was particularly important given that banks rely heavily on trust, and a loss of depositor faith in other mid-size banks could be extremely harmful. </p>
<p>But besides posing a systemic financial risk as the 16th-largest U.S. lender, the failure of SVB also threatened the health of the tech sector. </p>
<p><a href="https://twitter.com/GRDecter/status/1634300589067714562">Close to half</a> of <a href="https://www.cnn.com/2023/03/12/investing/silicon-valley-bank-bailout/index.html">U.S. startups backed by venture capital</a> firms, including <a href="https://www.cbsnews.com/news/bank-collapse-silicon-valley-bank-customers-roblox/">tens of thousands of technology and health care companies</a>, were customers at SVB. The bank’s failure <a href="https://www.cnbc.com/2023/03/10/silicon-valley-bank-customers-scramble-to-meet-payroll-pay-bills.html">would have made it hard</a> for many of them to <a href="https://www.npr.org/sections/money/2023/03/14/1163200179/the-collapse-of-silicon-valley-bank">pay their workers</a> or take out loans that keep businesses running.</p>
<h2>What are the problems of this approach?</h2>
<p>One concern is something economists call <a href="https://www.investopedia.com/terms/m/moralhazard.asp">moral hazard</a>. </p>
<p>U.S. regulators were basically doing what governments have done to prevent banking crises since at least the 19th century: provide liquidity. That is, according to the <a href="https://novelinvestor.com/notes/lombard-street-a-description-of-the-money-market-by-walter-bagehot/">academic theory</a> established by Economist magazine founder Walter Bagehot in 1873, central banks should lend freely to lenders during a financial crisis to prevent a panic and restore confidence in the system. </p>
<p>But doing this <a href="https://doi.org/10.1016/j.jbankfin.2014.05.009">could create a moral hazard</a> by potentially encouraging risky behavior by banks, which may come to believe they will always be bailed out. This dilemma highlights the challenge of balancing the need for financial stability with the desire to avoid creating perverse incentives. </p>
<p>With the SVB rescue, regulators likely hope to avoid this by focusing protection efforts on depositors – not equity or debt investors. </p>
<p>Another problem is that the rescue treats the symptoms more than the root causes. </p>
<p>The source of SVB’s downfall was that it invested a significant chunk of its assets in Treasury securities that lost value as the Fed hiked rates in 2022. <a href="https://s201.q4cdn.com/589201576/files/doc_downloads/2023/03/Q1-2023-Mid-Quarter-Update-vFINAL3-030823.pdf">SVB sold $21 billion worth</a> of these bonds at a loss of $1.8 billion in order to cover customer deposit withdrawals. This then prompted a stampede of clients to yank their mostly uninsured deposits. </p>
<p>But despite the depositor protection offered by the new program, many more banks still face asset-liability mismatches – that is, short-term deposits being invested in longer-term securities – that will not go away as a result of the program. <a href="https://www.wsj.com/articles/bond-losses-push-silicon-valley-bank-parent-to-raise-capital-125e89d4">Banks reported $620 billion of these unrealized losses as of December 2022</a>. </p>
<p>Some other banks – such as <a href="https://www.nar.realtor/magazine/real-estate-news/how-3-recent-bank-failures-could-impact-housing-market">Signature and Silvergate Capital</a>, which also recently failed – are similar to SVB, with concentrated business in risky sectors like venture capital, technology or cryptocurrencies. </p>
<h2>How big of a concern is the root of the problem?</h2>
<p>The good news is that <a href="https://www.bloomberg.com/news/newsletters/2023-03-10/svb-crisis-puts-vcs-at-risk-silvergate-shuts-down-adani-on-world-tour">few banks are likely</a> to have the same combination of <a href="https://www.bloomberg.com/opinion/articles/2023-03-14/svb-took-the-wrong-risks">unrealized losses</a>, concentrated deposits and <a href="https://twitter.com/M_McDonough/status/1634634765318909954/photo/1">default risk</a> that are likely to result in withdrawals as fast as what happened at SVB and Signature. </p>
<p>Critically, <a href="https://cdr.ffiec.gov/public/ManageFacsimiles.aspx">large and mid-size banks</a> are <a href="https://www.nytimes.com/2023/03/15/business/economy/silicon-valley-bank-federal-reserve-regulation.html">sufficiently regulated</a>, diversified, hedged and capitalized to prevent similar problems, especially <a href="https://twitter.com/FedGuy12/status/1634360773555388416">given the very different</a> <a href="https://twitter.com/lizrhoffman/status/1634321933486419970">balance sheet compositions</a> and asset liability management strategies.</p>
<p>But the risks are big, as the Fed’s aggressive campaign to raise interest rates could potentially make things worse. <a href="https://www.ft.com/content/415e6ef3-85d6-4cb8-a012-c2ad3cfe6782">Inflation remains elevated</a>, which would normally lead the U.S. central bank to continue to drive up rates. The nascent concern about stabilizing the financial sector at the same time as taming inflation means the Fed has its work cut out for it.</p>
<h2>So is the financial system safe?</h2>
<p>Unfortunately, not yet. </p>
<p>While the crisis has been averted for now by limiting the risk of another bank run, the financial system – as well as the <a href="https://www.atlantafed.org/cqer/research/gdpnow">modestly strong U.S. economy</a> – is showing cracks and fragility. </p>
<p>The <a href="https://www.bloomberg.com/news/articles/2023-03-15/credit-suisse-what-s-going-on-and-why-is-cs-stock-falling?srnd=premium&sref=Hjm5biAW">recent troubles at Credit Suisse</a> are a stark reminder of how quickly things can spiral out of control. </p>
<p>Credit Suisse shares have been under pressure for several years because of its own unique problems, including scandals and a closely knit customer base that makes it more vulnerable to contagion. But the recent U.S. bank failures are causing <a href="https://www.bloomberg.com/news/live-blog/2023-03-15/credit-suisse-in-crisis?srnd=premium&leadSource=uverify%20wall&sref=Hjm5biAW">broader panic among banks globally</a>, which prompted the Swiss National Bank – Switzerland’s equivalent of the Fed – to provide Credit Suisse a huge lifeline. </p>
<p>There’s no reason to think that the financial system is in serious trouble – for now – but the risks of more jitters have increased, putting more pressure on central banks, including the Fed, to roll back their inflation-fighting plans. Of course, doing so can unleash other risks – such as prices once again spiraling out of control.</p>
<p>All told, it’s a challenging balancing act, requiring careful precision and swift action to avoid a painful fall.</p><img src="https://counter.theconversation.com/content/201724/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Fed, Treasury and FDIC acted swiftly to protect depositors and stem any panic, but anxiety continues to grow about the state of the global financial system.D. Brian Blank, Assistant Professor of Finance, Mississippi State UniversityBrandy Hadley, Associate Professor of Finance and the David A. Thompson Distinguished Scholar in Applied Investments, Appalachian State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1765802022-02-20T05:55:30Z2022-02-20T05:55:30ZGhana’s debt makes development impossible: here are some solutions<figure><img src="https://images.theconversation.com/files/445584/original/file-20220210-27-186mld.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Ghana's economy is in dire straits</span> <span class="attribution"><span class="source">Wikimedia Commons</span></span></figcaption></figure><p><em>By the year 2000, the government of Ghana had borrowed so much that the country was in <a href="https://www.imf.org/en/News/Articles/2015/09/14/01/49/pr0211">debt distress</a>. It then subscribed to the <a href="https://www.imf.org/en/News/Articles/2015/09/14/01/49/pr0211">Heavily Indebted Poor Countries initiative</a> of the International Monetary Fund and World Bank. Consequently, much of the country’s external debt of over US$4 billion was written off by creditors. By the time the initiative ended in 2006, Ghana’s total public debt stock was US$780 million (25% of GDP). The debt stock has since risen by 7000% to <a href="https://www.ghanaweb.com/GhanaHomePage/business/Ghana-s-public-debt-stock-now-GH-341-8-billion-as-of-September-2021-1406452">$54 billion, which is 78% of GDP</a>. The current debt to GDP ratio is 78%, while the average for developing countries is 60%. Economist, Adu Owusu Sarkodie, explains how this happened, why it’s a problem and what can be done.</em></p>
<h2>How did Ghana get into this situation?</h2>
<p>After the Heavily Indebted Poor Countries initiative ended in 2006, the public debt stock has largely been driven by the continuous accumulation of budget deficits (48.6%), the currency deprecation (28.2%), and off-budget borrowings (23.2%). Between 2017 and 2019, Ghana’s debt stock grew astronomically for three main reasons, beyond the normal drivers. </p>
<p>First was the country’s <a href="https://www.fitchratings.com/research/sovereigns/energy-sector-debt-is-key-risk-to-ghana-post-pandemic-debt-trajectory-03-03-2021">energy sector debt</a>. This is debt owed to the country’s power producers and suppliers. It has been accumulated largely by Ghana’s state-owned enterprises, that struggle to generate enough internal revenue to pay their loans. In 2021, for instance, the government has so far provided a $3 billion bailout. </p>
<p>Second was the financial sector <a href="https://isd.gov.gh/topstories-isdnews-authentic-government-news-at-every-corner-of-the-nation/764/">clean-up exercise</a> undertaken by the country’s central bank. Between 2017 and 2019, the Bank of Ghana revoked the licences of some banks, savings and loans, micro-financial institutions, finance houses, and investment institutions due to their insolvency and financial malpractices. The government had to raise another <a href="https://isd.gov.gh/topstories-isdnews-authentic-government-news-at-every-corner-of-the-nation/764/">$3 billion in bonds</a> to pay customers of the defunct banks and financial companies.</p>
<p>Thirdly, like many countries in the world, COVID-19 has had a <a href="https://www.emerald.com/insight/content/doi/10.1108/IJSE-08-2020-0582/full/html">serious impact</a> on the Ghanaian economy due to lockdowns, border closures, restrictions in movement, and the fall in crude oil prices. The economic restrictions resulted in a fall in revenue of US$2 billion, while COVID-19 expenditures increased total government expenditure by US$1.7 billion, giving a total fiscal impact of almost US$4 billion in 2020.</p>
<h2>How bad is it?</h2>
<p>The current rigidity in the Ghanaian budget makes it impossible for the government to do anything without borrowing. Rigidity refers to those statutory payments in the budget over which the government has no control. Just two of the statutory payments (compensation of employees and debt service) consume the total revenue and grants. In 2020, debt service alone (paying interest plus amortisation) consumed 70% of revenue. That’s close to the level of 72% before the country subscribed to the Heavily Indebted Poor Countries initiative. </p>
<p>Based on the estimated revenue and expenditure figures in the 2021 and 2022 budgets, the debt service burden is expected to worsen in 2021 at 82%, before improving at 45% in 2022. </p>
<p>For the government to be able to meet the remaining statutory expenditure and all other discretionary expenditures, it will have to borrow. If the government does not instil discipline and raise revenue domestically, or cut down some expenditure (or both) to create fiscal space, it will have to seek help in an International Monetary Fund programme.</p>
<p>Recently, some international credit rating agencies have downgraded Ghana’s economy, citing the country’s inability to raise enough revenue to service its debt. The signal this sends to investors is that Ghana’s sovereign bond is not profitable and its default risk is too high. </p>
<p>The implication of this is that the government may not be able to raise money from the international capital market. The options are to either borrow domestically and crowd out the private sector, or borrow from other countries. If this option is exhausted, it will have to seek an International Monetary Fund programme.</p>
<h2>What has been the impact on the economy?</h2>
<p>The impact of the huge public debt and the slowed growth of revenue is that the country has to borrow to finance its spending every time. Until the government borrows it can do virtually nothing. This has slowed down the government’s ability to implement its programmes and policies to grow and transform the economy and create jobs. </p>
<p>Over a 16-year period (2006-2021), the country’s economic growth was largely driven by the extractive sector. This sector is capital intensive: it uses more machines than human beings. The effect is that, though there is some economic growth, the source of growth is not from sectors of the economy that can generate employment. This is why unemployment has <a href="https://www.bloomberg.com/news/articles/2021-12-19/ghana-unemployment-rate-has-tripled-in-10-years-census-shows">increased</a> from 5% to 13%. </p>
<h2>Are there any solutions?</h2>
<p>Ghana finds itself in difficult position. The only way out is to raise enough revenue to finance its development. Even if the government succeeded in borrowing, it would still have to raise revenue domestically to service the debt. Therefore, there is no substitute for domestic resource mobilisation. The projected budget deficit for 2022 is $6 billion. The government will have to raise revenue through taxes (without overburdening the taxpayers) and non-tax sources.</p>
<p>The Institute for Fiscal Studies <a href="https://www.ifsghana.org/the-role-of-the-extractive-sector-in-ghanas-comparatively-low-public-sector-revenue-mobilization-policy-brief-no-11/">researched</a> the sources of revenue to the government in 2018 and made the following recommendations as the possible additional revenue to Ghana’s public finance annually:</p>
<ul>
<li><p>Personal income tax of the workers in the informal sector – $47 million </p></li>
<li><p>Property tax – $157 million</p></li>
<li><p>Tax exemptions – $790 million </p></li>
<li><p>55% share of the extractive sector – $4 billion</p></li>
</ul>
<p>According to the Ghana Statistical Service, there are about <a href="https://statsghana.gov.gh/gssmain/storage/img/infobank/2021%20PHC%20Provisional%20Results%20Press%20Release.pdf">7.7 million workers</a> in the informal sector but it is difficult to measure their incomes. There is a difficulty in taxing incomes that are unknown. That is why there seems to be a good economic justification to tax them using the <a href="https://www.uncdf.org/article/7408/ghana-electronic-levy">proposed e-levy</a>. But the levy must be designed to achieve the objective of taxing the incomes of workers in the informal sector. </p>
<p>In addition to raising revenue, the government must also plug all loopholes, and ensure prudent management of public finance. The Auditor-General department and Public Accounts Committee of Parliament usually identify financial irregularities in their reports. </p>
<p>The recent Auditor-General’s <a href="https://www.myjoyonline.com/12-85bn-irregularities-committed-by-state-institutions-in-2020-auditor-general-report/">report</a> identified about $1.8 billion worth of irregularities in public finance. When these irregularities are checked, the government will gain the confidence and support of the citizens.</p>
<p>If the current growth in the public debt stock continues, then the country is likely to find itself in debt distress, which might lead to seeking an International Monetary Fund bailout.</p><img src="https://counter.theconversation.com/content/176580/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Adu Owusu Sarkodie does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Ghana’s economy is in its most precarious state in decades.Adu Owusu Sarkodie, Lecturer, Department of Economics, University of GhanaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1551062021-02-18T13:44:36Z2021-02-18T13:44:36ZAmericans still need a lifeline despite trillions in coronavirus aid<figure><img src="https://images.theconversation.com/files/384866/original/file-20210217-19-1lkwz89.jpg?ixlib=rb-1.1.0&rect=0%2C47%2C4576%2C2993&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Americas' financial desperation can be seen in the soaring demand for food assistance. </span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/VirusOutbreakNewYork/62f1bf36663c46d0bc5f67ae256076ad/photo?Query=covid%20food%20bank%20need&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=84&currentItemNo=29">AP Photo/John Minchillo</a></span></figcaption></figure><p>As <a href="https://www.npr.org/2021/02/15/968028373/lawmakers-debate-bidens-1-9-trillion-covid-19-relief-plan">Congress prepares another injection</a> of COVID-19 aid for businesses and individuals, there’s been debate about whether it’s necessary on top of the <a href="https://www.pgpf.org/blog/2021/01/heres-everything-congress-has-done-to-respond-to-the-coronavirus-so-far">US$3.5 trillion spent so far</a>.</p>
<p>President Joe Biden <a href="https://www.vogue.com/article/pandemic-relief-package-what-you-need-to-know">had initially hoped to get bipartisan support</a> for his $1.9 trillion proposal, but the <a href="https://www.npr.org/sections/coronavirus-live-updates/2021/01/31/962554923/10-senate-republicans-plan-to-detail-slimmed-down-covid-19-counteroffer">only counteroffer from Republicans</a> was a $600 billion bill, with many in the GOP suggesting more money wasn’t needed. And <a href="https://www.marketwatch.com/story/experts-worried-about-overheating-suggest-placing-automatic-spending-curbs-on-bidens-1-9-trillion-covid-relief-bill-11612813694">some economists have expressed concern</a> that giving Americans too much right now could overheat the economy. </p>
<p>We are public opinion scholars at the Harvard T.H. Chan School of Public Health. In cooperation with our partners at the Robert Wood Johnson Foundation and National Public Radio, <a href="https://doi.org/10.1080/05775132.2020.1866905">we conducted a survey in July and August of last year</a> to try to understand how the first round of aid had affected American families in need. What we found shocked us then and feels relevant now as the government negotiates its next steps.</p>
<p>Despite <a href="https://www.pgpf.org/blog/2021/01/heres-everything-congress-has-done-to-respond-to-the-coronavirus-so-far">trillions of dollars</a> in government assistance, about two-thirds of families that suffered job losses or reduced wages during the pandemic still reported facing serious financial hardship. </p>
<p>Many people were struggling – <a href="https://www.cbpp.org/research/poverty-and-inequality/tracking-the-covid-19-recessions-effects-on-food-housing-and">and still are</a> – just to pay for basic necessities, like food and rent. </p>
<h2>The first round of pandemic aid</h2>
<p>Congress <a href="https://www.pgpf.org/infographic/whats-in-the-cares-act-heres-a-summary">passed most of the initial relief in March</a>, including direct payments to qualifying families, expanded unemployment benefits and loans to small businesses that turned into grants if they kept workers on their payroll. </p>
<p>By July 1, when we began our survey, <a href="https://www.nytimes.com/2020/05/28/business/economy/coronavirus-stimulus-unemployment.html">most Americans entitled</a> to a direct check should have received it, and unemployed adults were still receiving supplemental aid of $600 a week on top of state benefits.</p>
<p>We wanted to understand the financial burdens experienced by American families that were economically harmed by the coronavirus pandemic. And we wanted to see whether the government aid was helping the people who needed it most.</p>
<p>Using a nationally representative, randomized survey design, we contacted 3,454 adults and asked them about the financial problems facing their households. We focused on the 46% who said they or other adults in their household either lost a job, had to close a business, were furloughed or had their wages or hours reduced since the start of the coronavirus pandemic. We published our findings in the economic affairs journal Challenge in January. </p>
<h2>Serious financial problems</h2>
<p>While it seems like a no-brainer that Americans weren’t ready for the unexpected employment disruptions caused by the COVID-19 pandemic, it was surprising to us that federal aid and <a href="https://theconversation.com/what-the-25-billion-the-biggest-us-donors-gave-in-2020-says-about-high-dollar-charity-today-154466">charitable assistance</a> seemed to be doing so little to support the people it was intended to help. </p>
<p>We found that the aid didn’t put much of a dent in the financial problems faced by families earning less than $100,000, whether because relief <a href="https://www.hks.harvard.edu/faculty-research/policy-topics/poverty-inequality-opportunity/only-one-quarter-service-sector">was delayed</a> or <a href="https://www.newyorker.com/business/currency/whats-happening-to-all-the-cares-act-money">wasn’t spent</a>, the amount wasn’t adequate or the funds <a href="https://www.gao.gov/products/GAO-20-701">never made it to the intended recipients</a>. </p>
<p>Among households with employment or wage losses during the pandemic, 87% of those earning less than $30,000 a year and 68% of those earning $30,000 to $99,999 told us they were still facing serious financial problems. And more than half of households in these income brackets reported they had already used up all or most of their savings – or they didn’t have savings to begin with. That share jumped to over three-quarters for people with incomes under $30,000.</p>
<p>Savings take years or decades to accumulate, so it’s likely these households are in even worse trouble now. What’s more, <a href="https://www.nytimes.com/2020/08/08/business/economy/lost-unemployment-benefits.html">significantly less aid has been provided</a> from the federal government since we conducted our survey.</p>
<p><iframe id="k7UjU" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/k7UjU/3/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<h2>Many Americans still need a lifeboat</h2>
<p>Our findings suggest there is a definite need for further government aid on a large scale for tens of millions of families.</p>
<p>A useful way to think about this is how the government provides <a href="https://training.fema.gov/emiweb/downloads/is7unit_3.pdf">relief after a natural disaster</a>. In disasters, cash payments are often sent directly to those in need, like lifeboats launched to rescue people at risk of drowning.</p>
<p>And in fact, the pandemic has been an economic disaster for some – <a href="https://www.pewresearch.org/social-trends/2020/09/24/economic-fallout-from-covid-19-continues-to-hit-lower-income-americans-the-hardest/">particularly low-income and Black and Latino households</a> – more than others. They still need a lifeboat to get them through the storm. </p>
<p>[<em>Get the best of The Conversation, every weekend.</em> <a href="https://theconversation.com/us/newsletters/weekly-highlights-61?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=weeklybest">Sign up for our weekly newsletter</a>.]</p><img src="https://counter.theconversation.com/content/155106/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mary G. Findling received funding for this study from the Robert Wood Johnson Foundation under grant #76253.</span></em></p><p class="fine-print"><em><span>John M. Benson received funding for this study from the Robert Wood Johnson Foundation under grant #76253. </span></em></p><p class="fine-print"><em><span>Robert J. Blendon received funding for this study from the Robert Wood Johnson Foundation under grant #76253.
</span></em></p>A survey of the impact of the first few rounds of coronavirus aid shows that most of those who lost jobs or wages due to the pandemic were facing severe economic hardship.Mary G. Findling, Research Associate at the Harvard T.H. Chan School of Public Health, Harvard UniversityJohn M. Benson, Senior Research Scientist at the Harvard T.H. Chan School of Public Health, Harvard UniversityRobert J. Blendon, Richard L. Menschel Professor of Public Health and Professor of Health Policy and Political Analysis, Emeritus, Harvard UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1525132021-01-22T20:37:44Z2021-01-22T20:37:44ZWhat does the economy need now? 4 suggestions for Biden’s coronavirus relief bill<figure><img src="https://images.theconversation.com/files/380377/original/file-20210125-19-bnbil0.jpg?ixlib=rb-1.1.0&rect=449%2C143%2C5164%2C3844&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Biden has made fixing the economy one of his top priorities. </span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/Biden/64002a97aea34463aaf8c0e86eb7ee2b/photo?Query=biden%20AND%20economy&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=303&currentItemNo=14">AP Photo/Evan Vucci</a></span></figcaption></figure><p><em>Editor’s note: The Biden administration has made it clear it wants to inject more money into the U.S. economy and provide more aid for priorities like vaccines, reopening schools and state governments. We asked four economists to share what’s on the top of their wish lists for Biden and Congress, and why.</em></p>
<h2>A better way to save businesses while helping workers</h2>
<p><strong>Steven Pressman, Colorado State University</strong></p>
<p>Since March, <a href="https://www.chicagotribune.com/business/ct-biz-coronavirus-small-business-failure-20200812-6u5ju4hvcnhv3cbnvslesuvnvq-story.html">20,000 U.S. businesses have failed every month</a>, on average. Small companies, which employ <a href="https://cdn.advocacy.sba.gov/wp-content/uploads/2019/04/23142719/2019-Small-Business-Profiles-US.pdf">nearly half of all workers</a>, have been <a href="https://www.businesswire.com/news/home/20201008005232/en/Small-Businesses-Feel-Biggest-Impact-of-Coronavirus-Pandemic">hit hardest</a>. The U.S. economy will struggle to recover without significant support for small businesses and their workers. </p>
<p>One way Congress addressed these problems back in March is by <a href="https://taxfoundation.org/sba-paycheck-protection-program-cares-act">offering small companies forgivable loans</a> if they kept workers on their payroll for 10 weeks. While helpful, the Paycheck Protection Program came with major flaws, such as a design that led to <a href="https://www.wsj.com/articles/ppp-was-a-fraudster-free-for-all-investigators-say-11604832072?mod=hp_lead_pos2">lots of fraud</a>. In addition, <a href="https://www.usatoday.com/story/news/politics/2020/09/01/coronavirus-relief-small-businesses-improperly-received-ppp-loans/5681021002/">billions of dollars went</a> to <a href="https://www.washingtonpost.com/business/2020/12/01/ppp-sba-data/">companies that didn’t need it</a>, while some of those in greatest need <a href="https://www.nytimes.com/2021/01/11/business/small-businesses-ppp-covid.html">couldn’t secure adequate funds</a>. </p>
<p>The U.K. had a different solution. Its government created the <a href="https://www.shrm.org/resourcesandtools/hr-topics/global-hr/pages/uk-furlough-scheme.aspx">Coronavirus Job Retention Scheme</a>, a form of wage and job insurance for workers. The government pays up to 80% of usual wages – subject to an income cap – to furloughed workers that companies retain as employees. Companies cover another 20% of usual wages. Low-income workers also receive additional monthly payments of up to the equivalent of about US$500. </p>
<p>Workers can be partially furloughed, working three or four days per week rather than five. This solves the problem of what to do about workers whose hours get cut or who go from full-time to part-time status. </p>
<p>The plan has helped companies reduce their labor costs, while maintaining flexibility to bring workers back when conditions allow. Importantly, aid goes to workers – not companies – which <a href="https://www.businesswest.co.uk/blog/coronavirus-job-retention-scheme-hugely-successful-how-will-it-end">has ensured workers and their incomes have been protected</a> throughout the crisis. And aid goes only to workers whose companies experience problems due to the coronavirus pandemic.</p>
<p>Unemployment rates in the two countries tell part of the British success story. In the U.K., unemployment <a href="https://www.ons.gov.uk/employmentandlabourmarket/peoplenotinwork/unemployment/timeseries/mgsx/lms">increased gradually last year</a> from 4% pre-pandemic to 4.9% in October. U.S. unemployment, in contrast, <a href="https://fred.stlouisfed.org/series/UNRATE">almost doubled</a> from 3.5% to 6.7% in the that same period, peaking at nearly 15% in April. </p>
<p>The U.K. program <a href="https://theconversation.com/covid-lockdowns-spring-will-see-finances-hit-as-economic-impact-kicks-in-151786">has provided support to workers</a> throughout the pandemic’s ups and downs. The Paycheck Protection Program was meant to be temporary, although <a href="https://www.wsj.com/articles/ppp-loans-everything-we-know-about-latest-small-business-protection-11608645691">more funds were added in December</a>. </p>
<p>In the U.K., fraud has been limited because companies don’t get the money. And the government <a href="https://www.crosslandsolicitors.com/site/media/coronavirus-hub/furlough-fraud-coronavirus-lockdown">has encouraged workers to become whistleblowers</a>, while imposing large penalties on the officers of companies engaged in fraud.</p>
<p>Rather than continuing to fund the Paycheck Protection Program, Congress and the president should switch gears and enact a program like the U.K.’s that will see America through the crisis, however long it lasts.</p>
<figure class="align-center ">
<img alt="Protesters display placards during a demonstration to support for tenants and homeowners at risk of eviction in Boston on Oct. 11." src="https://images.theconversation.com/files/380267/original/file-20210122-17-t3yiu1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/380267/original/file-20210122-17-t3yiu1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/380267/original/file-20210122-17-t3yiu1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/380267/original/file-20210122-17-t3yiu1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/380267/original/file-20210122-17-t3yiu1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/380267/original/file-20210122-17-t3yiu1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/380267/original/file-20210122-17-t3yiu1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">An eviction crisis looms for the Biden administration.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/EvictionBan/af06e3a060ec433cad1c20faf6b6cf03/photo?Query=eviction%20AND%20crisis&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=1197&currentItemNo=2">AP Photo/Steven Senne</a></span>
</figcaption>
</figure>
<h2>Addressing the eviction crisis</h2>
<p><strong>Melanie Long, College of Wooster</strong></p>
<p>The sharp rise in unemployment due to the pandemic has left many Americans <a href="https://www.cbpp.org/research/poverty-and-inequality/tracking-the-covid-19-recessions-effects-on-food-housing-and">struggling to pay the bills</a>. Renters have been among the most vulnerable. </p>
<p>Compared with homeowners, renters are <a href="https://www.jchs.harvard.edu/sites/default/files/ahr2011-3-demographics.pdf">more likely</a> to be poor, young and either Black or Hispanic – <a href="https://fas.org/sgp/crs/misc/R46554.pdf">the exact same demographic</a> of those who have suffered the most from the pandemic’s economic fallout.</p>
<p>The result has been a <a href="https://www.cnbc.com/2020/06/10/how-to-prevent-the-coming-coronavirus-tsunami-of-evictions.html">looming eviction crisis</a> that has been staved off by a <a href="https://evictionlab.org/covid-policy-scorecard">patchwork of federal, state and local moratoriums</a>. <a href="https://www.vox.com/21569601/eviction-moratorium-cdc-covid-19-congress-rental-assistance-rent-crisis">Millions of renters</a> could face homelessness once existing moratoriums expire and accumulated back rent comes due. </p>
<p>About <a href="https://www.washingtonpost.com/business/2020/12/07/unemployed-debt-rent-utilities/">9 million households</a> have fallen behind on rent payments, with <a href="https://www.marketplace.org/2020/12/09/millions-renters-face-holiday-evictions-long-term-debt/">over 1 million</a> estimated to owe $5,000 or more. This could also worsen the <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3739576">public health situation</a> and <a href="https://ighhub.org/understanding-homelessness/causes-intersections/unemployment-underemployment">slow the economic recovery</a>.</p>
<p>To address this crisis, I believe Congress needs to both provide short-term solutions and long-term fixes.</p>
<p>For starters, it’s vital that the Centers for Disease Control and Prevention’s eviction moratorium continue. On Jan. 20, Biden <a href="https://www.forbes.com/advisor/personal-finance/biden-plan-eviction-moratorium-rent-relief/">extended the moratorium – which was set to expire at the end of January – to March 31</a>. But that will likely need to be extended further. </p>
<p>Another critical need is rental and housing assistance. Biden’s proposed stimulus package already <a href="https://www.housingwire.com/articles/how-bidens-1-9t-stimulus-plan-impacts-housing/">includes $30 million</a> to help renters and support <a href="https://www.cnn.com/2020/12/17/success/landlords-struggling-rent-eviction/index.html">struggling landlords</a>. Adding even more assistance could have major economic benefits as low-income beneficiaries especially are likely to spend every extra penny on food and other goods, stimulating the economy.</p>
<p>Access to affordable housing has been worsening for years, especially in communities of color. The <a href="https://www.urban.org/policy-centers/housing-finance-policy-center/projects/reducing-racial-homeownership-gap">gap between black and white homeownership rates</a> has widened since the 1960s. The fact that only 42% of Black Americans own their homes, compared with 72% of their white peers, means most of them are renters, making them more <a href="https://inequality.stanford.edu/sites/default/files/Pathways_SOTU_2017_housing.pdf">vulnerable</a> to losing their homes. It’s also largely to blame for the <a href="https://www.brookings.edu/blog/up-front/2020/02/27/examining-the-black-white-wealth-gap/">stark racial wealth gap</a> in the U.S., which in turn <a href="https://www.mckinsey.com/industries/public-and-social-sector/our-insights/the-economic-impact-of-closing-the-racial-wealth-gap">reduces economic growth</a>. </p>
<p>Congress could begin to address these deeper problems by <a href="https://archive.curbed.com/2019/7/8/20686095/kamala-harris-homeownership-plan-2020-election-democratic-primary">providing down payment assistance</a> in historically <a href="https://www.investopedia.com/terms/r/redlining.asp">redlined</a> communities, which would help households that are not currently on the edge of a financial cliff take advantage of <a href="https://www.forbes.com/advisor/mortgages/low-mortgage-rates-high-home-prices/">historically low interest rates</a> as <a href="https://www.marketwatch.com/story/heres-how-homeowners-and-new-buyers-are-taking-advantage-of-record-low-mortgage-rates-2020-09-11">so many others have</a>. </p>
<figure class="align-center ">
<img alt="A woman tries to work on her computer while two young girls try to get her attention." src="https://images.theconversation.com/files/380268/original/file-20210122-13-1uxjhtk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/380268/original/file-20210122-13-1uxjhtk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/380268/original/file-20210122-13-1uxjhtk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/380268/original/file-20210122-13-1uxjhtk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/380268/original/file-20210122-13-1uxjhtk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/380268/original/file-20210122-13-1uxjhtk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/380268/original/file-20210122-13-1uxjhtk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Women have borne the brunt of increased child care needs during the pandemic.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/mother-working-from-home-with-children-in-royalty-free-image/1273890998">MoMo Productions/DigitalVision via Getty Images</a></span>
</figcaption>
</figure>
<h2>Helping women get back to work</h2>
<p><strong>Veronika Dolar, SUNY Old Westbury</strong></p>
<p>During the pandemic, unemployment <a href="https://theconversation.com/women-risk-losing-decades-of-workplace-progress-due-to-covid-19-heres-how-companies-can-prevent-that-145073">has been felt most acutely</a> by women. </p>
<p>Women in the U.S. <a href="https://www.thecut.com/2021/01/all-jobs-lost-in-december-2020-were-held-by-women-report.html">lost a total of 156,000 jobs</a> in December, even as men gained 14,000. There were <a href="https://www.bls.gov/news.release/empsit.nr0.htm">nearly 2.1 million fewer</a> women in the labor force at the end of 2020 than there were pre-pandemic.</p>
<p>One reason for this is that women are more heavily represented in sectors that saw the biggest job losses in December, such as hospitality and private education. But another important one is that women generally have been <a href="https://www.nytimes.com/2020/05/06/upshot/pandemic-chores-homeschooling-gender.html">expected to increase</a> their <a href="https://www.americanprogress.org/issues/early-childhood/reports/2019/03/28/467488/child-care-crisis-keeping-women-workforce/">already disproportionate share</a> of household child care duties after COVID-19 shut down schools. </p>
<p>All of this could lead to a significant decline in women’s total wages over time – <a href="https://www.americanprogress.org/issues/women/reports/2020/10/30/492582/covid-19-sent-womens-workforce-progress-backward/">one estimate puts it at $64.5 billion a year</a>. This would result in a sharp drop in economic activity and billions in lost tax revenue for state and federal budgets.</p>
<p>But Congress could help offset this outcome in several ways.</p>
<p>One of the most critical is helping parents find affordable child care facilities. <a href="https://www.cnbc.com/2020/12/30/many-child-care-centers-nationwide-still-remain-closed.html">More than a quarter of child care centers in the U.S. remain closed</a> because of the pandemic, and those that are open <a href="https://www.theatlantic.com/ideas/archive/2019/11/why-child-care-so-expensive/602599/">are often unaffordable</a>. Child care costs <a href="https://www.americanprogress.org/issues/early-childhood/reports/2020/09/03/489900/true-cost-providing-safe-child-care-coronavirus-pandemic/">have increased 47% during the pandemic</a>. </p>
<p><a href="https://www.washingtonpost.com/us-policy/2021/01/14/biden-stimulus-covid-relief/">Biden wants to address this</a> by providing $25 billion to directly support child care providers and $15 billion to <a href="https://www.ffyf.org/issues/ccdbg/">help low-income families afford care</a>. </p>
<p>While this funding would go a long way to ensuring mothers have access to affordable child care, the lack of flexibility at most providers means women with uncertain work hours or who need other accommodations will still struggle. A more comprehensive plan should include some support to hire babysitters or even child support vouchers that could be spent as needed. </p>
<p>The other side of this issue is ensuring new mothers and fathers can take time off work to care for their children themselves. <a href="https://www.huffpost.com/entry/joe-biden-covid-relief-proposal-women_n_6001f056c5b62c0057bce58f">Biden’s proposal includes</a> up to 14 weeks of paid family and medical leave, which will help ensure women don’t have to choose between a new baby and their career.</p>
<h2>Unemployment insurance reform</h2>
<p><strong>R. Andrew Butters, Indiana University</strong></p>
<p><a href="https://fred.stlouisfed.org/series/PAYEMS#0">Millions of Americans</a> who have lost their jobs as a result of the pandemic have relied on the <a href="https://www.nytimes.com/2020/11/11/business/economy/unemployment-benefits-cutoff.html">unemployment insurance system to pay for bills, rent and food</a>. </p>
<p>But that system, in terms of <a href="https://www.nytimes.com/2020/03/19/business/coronavirus-unemployment-states.html">staffing</a> and <a href="https://www.wsj.com/articles/states-struggle-with-coronavirus-unemployment-claims-surge-11588239004">technology</a>, <a href="https://www.wsj.com/articles/the-long-run-of-american-job-growth-has-ended-11585215000">wasn’t designed to handle</a> the unprecedented need seen today. About 5 million people made <a href="https://fred.stlouisfed.org/series/CCSA">continuing claims for jobless benefits</a> in January. That’s down from a record 25 million in May but still near the highest the figure had ever been previously. </p>
<p>Aid packages passed in <a href="https://home.treasury.gov/policy-issues/cares">March</a> and <a href="https://www.natlawreview.com/article/federal-covid-relief-bill-passed-congress-december-2020">December</a> extended the benefits to people who don’t normally receive them – such as gig workers and part-time employees – and included a federal supplement. But these changes <a href="https://indianapublicmedia.org/news/dwd-awaiting-more-guidance-to-roll-out-unemployment-benefit-changes.php">added strain to the system</a> and made it more difficult to <a href="https://www.wsj.com/articles/wave-of-attempted-fraud-hits-state-unemployment-claims-programs-11608633000">prevent fraud</a> and <a href="https://www.latimes.com/california/story/2021-01-07/california-stops-payments-unemployment-claims-fraud-edd">process legitimate claims</a>.</p>
<p>[<em>Deep knowledge, daily.</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=deepknowledge">Sign up for The Conversation’s newsletter</a>.]</p>
<p>Keeping unemployment benefits flowing to people out of work due to the pandemic is essential to the economic recovery, both so that the unemployed can afford to live and also for the broader economy, which <a href="https://www.thebalance.com/consumer-spending-definition-and-determinants-3305917">depends on consumer spending</a>. </p>
<p>But this requires ensuring the system is effective and reaches everyone who needs help. Lawmakers could begin to do this by making some temporary changes permanent. </p>
<p>For example, traditionally, independent contractors, part-time employees and some other categories have been ineligible for unemployment benefits. In March, Congress <a href="https://www.investopedia.com/pandemic-unemployment-assistance-pua-definition-4802064">created</a> <a href="https://www.investopedia.com/pandemic-emergency-unemployment-compensation-peuc-definition-4802046">two programs</a> that specifically provide them with benefits. But those programs expire in March. Lawmakers shouldn’t simply extend them again but ensure <a href="https://www.cnbc.com/2020/02/04/gig-economy-grows-15percent-over-past-decade-adp-report.html">these growing</a> <a href="https://wol.iza.org/articles/why-does-part-time-employment-increase-in-recessions/long">segments</a> of the workforce always have access to benefits. </p>
<p>Lawmakers could also make sure extended benefits – that is, allowing the unemployed to receive up to 50 rather than <a href="https://oui.doleta.gov/unemploy/docs/factsheet/UI_Program_FactSheet.pdf">only 26 weeks</a> of insurance – don’t expire in the March. </p>
<p>And I believe the relief package should also consider investing to help state offices hire more workers, update their technology infrastructure and coordinate more effectively with other states. This should lead to timelier and more accurate payments and protect against the most sophisticated attempts at fraud.</p><img src="https://counter.theconversation.com/content/152513/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Biden proposed $1.9 trillion in new coronavirus relief spending to help with the economic fallout of COVID-19. Four economists have a few ideas for him.Steven Pressman, Professor of Economics, Colorado State UniversityMelanie G. Long, Assistant Professor of Economics, The College of WoosterR. Andrew Butters, Assistant Professor of Business Economics, Indiana UniversityVeronika Dolar, Assistant Professor of Economics, SUNY Old WestburyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1518232020-12-10T13:36:05Z2020-12-10T13:36:05ZWhy shielding businesses from coronavirus liability is a bad idea<figure><img src="https://images.theconversation.com/files/374021/original/file-20201209-19-155zhxy.jpg?ixlib=rb-1.1.0&rect=80%2C8%2C5910%2C3979&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Posting signs like this are often enough to avoid liability. </span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/VirusOutbreakColorado/c1ea3e674d8c4e6c80331c642984dd85/photo?Query=coronavirus%20mask%20sign&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=686&currentItemNo=1">AP Photo/David Zalubowski</a></span></figcaption></figure><p>Congress <a href="https://www.nytimes.com/2020/12/08/us/politics/congress-coronavirus-stimulus.html">may be close to a deal</a> on another coronavirus bailout, but Senate Republican demands for liability protections for businesses <a href="https://www.crainsnewyork.com/politics/mcconnell-says-relief-talks-should-drop-liability-state-aid">remain a major obstacle</a>. </p>
<p>Senate Majority Leader Mitch McConnell <a href="https://www.nytimes.com/2020/04/28/business/businesses-coronavirus-liability.html">has long warned of an “avalanche”</a> of lawsuits that will stymie economic recovery efforts if Congress does not grant companies sweeping immunity from civil liability for failure to adequately protect workers and customers from infection. </p>
<p><a href="https://press.uchicago.edu/ucp/books/book/chicago/O/bo35855002.html">My research</a> on the role of civil lawsuits in reducing foodborne illness outbreaks suggests that fears of excessive litigation are unwarranted. What’s more, the modest liability exposure that does exist is important to ensuring businesses take reasonable coronavirus precautions as they resume normal operations.</p>
<h2>How not to be careless</h2>
<p>As a general matter, businesses are subject to civil liability for <a href="https://injury.findlaw.com/accident-injury-law/proving-fault-what-is-negligence.html">carelessness</a> that causes injury to others. The law defines carelessness as a failure to exercise “reasonable care.”</p>
<p>In applying this standard, courts consider several factors: </p>
<ul>
<li>Did the business take available <a href="https://www.law.cornell.edu/wex/negligence">cost-effective precautions</a> to prevent injury? </li>
<li>Did the business comply with <a href="https://www.nolo.com/dictionary/negligence-per-se-term.html">laws or regulations</a> designed to protect public health and safety? </li>
<li>Did the business conform to <a href="http://www.kohlerlaw.com/CustomasProofofNegligence">industry standards</a> for health and safety? </li>
<li>Did the business exercise <a href="https://www.lawnow.org/the-reasonable-person/">common sense</a>? </li>
</ul>
<p>If the answer to one or more of the questions is no, then a court may conclude that the business was careless and is subject to liability for damages to customers who suffered harm. </p>
<p>In the context of the current pandemic, I believe that reasonable care sets a clear standard for business owners. Invest in cost-effective precautions like ensuring employees wear masks and provide for social distancing. Follow the latest guidance of health officials and all health and safety regulations. Keep up with what other similar businesses are doing to prevent infection. Use common sense.</p>
<p>Law-abiding, thoughtful <a href="https://www.nytimes.com/2020/04/26/business/coronavirus-states-businesses-reopen.html">business owners</a> – those who care about the safety of their employees and their patrons – are likely to exercise reasonable care to prevent COVID-19 transmission with or without the threat of a lawsuit.</p>
<p>For example, the owner of a nail salon in Georgia back in April <a href="https://www.nytimes.com/2020/04/28/opinion/coronavirus-reopening-georgia.html">described her plans for reopening</a>. The salon will accept patrons by appointment only, conduct pre-screening telephone interviews for signs of illness and limit the number of people in the salon at any one time. They’ll take temperatures before allowing people to enter, require hand-washing, equip employees and patrons with masks and gloves, and sanitize all work areas between appointments.</p>
<p><a href="https://www.nytimes.com/2020/04/26/business/coronavirus-states-businesses-reopen.html">Conscientious business owners</a> like this have no reason to fear a lawsuit alleging they failed to take reasonable precautions. </p>
<p>Predictions of <a href="https://www.washingtonpost.com/business/2020/04/24/liability-shield-white-house-coronavirus/">“frivolous” lawsuits</a> appear to be generating unnecessary anxiety among business groups. But they shouldn’t. Personal injury lawyers representing victims work on a <a href="https://law.freeadvice.com/litigation/litigation/lawyer_contingency_fee.htm">contingency fee</a> basis. This means that they earn fees only when they bring cases with a strong enough chance of winning to reach a favorable settlement or a judgment.</p>
<p>Lawyers have no incentive to bring sure losers, and they risk being <a href="https://www.cga.ct.gov/PS98/rpt%5Colr%5Chtm/98-R-0916.htm">disciplined</a> for professional misconduct if they do so. For these reasons, <a href="https://www.library.ca.gov/Content/pdf/crb/reports/FrivolousActionFilingsReport.pdf">frivolous lawsuits are rare</a> and highly unlikely in the context of COVID-19 transmission claims against businesses.</p>
<h2>Exaggerated fears</h2>
<p>The best available data does not support dire warnings about excessive litigation. As of Dec. 7, <a href="https://www.huntonak.com/en/covid-19-tracker.html">6,571 civil lawsuits have been filed</a> related to COVID-19. Only 37 of these are personal injury claims by business patrons for COVID-19 exposure, and an additional 116 are claims by employees against companies for inadequate protection from infection in the workplace, personal injury or wrongful death.</p>
<p>Most of the claims involved other issues, such as 1,372 insurance disputes over business losses and 1,184 claims for alleged civil rights violations.</p>
<p>If there is any reason to fear excessive litigation, these numbers suggest that the real threat is from lawsuits filed by business owners against their insurance companies and individuals protesting public health measures designed to prevent another economic shutdown – not from personal injury claims. </p>
<p>Even for business owners who fail to take reasonable precautions, the prospect of a personal injury claim is still remote.</p>
<p>To successfully sue a business for COVID-19 transmission, a patron would have to prove that he or she contracted COVID-19 from the business and not from some other source. However, most people infected with COVID-19 currently have no reliable way of <a href="https://www.eff.org/deeplinks/2020/04/challenge-proximity-apps-covid-19-contact-tracing">identifying the source</a> of their infection. The <a href="https://annals.org/aim/fullarticle/2762808/incubation-period-coronavirus-disease-2019-covid-19-from-publicly-reported">gap of three to 11 days</a> between infection and illness, the difficulty of <a href="https://news.fiu.edu/2020/tracking-the-path-of-an-outbreak">recalling all of one’s contacts</a> during that interval and <a href="https://www.nytimes.com/2020/04/06/opinion/coronavirus-testing.html">limited testing</a> for the virus present formidable obstacles to establishing causation.</p>
<p>Moreover, a business would not be liable to patrons who knowingly and voluntarily assumed the risk of infection. Patrons of crowded stores or businesses where many customers and employees are not wearing masks, for example, would not have viable legal claims even if they can prove carelessness and causation.</p>
<p>As for claims by employees against careless businesses, most of these will be covered by <a href="https://www.forbes.com/sites/aaroncolby/2020/05/13/the-workplace-and-covid-19-workers-compensation-to-the-rescue/#7dcf4bcb6295">workers’ compensation</a>, which precludes employees from filing negligence claims for workplace injuries.</p>
<p>[<em>The Conversation’s science, health and technology editors pick their favorite stories.</em> <a href="https://theconversation.com/us/newsletters/science-editors-picks-71/?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=science-favorite">Weekly on Wednesdays</a>.]</p>
<h2>Sending a strong signal</h2>
<p>Because of these considerable challenges, viable legal claims related to COVID-19 are likely to be extremely rare. </p>
<p>Yet even a small number of personal injury lawsuits act as a nudge, encouraging the entire business community to adopt reasonable precautions. This is one of the lessons of civil litigation arising out of foodborne illness outbreaks.</p>
<p>As I document in my 2019 book, “<a href="https://press.uchicago.edu/ucp/books/book/chicago/O/bo35855002.html">Outbreak: Foodborne Illness and the Struggle for Food Safety</a>,” a handful of high-profile lawsuits against food companies have encouraged businesses at every link along the supply chain to improve their safety practices. That’s what happened after lawsuits against <a href="https://www.foodsafetynews.com/2017/12/jack-in-the-box-e-coli-outbreak-25th-anniversary/">Jack in the Box</a> over contaminated hamburgers in 1993 and <a href="https://www.foodsafetynews.com/2009/09/meaningful-outbreak-7-dole-spinach-e-coli-outbreak/">Dole</a> over <em>E. coli</em> in baby spinach in 2006.</p>
<p>Similarly, the prospect of liability for COVID-19 transmission is likely to encourage business owners to invest in cost-effective precautions, follow the advice of public health authorities, adopt industry safety standards and use common sense.</p>
<p>I believe shielding business owners from this liability is one kind of immunity that will not help end the current crisis.</p>
<p><em>This is an updated version of an <a href="https://theconversation.com/business-liability-shield-is-holding-up-another-coronavirus-bailout-a-legal-scholar-explains-why-immunity-is-unnecessary-and-even-harmful-145611">article most recently published</a> on Sept. 8, 2020.</em></p><img src="https://counter.theconversation.com/content/151823/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Timothy D. Lytton is a member of the American Association for Justice.</span></em></p>Congress and the White House are trying to wrap up negotiations on a nearly $1 trillion coronavirus bailout, but Senate Republican demands for a liability shield has been a key obstacle.Timothy D. Lytton, Distinguished University Professor & Professor of Law, Georgia State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1374722020-05-27T13:48:29Z2020-05-27T13:48:29ZGreen bailouts: relying on carbon offsetting will let polluting airlines off the hook<figure><img src="https://images.theconversation.com/files/337949/original/file-20200527-20215-8iv9h9.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C3992%2C2992&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://unsplash.com/photos/D59013q1Um4">Dan Meyers/Unsplash</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>The coronavirus pandemic has grounded thousands of aircraft, contributing to the <a href="https://www.theguardian.com/environment/2020/may/19/lockdowns-trigger-dramatic-fall-global-carbon-emissions">largest-ever annual fall in CO₂ emissions</a>. At some point though, the planes will soar again and with them, global emissions.</p>
<p>Most airlines in the UK have committed to achieving <a href="https://www.sustainableaviation.co.uk/wp-content/uploads/2020/02/SustainableAviation_CarbonLeaflet_20200129.pdf">net zero carbon emissions by 2050</a>. From 2026, it will become mandatory for airlines worldwide to ensure that <a href="https://www.icao.int/environmental-protection/Pages/A39_CORSIA_FAQ2.aspx">their annual emissions</a> stay flat. But the UK aviation industry also plans to <a href="https://www.theguardian.com/business/2020/feb/04/uk-air-industry-sets-zero-carbon-target-despite-70-more-flights">increase the number of passengers it serves by 70%</a> in the next three decades.</p>
<p>To pull this off, airlines will be planning to fly planes at or near full passenger capacity and use cleaner burning fuels. But the rest of the emissions airlines hope to cut – between one-third and half of the total – are expected to come from <a href="https://www.sustainableaviation.co.uk/wp-content/uploads/2020/02/SustainableAviation_CarbonLeaflet_20200129.pdf">market-based measures</a>, such as carbon offsetting and emissions trading. </p>
<p>You’ve probably encountered an option to offset your carbon footprint when buying a flight. The payment page of Ryanair’s website suggested a “carbon offset contribution” of £2 for a return flight from Gatwick to Alicante. <a href="https://theconversation.com/why-airline-bailouts-are-so-unpopular-with-economists-137372">Airlines seeking government bailouts</a> are likely to use carbon offsetting and emissions trading to show they’re serious about putting their emissions on a downward trajectory. But what do they involve and are they really a solution to climate change? </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/336997/original/file-20200522-124840-1qas24c.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/336997/original/file-20200522-124840-1qas24c.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/336997/original/file-20200522-124840-1qas24c.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=244&fit=crop&dpr=1 600w, https://images.theconversation.com/files/336997/original/file-20200522-124840-1qas24c.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=244&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/336997/original/file-20200522-124840-1qas24c.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=244&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/336997/original/file-20200522-124840-1qas24c.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=306&fit=crop&dpr=1 754w, https://images.theconversation.com/files/336997/original/file-20200522-124840-1qas24c.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=306&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/336997/original/file-20200522-124840-1qas24c.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=306&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Tick this box and all your carbon sins will be forgiven.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/stoweboyd/1469456837/in/photolist-3eRmjH-eMPDB9-ceV8do-ceV8H9-3vkiDp-8YkrtQ-LKh7H-59BuXW-tJMJzL-5fwiRo-5jx4F6-5QDWAz-575MBS-5iutK6-53qkut-77Wqba-bpXWK4-8c6Mna-9XiR4p-9XmEJ9-7X6BBh-858mMs-7fCXr7-2hthWEi-uUfxN5-5JRFqN-5L57Pf-ud1r3q-2gxxtJc-2eoQVoH-4iWPJ5-8iNFe9-2eAH8Tf-fyB5JC-6d3YK2-7e3pSP-2h1TfAv-8PnmQ9-cegdfG-22pqecU-ceV58w-59njvL-wbdDxQ-9GbQPC-6d3YPF-48B6X3-apX3zY-9LS1XC-7YbYsa-2kq32V">Stowe Boyd/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>Avoiding upsets with offsets</h2>
<p>The idea of offsets is to cancel out your own emissions by reducing equivalent emissions elsewhere. This could be by purchasing carbon credits from an <a href="https://www.theguardian.com/environment/2011/jul/05/what-is-emissions-trading">emissions trading scheme</a>, where one credit typically equals one metric tonne of CO₂. When a carbon credit is “retired” – essentially ripped up – it saves one tonne of CO₂ from being emitted by the countries or companies that sell them. </p>
<p>Alternatively, you can invest in offsetting schemes – called clean development mechanisms – which aim to reduce future emissions in developing countries by providing greener cooking stoves, for example. There are also carbon removal schemes which aim to actively absorb carbon by planting trees, or developing technologies that can absorb carbon from the air.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-airline-bailouts-are-so-unpopular-with-economists-137372">Why airline bailouts are so unpopular with economists</a>
</strong>
</em>
</p>
<hr>
<p>Only a decade ago, carbon offsetting was largely voluntary and schemes were unverified and unregulated. Broken promises and schemes causing <a href="https://www.telegraph.co.uk/science/2019/08/20/carbon-offsetting-may-increase-pollution-experts-warn-rich-cant/">more harm than good</a> abounded. Today, there are several trustworthy schemes that can verify the work of offsetting projects, such as the <a href="https://verra.org/project/vcs-program/">Verified Carbon Standard</a>. As the popularity of offsetting schemes increases, regulation continues to improve. Even the Intergovernmental Panel on Climate Change trusts carbon offsetting to ensure its meetings – which involve delegates flying from around the world – are <a href="https://www.ipcc.ch/2018/06/15/ipcc-meetings-go-carbon-neutral/">carbon neutral</a>.</p>
<p>But whether these schemes actually make sufficiently deep carbon cuts over an effective timescale to actually slow climate change is another matter. With tree planting, it can take a long time for newly planted trees to start storing carbon, and it’s difficult to accurately predict how much carbon each tree will put away during its lifetime. That carbon is easily re-released during forest fires or as a result of deforestation.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/337957/original/file-20200527-20229-u4lup3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/337957/original/file-20200527-20229-u4lup3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/337957/original/file-20200527-20229-u4lup3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/337957/original/file-20200527-20229-u4lup3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/337957/original/file-20200527-20229-u4lup3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/337957/original/file-20200527-20229-u4lup3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/337957/original/file-20200527-20229-u4lup3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Tree planting isn’t the panacea for climate change many would like it to be.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/tree-planting-uganda-close-many-small-756780151">Dennis Wegewijs/Shutterstock</a></span>
</figcaption>
</figure>
<p>Carbon credit trading and carbon offsetting schemes can support projects which reduce emissions and remove carbon from the atmosphere if they’re sufficiently ambitious – and they should be going ahead anyway, without their benefits being cancelled out by businesses using these schemes to continue polluting. For example, a tax on airlines and customers could fund offsetting projects that aim to cut at least double the units of carbon emitted per flight, with frequent flyers being taxed more heavily.</p>
<p>But sustainability targets for airlines need to be based on real emissions cuts at their source. That would mean drastically reducing the number of flights each year, especially those with reasonable travel alternatives such as rail. As a condition for any post-COVID-19 bailout, airlines should invest heavily in the research and development of technologies that can make flights carbon-neutral, such as <a href="https://www.theguardian.com/world/2020/may/27/worlds-largest-all-electric-aircraft-set-for-first-flight?CMP=share_btn_tw">electric engines and batteries</a>. The marketing of rescued airlines should also be honest with customers about the climate impact of their flight.</p>
<p>Aviation will need to change drastically to shrink its contribution to climate change. As governments consider state aid for flagging airlines, they have a rare opportunity to enforce lasting changes. But if offsetting is earmarked as the principal way for them to reach net zero emissions – with no reduction in the number of flights or control over how airlines invest their revenue, these efforts could become little more than greenwashing. When it comes to meaningful action on aviation emissions, now is the time to get our heads out of the clouds.</p>
<hr>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/263883/original/file-20190314-28475-1mzxjur.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/263883/original/file-20190314-28475-1mzxjur.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=140&fit=crop&dpr=1 600w, https://images.theconversation.com/files/263883/original/file-20190314-28475-1mzxjur.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=140&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/263883/original/file-20190314-28475-1mzxjur.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=140&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/263883/original/file-20190314-28475-1mzxjur.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=176&fit=crop&dpr=1 754w, https://images.theconversation.com/files/263883/original/file-20190314-28475-1mzxjur.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=176&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/263883/original/file-20190314-28475-1mzxjur.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=176&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p><em><a href="https://theconversation.com/imagine-newsletter-researchers-think-of-a-world-with-climate-action-113443?utm_source=TCUK&utm_medium=linkback&utm_campaign=TCUKengagement&utm_content=Imagineheader1137472">Click here to subscribe to our climate action newsletter. Climate change is inevitable. Our response to it isn’t.</a></em></p><img src="https://counter.theconversation.com/content/137472/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ben Christopher Howard does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Carbon offsetting is better regulated than it once was, but it’s no solution to the climate crisis.Ben Christopher Howard, Doctoral Researcher in Nature-based Solutions, University of BirminghamLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1378512020-05-06T12:54:16Z2020-05-06T12:54:16ZWhy April was Wall Street’s best month in decades – despite dismal mainstreet news<figure><img src="https://images.theconversation.com/files/332719/original/file-20200505-83725-6t24hs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">It's a bull market – for now.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-illustration/bull-market-artwork-icon-business-concept-1029670141">Shutterstock</a></span></figcaption></figure><p>At times the contrast between the real economy and the stock market is striking. For US stocks, April was their <a href="https://www.nytimes.com/2020/04/30/business/stock-market-today-coronavirus.html">best month since 1987</a>, while at the same time real economic indicators – such as employment, manufacturing, services, trade, commodities and GDP – tanked. It seems that in April, the stock market caught the tail end of spring break spirit. </p>
<p>Some suggest this shows investor sentiment is free of any anchor in the real economy. Either this or rampant speculative flows “buying the bottom” have become a self-fulfilling force. I argue that market sentiment in April was informed by twin-howitzer policy deployments of overriding force and clarity, but which are ultimately of finite holding power. </p>
<p>During economic contractions, stock prices generally react negatively to unanticipated increases in unemployment. Research shows that a rise in unemployment portends <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261.2005.00742.x">reduced earnings and dividend growth</a> for companies. This relationship is especially strong during economic contractions. So when unemployment increases unexpectedly, stock prices fall – usually.</p>
<p>Yet the big step-change increase in initial jobless claims <a href="https://theconversation.com/economic-effects-of-coronavirus-lockdowns-are-staggering-but-health-recovery-must-be-prioritised-135341">in the week ending March 21</a> coincided with an extraordinary sequence of dramatic response measures by the US central bank, the Federal Reserve. The stock market’s bounce began on the following Monday and continued throughout April, despite mounting unemployment-insurance claims, which have now crossed the <a href="https://fred.stlouisfed.org/series/ICSA">30 million mark</a>.</p>
<p>One particularly cynical reason for this is that furloughed and laid-off employees relieve businesses of costs. Of course, the wider economy is deprived of their spending as well. But from the third week of March, the trajectories for unemployment and spending were firmly set and known to market participants. </p>
<p>From that time onward, the subsequent rise of unemployment and the associated fall in spending were no longer “unanticipated”. The cascade of furloughs and lay-offs were <a href="https://www.ft.com/content/c12a0bf6-f6d4-48ff-990b-13bc9bae4679">predictable</a> and so this information was built into both sentiment and stock prices at the time. Hence, the weeks of increasingly dire real-economy figures didn’t move the market in a big way. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/332696/original/file-20200505-83745-1aafjuj.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/332696/original/file-20200505-83745-1aafjuj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/332696/original/file-20200505-83745-1aafjuj.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=311&fit=crop&dpr=1 600w, https://images.theconversation.com/files/332696/original/file-20200505-83745-1aafjuj.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=311&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/332696/original/file-20200505-83745-1aafjuj.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=311&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/332696/original/file-20200505-83745-1aafjuj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=391&fit=crop&dpr=1 754w, https://images.theconversation.com/files/332696/original/file-20200505-83745-1aafjuj.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=391&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/332696/original/file-20200505-83745-1aafjuj.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=391&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Jobless claims tracked with the S&P 500 stock index.</span>
<span class="attribution"><span class="source">Kim Kaivanto</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<h2>Government intervention</h2>
<p>But the more important factor for this month-long rise of the US stock market in the face of consistently dismal real-economy news was the unprecedentedly large, double-barrelled federal response – of financial-sector liquidity programmes and real-sector stimulus programmes – which was also emulated by governments around the world. </p>
<p>The US Federal Reserve’s <a href="https://uk.reuters.com/article/us-usa-fed-repo/fed-provides-massive-liquidity-injection-to-calm-markets-amid-signs-of-stress-idUKKBN20Z31H">extraordinary policy measures</a> – and subsequently the nearly <a href="https://www.marketwatch.com/story/the-us-treasury-plans-to-borrow-a-record-3-trillion-in-the-second-quarter-to-fight-coronavirusmore-than-twice-what-it-borrowed-in-all-of-fiscal-2019-2020-05-04">US$3 trillion authorised by the US Congress</a> in the form of the CARES Act – provides firms and markets with emergency liquidity support to stave off an avalanche of defaults. Despite curtailed consumer and business spending, these government programmes offer businesses a means of avoiding immediate defaults – hopefully until the lockdown policies can be lifted. Think of this as an emergency transfusion and cauterisation of the wound. </p>
<p>The economic historian Niall Ferguson <a href="https://finance.yahoo.com/news/market-signals-distorted-coronavirus-stimulus-says-author-niall-ferguson-210117471.html">has suggested</a> that the sheer scale of this state intervention is distorting the signals we are getting from the financial markets. But the breadth and scale of the intervention has an effect of its own, which is just as important as the support itself. It sends a credible signal that under the Trump administration, business will get all the support it needs to weather this pandemic. The US president sees buoyant markets as the <a href="https://uk.reuters.com/article/uk-usa-trump-speech-stocks-analysis/trump-touts-stock-markets-record-run-but-who-benefits-idUKKBN1ZZ1AT">key to his re-election</a>, and he is dedicated to using all means at his disposal to that end.</p>
<h2>Long-term debt issues</h2>
<p>Buried in the weeds of this global crisis, seeds of destruction are sprouting. Much of the <a href="https://www.shearman.com/perspectives/2020/03/congress-passes-largest-ever-economic-stimulus-package-key-provisions-of-cares-act-covid-19">CARES Act</a> emergency support for business consists of lending programmes. Of this, the US <a href="https://www.shearman.com/perspectives/2020/03/congress-passes-largest-ever-economic-stimulus-package-key-provisions-of-cares-act-covid-19">treasury received US$500 billion</a> to support hard-hit big businesses like airlines, as well as states and cities – with loans, loan guarantees, and other investments. </p>
<p>But already in the autumn of 2019, the debt burden of US corporates <a href="https://markets.businessinsider.com/news/stocks/us-corporate-debt-10-trillion-record-percentage-economy-expert-warnings-2019-12-1028731031">approached a whopping US$10 trillion</a>. As a ratio of GDP, the debt of nonfinancial firms in the US is at an <a href="https://www.jpmorgan.com/country/US/en/research/cares-act">all-time high</a>. Some calculations place the proportion of “zombie firms” – companies whose earnings are so low that they must issue new debt just to cover the interest-payment obligations on their existing debt – <a href="https://ruchirsharma.com/wp-content/uploads/2020/04/12_Sharma-FA-Comeback.pdf">at 16% among US public companies</a>. Not only is lockdown pushing this figure higher, but so are the very loan programmes which were created to serve as emergency lifelines.</p>
<p>For large firms, refinancing continues to be viable, albeit with shortened maturities. <a href="https://www.ft.com/content/0aad151d-4ae5-4e24-996c-92c6aeb4fad5">Stress-test analysis</a> of S&P 500 firms reveals a shift: fewer strong firms and more weak and vulnerable ones. So even with further top-ups to CARES Act programmes, the eventual recovery is likely to be subdued, at least until an effective COVID-19 vaccine becomes widely available.</p><img src="https://counter.theconversation.com/content/137851/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kim Kaivanto does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The contrast between the real economy and the stock market is striking. How long will it last?Kim Kaivanto, Senior Lecturer in Economics, Lancaster UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1373722020-05-06T09:52:40Z2020-05-06T09:52:40ZWhy airline bailouts are so unpopular with economists<figure><img src="https://images.theconversation.com/files/332161/original/file-20200503-42929-1ywc4ph.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Tatyana Belyakova / shutterstock</span></span></figcaption></figure><p>For airlines, the reckoning is no longer far away on the horizon. It’s now a jumbo jet meters from the runway, landing gear down. Without a sizeable external cash injection, many international airlines will follow <a href="https://theconversation.com/voluntary-administration-isnt-a-death-sentence-for-virgin-australia-or-for-competition-136832">Virgin Australia</a> into insolvency within months, if not weeks. </p>
<p>Should governments bail airlines out? And if so, should any conditions be imposed, particularly in a world that requires <a href="http://www3.weforum.org/docs/WEF_The_Net_Zero_Challenge.pdf">rapid progress to net-zero emissions</a>? </p>
<p>The uncertainty of COVID-19 and a pancession (pandemic-induced recession) of unknown duration, has meant the <a href="https://www.bloomberg.com/news/articles/2020-03-26/the-airlines-most-in-danger-as-virus-inflicts-252-billion-blow">short-term bankruptcy risk</a> for many airlines is at an all-time high. It is becoming increasingly difficult for <a href="https://www.dailymail.co.uk/news/article-8236395/Richard-Branson-warns-Virgin-Atlantic-collapse-without-500m-taxpayer-funded-bailout.html">airlines</a> and <a href="https://www.reuters.com/article/health-coronavirus-boeing-debt/boeing-cfo-says-markets-essentially-closed-to-new-debt-idUSL1N2BH1MU">aerospace</a> players to source finance through traditional private debt and equity pathways. But underlying this are some salient truths. Many countries see mobility, airline jobs and a competitive aerospace sector as non-negotiables – and will do all they can to prevent the loss of a major airline.</p>
<p>However, airline bailouts are an inefficient use of taxpayer money at a time when fiscal recovery (stimulus) spending is sorely needed. </p>
<p>We recently surveyed 231 leading economists (from 53 countries) including senior finance ministry and central bank officials, for a new <a href="https://www.smithschool.ox.ac.uk/publications/wpapers/workingpaper20-02.pdf">Oxford Review of Economic Policy paper</a>, and asked them about 25 different stimulus policies. We found that airline bailouts have the lowest perceived economic payoff and the lowest overall desirability. Conceivably these policymakers were put off by the industry’s carbon emissions and perceptions of history repeating itself. In this vein, governments want to <a href="https://www.theaustralian.com.au/subscribe/news/1/?sourceCode=TAWEB_WRE170_a_GGL&dest=https%3A%2F%2Fwww.theaustralian.com.au%2Fnation%2Failing-virgins-crash-landing-as-plea-for-100m-rejected%2Fnews-story%2Fcc010ed3b1fec433a831e37838f9f601&memtype=anonymous&mode=premium">avoid setting a precedent</a> for future crises – that is, they hope to encourage responsible behaviour by the industry. Any airline bailout clearly should require a quid pro quo.</p>
<h2>Making bailouts sustainable</h2>
<p>The solution is simple: any airline bailout should include conditions that the airline reach net-zero carbon emissions by 2050, with interim targets and a plan to deliver. If airlines fail to meet these conditions, or any number of intermediate climate-related targets, bailout funding would be converted to equity so that the taxpayer could own a stake.</p>
<p>In this way, airline executives and shareholders would have strong financial incentives to meet carbon reduction targets, governments would improve their progress to meeting international climate commitments, and the world would benefit from slowed global warming.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/332739/original/file-20200505-83736-16jf5vz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/332739/original/file-20200505-83736-16jf5vz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/332739/original/file-20200505-83736-16jf5vz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/332739/original/file-20200505-83736-16jf5vz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/332739/original/file-20200505-83736-16jf5vz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/332739/original/file-20200505-83736-16jf5vz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/332739/original/file-20200505-83736-16jf5vz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Time to phase out the high-carbon jet fuel?</span>
<span class="attribution"><span class="source">Jaromir Chalabala / shutterstock</span></span>
</figcaption>
</figure>
<p>Green bailout conditions should allow for strong ambitions – such as airlines reaching <a href="https://standbynordic.com/norway-30-of-fuel-sustainable-by-2030/">30% sustainable fuel use</a> by 2030 – without prescribing solutions. Governments must empower airlines to develop their own pathways for carbon reduction, providing the freedom to business to determine the most cost-effective decarbonisation choices.</p>
<p>Even airlines which are not bailed out need to do better on sustainability. The current global agreement, <a href="https://www.icao.int/environmental-protection/CORSIA/Pages/default.aspx">CORSIA</a>, the Carbon Offsetting and Reduction Scheme for International Aviation, requires airlines to offset all growth in emissions from 2020 onwards. This is a good start, but it is far from enough to reach net zero in three decades time. </p>
<p>Yet, as a result of the <a href="https://go.updates.iata.org/webmail/123902/1132265093/0f71e0a5afb5eda4c820a327d343e19139c83ac83cbba4afa4ed25e5e8177474">huge reduction</a> in air travel, the global airlines trade association, IATA, has implied that the climate emergency should be deprioritised to allow for COVID-19 recovery, citing “<a href="https://www.eraa.org/system/files/corsia_covid_position_paper_on_baseline_25_march_2020.pdf">inappropriate economic burden</a>”. Maybe a realistic compromise would be to cut the airlines some slack in the short term, perhaps using the average of 2017-2020 emissions as the baseline (rather than 2020 alone) – the extra two years would reduce the effect of the crisis. </p>
<p>However, we can and should ask much more of the industry in the medium and long term – nothing less than a collective net zero target is required.</p>
<h2>Achieving net zero</h2>
<p>The concept of net zero aviation is not far-fetched. <a href="https://www.qantasnewsroom.com.au/media-releases/qantas-group-to-slash-carbon-emissions/">Qantas</a>, <a href="https://www.iairgroup.com/en/sustainability/flightpath-net-zero">IAG</a> and <a href="https://www.etihad.com/en-gb/news/etihad-targets-zero-net-carbon-emissions-by-2050-in-expanded-commitment-to-environmental-sustainability">Etihad</a> have already committed to reaching it by 2050 while <a href="https://company.finnair.com/en/sustainability/co2-reduction">Finnair</a> believes it can do it by 2045. How? Through alternative power, efficiency opportunities and direct carbon offsets. </p>
<p>Jet fuel and aviation gas have almost-exclusively powered jet turbine and propeller planes since the second world war. Biofuels were first <a href="https://www.airbus.com/newsroom/press-releases/en/2011/07/world-s-first-scheduled-passenger-biofuel-flights-commence.html">approved for commercial airliner use</a> in <a href="https://www.astm.org/Standards/D7566.htm">2011</a> and though they remain much more expensive, production efficiencies are <a href="https://www.irena.org/documentdownloads/publications/irena_biofuels_for_aviation_2017.pdf">reducing</a> prices, as might emerging <a href="https://www.energy.gov/eere/bioenergy/algal-biofuels">algae</a> and <a href="https://theconversation.com/jet-fuel-from-sugarcane-its-not-a-flight-of-fancy-84493">sugarcane</a>-based technologies. </p>
<p>Battery-powered flight is no longer science fiction. In 2019, the <a href="https://www.telegraph.co.uk/technology/2019/06/21/worlds-first-electric-plane-can-travel-650-miles-battery-power/">world’s first fully electric commercial plane</a> was unveiled at the Paris Air Show. Projections suggest that such aircraft could become <a href="https://www.iata.org/contentassets/8d19e716636a47c184e7221c77563c93/technology20roadmap20to20205020no20foreword.pdf">a staple of short-range travel by 2035</a>.</p>
<p>New zero-carbon fuels hold great promise. Both hydrogen and ammonia can be <a href="https://www.sciencemag.org/news/2018/07/ammonia-renewable-fuel-made-sun-air-and-water-could-power-globe-without-carbon">produced efficiently</a> from air, water and renewable energy. Synthetic kerosene (made from renewable hydrogen and CO2 captured from the air) is another route that <a href="https://www.greenaironline.com/news.php?viewStory=2665">is being explored</a>. All of these rely upon renewable energy, which is getting cheaper every year.</p>
<p>There are other options. More <a href="https://www.cio.com/article/3493085/qantas-cloud-based-flight-sim-saving-millions-in-fuel.html">efficient flight planning</a> and plane design can help. Reduced airport taxiing, idling and longer runways could help too, offering significant reductions in cost and carbon emissions. Lighter materials and more efficient spacing of seats could dramatically reduce fuel consumption for equivalent loads.</p>
<p>Finally, airlines can partner to play a key role in developing more reliable carbon offset markets. As discussed in a <a href="https://www.nature.com/articles/s41586-019-1681-6">recent Nature paper</a>, carbon offsets are not all equal because they store carbon for longer or shorter times. Airlines can hold competitors to account on weak carbon offset standards and lobby for industry-wide carbon audit processes that are conducted through independent review.</p>
<p>The impacts of COVID-19 on aviation are only just beginning to be felt. Governments should use bailouts to encourage innovation and get something for all of us, and the climate, in return.</p><img src="https://counter.theconversation.com/content/137372/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Brian O'Callaghan receives funding from The Rhodes Trust. </span></em></p><p class="fine-print"><em><span>Cameron Hepburn is a Director of Aurora Energy Research Limited and Vivid Economics Limited. He is on the external Advisory Board of Royal Dutch Shell, and the Advisory Panel of the Sarasin Climate Active Fund. He receives funding from UKRI and the Oxford Martin School. </span></em></p>Any bailout should include conditions that the airline reach net-zero carbon emissions by 2050.Brian O'Callaghan, PhD Candidate in Energy Finance, University of OxfordCameron Hepburn, Professor of Environmental Economics, University of OxfordLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1361382020-04-27T12:08:03Z2020-04-27T12:08:03ZCoronavirus bailouts will cost taxpayers hundreds of billions of dollars – unlike past corporate rescues that actually made money for the US Treasury<figure><img src="https://images.theconversation.com/files/330432/original/file-20200424-163122-16ka2t6.jpg?ixlib=rb-1.1.0&rect=0%2C649%2C6979%2C4925&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Fire up the printing presses.</span> <span class="attribution"><span class="source">Nerthuz/Getty Images</span></span></figcaption></figure><p>The U.S. government <a href="https://www.bloomberg.com/news/articles/2020-04-24/congress-braced-for-a-bruising-fight-over-next-virus-relief-bill?srnd=premium&sref=Hjm5biAW">has now pledged almost US$3 trillion</a> to save the economy and Americans from the coronavirus recession. </p>
<p>Most of that is aimed at individual Americans in the form of <a href="https://www.vox.com/future-perfect/2020/3/24/21188470/coronavirus-unemployment-benefits-senate-stimulus">additional unemployment insurance</a> or the so-called <a href="https://www.irs.gov/coronavirus/economic-impact-payments">economic impact checks</a>. About $1.2 trillion – and counting – represent bailouts for American companies, large and small. </p>
<p>And more than 60% of that is in the form of grants or other financial assistance that will likely become grants – funds that will not be recovered by taxpayers. The Congressional Budget Office estimated on April 23 that the company-related coronavirus bailouts, excluding the <a href="https://www.nytimes.com/2020/04/23/us/politics/house-passes-relief-for-small-businesses-and-aid-for-hospitals-and-testing.html">fourth one just signed into law</a>, will <a href="https://www.cbo.gov/system/files/2020-04/hr748.pdf">ultimately cost more than $400 billion</a> over 10 years. Given that most of the latest bailout, worth $484 billion, will most likely end up becoming grants to small businesses as well, the price tag is bound to get a lot higher. </p>
<p>It may not come as a surprise that taxpayers ultimately foot the bill when lawmakers spend their money to bail out a corporate industry – such as <a href="https://www.rasmussenreports.com/public_content/business/federal_bailout/october_2011/60_oppose_financial_bailouts_74_say_wall_street_benefited_most">Wall Street during the Great Recession</a> – or the entire economy today. But this is actually the exception, not the rule. </p>
<p>The truth is, as my research shows, the vast majority of business bailouts passed by Congress over the past half century have either broken even or generated a profit. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/330567/original/file-20200426-163122-19o7xo4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/330567/original/file-20200426-163122-19o7xo4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=479&fit=crop&dpr=1 600w, https://images.theconversation.com/files/330567/original/file-20200426-163122-19o7xo4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=479&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/330567/original/file-20200426-163122-19o7xo4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=479&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/330567/original/file-20200426-163122-19o7xo4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=603&fit=crop&dpr=1 754w, https://images.theconversation.com/files/330567/original/file-20200426-163122-19o7xo4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=603&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/330567/original/file-20200426-163122-19o7xo4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=603&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The U.S. aided Lockheed after the defense contractor struggled to secure financing for its new large luxury jetliner, the L-1011 TriStar.</span>
<span class="attribution"><span class="source">Bettmann/Getty Images</span></span>
</figcaption>
</figure>
<h2>Profitable bailouts</h2>
<p>As part of <a href="https://politics.ucsc.edu/graduate/graduate-student-directory/index.php?uid=swnewsom">my ongoing research</a> on economic policymaking during recessions, I studied 10 corporate bailouts approved by Congress since 1969.</p>
<p>I only looked at bailouts that involved direct assistance – in the forms of loans, guarantees, grants or capital injections – by Congress to a company or industry in financial distress. I excluded the <a href="https://www.investopedia.com/terms/s/sl-crisis.asp">Savings and Loan crisis</a> of the 1980s and 1990s because that was less of a bailout and more of an expensive regulatory wind-down. All of the figures below have been adjusted for inflation. </p>
<p>I found that half of the bailouts made a clear profit for taxpayers. </p>
<p>For example, Lockheed Martin ran into <a href="https://www.nytimes.com/1971/02/02/archives/lockheed-accepts-a-loss-of-200million-on-c5a-lockheed-accepts-a.html">financial difficulties</a> in 1971 because the planes, helicopters and other military equipment it was making for the U.S. Department of Defense cost more than the Pentagon agreed to pay, which led to significant losses and fees. The defense contractor pinned its survival on making money off its <a href="https://www.lockheedmartin.com/en-us/news/features/history/l-1011.html">state-of-the-art TriStar airliner</a> but struggled to secure enough financing to finish the project. </p>
<p>Congress, concerned with the loss of at least 25,000 jobs if Lockheed went bankrupt, provided Lockheed with a lifeline in the form of loan guarantees. That is, it agreed to back a $1.62 billion private loan in exchange for a fee. Although the TriStar was a flop, it was enough to keep Lockheed solvent, and taxpayers earned $198 million. </p>
<p>Similarly, automaker Chrysler <a href="https://www.washingtonpost.com/archive/business/1979/11/04/the-bottom-line-details-of-the-chrysler-bailout/a7175793-ac11-4b4f-bbce-3cfbf620f77c/">found itself in financial peril</a> in late 1979 in part due to its slow reaction to market shifts brought about by the 1970s energy crisis. Consumers wanted more fuel efficient cars; Chrysler made too many gas guzzlers. <a href="https://publishing.cdlib.org/ucpressebooks/view?docId=ft4x0nb2jj&chunk.id=d0e2181&toc.depth=1&toc.id=d0e2181&brand=ucpress">Post-bailout studies</a> suggested the company <a href="https://books.google.com/books/about/Riding_the_Roller_Coaster.html?id=aQhTq18vi7AC">was headed toward insolvency</a>.</p>
<p>The potential loss of 250,000 jobs and the adverse impact on automotive dealers and suppliers spurred Congress to offer Chrysler up to $4.98 billion in loan guarantees. As a precondition for this help, Chrysler, in addition to paying fees on the loans, granted the U.S. government rights to buy 14.4 million company shares at a set price. This arrangement provided taxpayers with $1.03 billion – on $4 billion worth of loans – when the <a href="https://www.nytimes.com/1983/09/13/business/chrysler-top-bids-to-buy-back-stock-rights.html">government sold the shares</a> in 1983.</p>
<p>And more recently, Congress <a href="https://www.bloomberg.com/news/articles/2012-09-14/tallying-the-full-cost-of-the-financial-crisis?sref=Hjm5biAW">pledged trillions of dollars</a> saving the financial system in 2008. For my purposes, I split the aid to companies into four distinct bailouts, three of which made large profits. </p>
<p>One in particular, the <a href="https://ftalphaville.ft.com/2010/09/17/346281/why-does-everyone-hate-tarp/">much-derided</a> <a href="https://www.treasury.gov/initiatives/financial-stability/TARP-Programs/Pages/default.aspx">Troubled Asset Relief Program</a>, was a $854 billion bailout for financial companies. Ultimately, $382 billion was dispersed to Wall Street firms like Citigroup, JPMorgan and AIG in exchange for preferred stock and other compensation. Taxpayers earned $32.5 billion. </p>
<p>A <a href="https://fas.org/sgp/crs/misc/R44525.pdf">separate bailout</a> to Fannie Mae and Freddie Mac was <a href="https://www.bloomberg.com/quicktake/fannie-mae-and-freddie-mac-irbtxzdk">even more lucrative</a>. The U.S. government received preferred stock for the $234 billion invested in the two housing giants. Taxpayers got its money back as well as $123 billion in profits. </p>
<p>There were also two bailouts – for the <a href="https://fas.org/sgp/crs/misc/RS21278.pdf">Farm Credit System</a> in 1987 and the <a href="https://www.congress.gov/106/plaws/publ51/PLAW-106publ51.pdf">Steel and Oil and Gas industries</a> in 1999 that likely made money, but I was unable to find all the details necessary to do the full analysis. At a minimum, my review suggests both broken even. </p>
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<h2>Losses (mostly) by design</h2>
<p>Three bailouts approved by Congress since 1969 cost taxpayers’ money. In two of the cases, this was by design. </p>
<p>The railroad industry, from 1960 to 1970, <a href="https://www.nytimes.com/1973/02/11/archives/collapse-of-penn-central-reflects-ills-of-railroads-collapse-of.html">saw its total net income cut in half due</a>, in part, to mismanagement, market shifts in transportation from rail to vehicles and poor oversight by regulatory agencies. Its collapse not only ensured a large spike in unemployment, it meant losing a mode of transportation that, at the time, moved 41% of the nation’s goods and shipped U.S. military equipment domestically. </p>
<p>Congress, seeing this industry as vital to U.S. commerce and defense, <a href="https://fas.org/sgp/crs/misc/R46277.pdf">wanted to ensure the railroad industry remained afloat</a>. Beginning in 1970, several ailing railroad companies received $25.3 billion worth of loan guarantees and grants that were never meant to be repaid. Eventually, seven bankrupt rail companies were consolidated into one profit-making corporation on the taxpayers’ dime. </p>
<p>The terrorist attacks on 9/11 <a href="https://link.springer.com/chapter/10.1057/9780230100060_7">shut down the national aviation system</a> for three days and significantly reduced airline traffic for the remainder of 2001. The airline industry, which made up close to 10% of U.S. GDP at the time, was expected to lose $5 billion by the end of 2001. </p>
<p>Congress quickly <a href="https://www.washingtonpost.com/archive/politics/2001/09/22/congress-passes-15-billion-airline-bailout/964da954-32ef-4689-b5e5-cf3ef8f6f982/">provided the industry</a> with $22.1 billion in financial assistance to ensure its stability and viability. A third of this assistance came in the form of grants never meant for repayment as compensation for losses stemming from 9/11 and the three-day shutdown of the national aviation system. The remainder came in the form of loan guarantees that produced a slight profit. </p>
<p>And with extra money left over from the Troubled Asset Relief Program, the <a href="https://www.treasury.gov/initiatives/financial-stability/reports/Documents/2020.03%20March%20Monthly%20Report%20to%20Congress.pdf">U.S. Treasury loaned automakers</a> General Motors and Chrysler and their financing units about $97.2 billion in exchange for the right to purchase stock at a set price. This was in addition to a <a href="https://money.cnn.com/2008/09/29/autos/federal_loans/index.htm?section=money_latest">$30.5 billion loan</a> issued in September 2008 to finance more fuel-efficient cars. While most of the aid actually disbursed was paid back, taxpayers lost $14.9 billion after both companies went bankrupt.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/330569/original/file-20200426-163062-9eygsl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/330569/original/file-20200426-163062-9eygsl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/330569/original/file-20200426-163062-9eygsl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/330569/original/file-20200426-163062-9eygsl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/330569/original/file-20200426-163062-9eygsl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/330569/original/file-20200426-163062-9eygsl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/330569/original/file-20200426-163062-9eygsl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Chrysler’s second bailout wasn’t as successful as its first.</span>
<span class="attribution"><span class="source">Joe Raedle/Getty Images</span></span>
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<h2>Coronavirus bailouts</h2>
<p>Like the bailouts for the railroad and airline industries, a large chunk of the coronavirus aid is never meant to be paid back. </p>
<p>As long as small businesses keep workers on their payrolls, they won’t have to pay back the <a href="https://www.marketwatch.com/story/house-set-to-pass-bill-that-replenishes-coronavirus-aid-program-for-small-businesses-2020-04-23">$659 billion in total assistance</a> under the payroll protection program. </p>
<p>The <a href="https://fortune.com/2020/04/19/airlines-coronavirus-travel-industry-bailout/">airline industry has received $61 billion</a> in financial assistance from Congress, including a little more than half in grants. Small passenger airlines, the bulk of applicants, will not repay this assistance, while large airlines are expected to. </p>
<p>Congress also authorized Treasury Secretary Steven Mnuchin to provide distressed corporations and state and local governments <a href="https://www.schiffhardin.com/insights/publications/2020/cares-act-500-billion-economic-stabilization-fund-for-severely-distressed-businesses">with up to $454 billion in loans</a> and $17 billion for public companies <a href="https://www.bloomberg.com/news/articles/2020-04-24/mnuchin-asks-for-equity-stakes-in-exchange-for-17-billion-aid">deemed critical to national security</a>. Taxpayers will get interest and possibly equity stakes in some cases. </p>
<p>At the end of the day, Congress knows that when literally tens of millions of jobs, millions of small businesses and dozens of vital industries are at stake, you don’t haggle over the details. You just rescue them.</p>
<p>[<em>You need to understand the coronavirus pandemic, and we can help.</em> <a href="https://theconversation.com/us/newsletters?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=upper-coronavirus-help">Read The Conversation’s newsletter</a>.]</p><img src="https://counter.theconversation.com/content/136138/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Scott Newsome does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Seven of the past 10 business bailouts since 1969 have either broke even, or more frequently, ended up making a tidy profit for taxpayers.Scott Newsome, Ph.D. candidate in Politics, University of California, Santa CruzLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1353652020-04-21T15:01:27Z2020-04-21T15:01:27ZWhat future do airlines have? Three experts discuss<p>Airlines face an unprecedented international crisis in the wake of the coronavirus pandemic. The International Air Transport Association (IATA) estimates that the global industry will lose <a href="https://www.iata.org/en/iata-repository/publications/economic-reports/covid-19-delivers-unprecedented-shock/">US$252 billion</a> in 2020. Many airlines are cutting up to <a href="https://www.forbes.com/sites/geoffwhitmore/2020/04/11/what-airline-routes-are-still-active/#3a04d26c2794">90%</a> of their flight capacity. On March 1, more than two million people in the US were flying per day. A month on, <a href="https://www.tsa.gov/coronavirus/passenger-throughput">fewer than 100,000</a> people are going through airport security daily. </p>
<p>Some climate activists have welcomed the emptied skies, pointing to the <a href="https://www.energylivenews.com/2020/04/06/coronavirus-could-see-38-drop-in-airline-co2-emissions/">dramatic fall</a> in <a href="https://www.theguardian.com/environment/2020/apr/12/global-carbon-emisions-could-fall-by-record-25bn-tonnes-in-2020">carbon emissions</a>. But <a href="https://www.nationalgeographic.co.uk/environment-and-conservation/2020/04/carbon-emissions-are-falling-sharply-due-coronavirus-not-long">others worry</a> that the bounce back and attempts to take back some of the losses might mean that an opportunity for fundamental, sustained change <a href="https://www.airport-technology.com/news/sustainable-aviation-2050-goal">may be missed</a>. </p>
<p>In the US, a federal government <a href="https://www.businessinsider.com/american-airlines-delta-united-jetblue-reach-agreement-on-coronavirus-bailout-2020-4?r=US&IR=T">US$50 billion</a> bailout fund – part of which will fund cash grants going towards airline workers, and the other part loans for the airlines themselves – was rolled out piecemeal in March, with <a href="https://www.nytimes.com/2020/04/14/business/coronavirus-airlines-bailout-treasury-department.html">revisions announced</a> on April 14.</p>
<p>More than 200 airlines applied. American Airlines will get US$5.8 billion, Delta US$5.4 billion, and Southwest US$3.2 billion, among others. Donald Trump, the US president, stated that the airline bailout was needed to return the industry to “good shape” and was “not caused by them.” Another US$4 billion is available for cargo airlines and US$3 for contractors.</p>
<p>In the UK, it was <a href="https://www.theguardian.com/uk-news/2020/mar/24/uk-airlines-and-airports-told-not-to-expect-industry-wide-covid-19-bailout">initially announced</a> that no industry-wide bailout would be offered. Instead, the industry would have to rely on broader aid packages covering 80% of salaries (below a cap) for furloughed employees. But subsequently, the government quickly gave easyJet a <a href="https://www.theguardian.com/business/2020/apr/06/easyjet-secures-600m-coronavirus-loan-from-uk-treasury-and-bank">£600 million</a> loan (US$740 million). Flybe, a smaller regional or “secondary” airline with pre-crisis financial issues, was not bailed out and collapsed. Many money-making routes Flybe ran have since been picked up by others.</p>
<p>Continental Europe is in worse shape. Italy has re-nationalised <a href="https://www.forbes.com/sites/jamesasquith/2020/04/01/could-airlines-be-nationalised-as-italy-takes-full-ownership-of-alitalia-will-more-airlines-follow/#10ad02c377df">Alitalia</a>, forming a <a href="https://onemileatatime.com/alitalia-italian-government/">new state-owned entity</a> and investing €600 million (US$650 million). France has <a href="https://www.bloomberg.com/news/articles/2020-04-08/france-expects-to-give-massive-support-to-air-france-klm">indicated</a> it will do whatever it takes to bailout Air France/KLM (France owns 15% and the Dutch 13%), with a possible €6 billion <a href="https://www.nytimes.com/reuters/2020/04/16/business/16reuters-health-coronavirus-france-airfranceklm.html">bailout package</a> (US$6.5 billion). </p>
<p>Meanwhile, Australia’s Qantas secured a <a href="https://www.airlineratings.com/news/qantas-boosts-liquidity-1-05-billion-loan/">A$1 billion loan</a> (US$660 million). Debt-laden Virgin Australia, meanwhile, was denied a A$1.4 billion loan (US$880 million) and has subsequently plunged into <a href="https://theconversation.com/voluntary-administration-isnt-a-death-sentence-for-virgin-australia-or-for-competition-136832">voluntary administration</a>. Singapore Airlines, however, got a <a href="https://economictimes.indiatimes.com/news/international/business/singapore-airlines-obtains-13-billion-rescue-package-amid-coronavirus-shock/articleshow/74854750.cms">US$13 billion</a> aid package.</p>
<p>The airline industry has faced many crises before – 9/11 and the 2010 Icelandic volcano eruption, for example. But these pale in comparison to the <a href="https://edition.cnn.com/2020/04/07/business/lufthansa-shuts-germanwings-on-coronavirus/index.html">economic hit</a> that airlines are currently facing. Some are asking: <a href="https://www.airfinancejournal.com/articles/3578388/coronavirus-liquidity-report-who-will-be-the-survivors">can it recover</a>? Is this an economic crisis that could reshape how we travel and live? Or will it turn out to be more of a pause, before returning to business as usual? And what role does the climate crisis play in all this – how will sustainability figure in any rebooting of the industry going forward? </p>
<p>We are all experts in the airline industry. Darren Ellis (Lecturer in Air Transport Management) considers these questions first, looking at the industry’s structure and response. Jorge Guira (Associate Professor in Law and Finance) then explores bailout options and likely future scenarios for the industry. Finally, Roger Tyers (Research Fellow in Environmental Sociology) considers how the industry might just be at a turning point in terms of how it tackles climate change.</p>
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<img alt="" src="https://images.theconversation.com/files/288776/original/file-20190820-170910-8bv1s7.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/288776/original/file-20190820-170910-8bv1s7.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/288776/original/file-20190820-170910-8bv1s7.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/288776/original/file-20190820-170910-8bv1s7.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/288776/original/file-20190820-170910-8bv1s7.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/288776/original/file-20190820-170910-8bv1s7.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/288776/original/file-20190820-170910-8bv1s7.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p><strong><em>This article is part of Conversation Insights</em></strong>
<br><em>The Insights team generates <a href="https://theconversation.com/uk/topics/insights-series-71218">long-form journalism</a> derived from interdisciplinary research. The team is working with academics from different backgrounds who have been engaged in projects aimed at tackling societal and scientific challenges.</em> </p>
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<h2>A global problem</h2>
<p><em>Darren Ellis, Lecturer in Air Transport Management</em></p>
<p>Most of the global airline industry is currently grounded. Although some routes are still managing to operate, and there is evidence of a gradual <a href="https://centreforaviation.com/analysis/reports/covid-19-recovery-air-china-files-may-holiday-sched-at-2019-levels-520264">domestic air market rebound</a> in China, 2020 will certainly not see the <a href="https://www.theguardian.com/business/2019/jun/02/airline-industry-cuts-profit-forecasts-fifth-us-china">4.6 billion</a> annual passengers of 2019. The long-term trend of ever-rising air passenger numbers year on year has been brought to a dramatic and rapid halt.</p>
<p>What this means for the global airline industry is vividly on display at airports around the globe as terminals <a href="https://www.independent.co.uk/travel/news-and-advice/airport-runway-closed-flight-coronavirus-atlanta-hartsfield-jackson-a9421881.html">remain empty</a> and aircraft occupy any available parking space. </p>
<p>Like the predominately national response to the virus, so the airline industry is also seeing a wide range of policies and practices tailored and implemented almost exclusively at the national level. This means that some airlines, thanks to well-chosen national policies, will fare better, while others will flounder.</p>
<p>This is because beyond the multilateral single air market of Europe, the global industry remains firmly structured on a bilateral system. This web of country to country <a href="https://www.cambridge.org/core/books/principles-and-practice-of-international-aviation-law/7660D2C7ECDCCD3234E719BD55B3899A">air service agreements</a> (ASAs) is basically made up of trade treaties which governments sign with one another to determine the level of air access each is willing to permit. Even in Europe, the single air market essentially acts as one nation internally, while externally, individual European countries continue to deal with many countries on a bilateral basis. </p>
<p>The bilateral system is based on a bundle of rules and restrictions, including airline ownership (typically, a minimum of 51% of an airline must be owned by people from the country where the airline is based), national control, single airline citizenship and home base requirements. This effectively locks airlines into a single country or jurisdiction. </p>
<p>Despite this structure, global cooperation in aviation is strong, particularly across safety standardisation, but less so on the economic front. A lot of this cooperation happens via the <a href="https://www.icao.int/Pages/default.aspx">International Civil Aviation Organization</a> (ICAO), the industry’s specialised UN agency. Meanwhile, the <a href="https://www.iata.org/">IATA</a> supports and lobbies on behalf of member airlines.</p>
<p>Likewise, international mergers and acquisitions are rare – aside from in Europe, where partial mergers have created dual and multiple brands like <a href="https://www.dw.com/en/france-netherlands-seek-to-douse-air-france-klm-controversy/a-47738444">Air France/KLM</a>. Where single airline brands have been created with cross border mergers – such as LATAM Airlines in South America – national aircraft registration and other restrictions remain in place, thereby reflecting <a href="https://eu.usatoday.com/story/todayinthesky/2015/08/07/so-long-lan-and-tam-airlines--soon-fly-under-latam-brand/31293475/">multiple airlines</a> in these respects. </p>
<p>Consequently, national responses will be front and centre as the industry responds to the current pandemic. In countries where a single flag carrier is based, such as Thailand and Singapore, governments are unlikely to let their airlines fail. While in others, where multiple airlines operate, a <a href="https://australianaviation.com.au/2020/03/virgin-group-asks-for-1-4bn-bailout-reports/">level playing field</a> of assistance and support is more likely, even if outcomes <a href="https://www.smh.com.au/business/companies/virgin-australia-set-for-voluntary-administration-20200420-p54lcd.html">differ widely</a>. This is not to say that all airlines will necessarily survive what is likely to be an extended <a href="https://www.theguardian.com/business/2020/mar/15/prepare-for-the-coronavirus-global-recession">U-shaped crisis</a>, unlike the more V-shaped crises of the past, such as 9/11 and the 2008 global financial crisis.</p>
<p>The national structure of the industry also highlights why major airlines failing is relatively rare. Yes, airlines have merged in domestic air markets like the US, and individual brands have disappeared as a result, but few major airlines have gone out of business because they failed. Even Swissair, which was famously <a href="https://www.nytimes.com/2001/10/02/business/much-of-swissair-seeks-bankruptcy.html">bankrupt</a> and defunct in late 2001, soon reappeared as <a href="https://www.ft.com/content/e1d4e966-fa89-11dc-aa46-000077b07658">Swiss International Airlines</a>. </p>
<p>And so, although airline brands have come and gone, the industry had remained on a growth path for decades. It will take time to recover from the pandemic. Some airlines will fail. But widespread changes to the industry’s structure are unlikely to occur. People will, of course, need and want to travel by air again when this pandemic is over. Which airlines survive – and which go on to thrive – will largely depend on how successful individual countries’ economic support packages turn out to be.</p>
<h2>Bailout essentials</h2>
<p><em>Jorge Guira, Associate Professor in Law and Finance</em></p>
<p>The global outcomes of the crisis, then, are firmly anchored in national responses. The airline industry is cyclical: it is used to peaks and valleys. Bailouts have repeatedly been <a href="https://www.wfw.com/articles/covid-19-aviation-restructuring-report/">vital for airlines</a>, so many countries have some sort of precedent to go by.</p>
<p>In any bailout, the <a href="https://www.airfinancejournal.com/articles/3578388/coronavirus-liquidity-report-who-will-be-the-survivors-?">key question</a> is whether this is a solvency or liquidity crisis. Solvency means that the airline will be very unlikely to ever remain financially viable. Liquidity means that the airline has a high risk of running out of cash flow but should be solvent soon, if supported. Assessing this is sometimes complex. </p>
<p>Cash is king. “Streamlining” – a fancy word for cost cutting – can help. Unencumbered assets such as aeroplanes can be sold, or used as collateral for loans. But many planes are often leased, so this may be problematic. </p>
<p>Existing contracts must be reviewed. Breach of covenants, which are legally binding promises to do (or to refrain from doing) things in a certain way, may need to be waived. For instance, lease agreements for the planes often require flights to carry on, and business as usual is suspended at present. Other agreements require flights to maintain landing spaces in airports – leading to the “<a href="https://www.businessinsider.com/coronavirus-airlines-bailout-empty-flights-requirement-2020-4?r=US&IR=T">ghost planes</a>” many were appalled by earlier on in the crisis, and that still continue.</p>
<p>Certain financial tests may not be met, such as how much debt there is compared to earnings. These can alarm creditors. And this can lead to deterioration in bond credit ratings, reflecting increased financial distress. Other triggers may <a href="https://www.barrons.com/articles/airline-stocks-arent-a-buy-yet-heres-watch-to-watch-for-51584145003">also arise</a>. Defaulting on one financial contract usually requires informing other creditors. This can trigger defaults on other agreements, creating a domino effect.</p>
<p>So renegotiating operating and financial contracts is crucial. Airlines may have to pick and choose who to pay first. Unions must be kept happy, and other stakeholders must focus on recovery.</p>
<p>All this means that state bailouts, help and other guarantees are crucial for the industry to survive. In the US, for example, net operating losses are carried forward and used to shield revenues and offset these from tax for when things return to normal.</p>
<p>If liquidity is the problem, the real issue is time: how long will it take for the airline to get back on its feet and resume flying more normally? If solvency is the problem, the company cannot survive the demand collapse it is facing. The COVID-19 pandemic is such a fraught time for airlines because of the difficulty in predicting when the crisis will end. This can complicate determining whether it is a more temporary liquidity crisis or a deeper solvency concern.</p>
<p>After 9/11, the airline industry completely shut down in the US. People witnessing the horrifying scenes of the Twin Towers’ collapse were hardly eager to board a plane. So, the government chose to step in to restore confidence. And it did so, successfully, by offering aid including loans and used warrants, which involves investing in airlines when the stock is at a reduced or rock bottom price and waiting for it to go up again. The US government’s COVID-19 financial rescue package <a href="https://www.nytimes.com/2020/03/17/business/dealbook/coronavirus-airline-bailouts.html">parallels this approach</a>.</p>
<p>The US approach is noteworthy because of its size and scale, and the fact that it is built on the 9/11 case and has been modified for the unique present circumstances. It is also an interesting counterpoint to the strategy of the strongly free market-oriented UK, and Australia, which has been more restrained in its approach.</p>
<p>Airline norms suggest that 25% of revenues should be kept in case of any emergency, but this <a href="https://www.airfinancejournal.com/articles/3578388/coronavirus-liquidity-report-who-will-be-the-survivors-?">has tended not to happen recently</a>. Corporate earnings have generally not been held for a rainy day, and now that rainy day has arrived. This creates a classic moral hazard problem: many airlines seem to act as if they are too important to fail, because in the end, they believe they will be bailed out. And regulation does not otherwise hold any excesses in check.</p>
<p>Compounding this, some US airlines have recently been accumulating cheap debt, due to low interest rates and lots of credit availability. The five big US carriers, instead of paying off debt, have been spending <a href="https://markets.businessinsider.com/news/stocks/airline-bailout-coronavirus-share-buyback-debate-trump-economy-aoc-2020-3-1029006175">96%</a> of available cash on <a href="https://www.bloomberg.com/news/articles/2020-03-16/u-s-airlines-spent-96-of-free-cash-flow-on-buybacks-chart">stock buybacks</a>. Many <a href="https://www.forbes.com/sites/kathrynjudge/2020/04/15/the-covid-19-bailouts/amp/">question</a> whether airlines should be bailed out in <a href="https://clsbluesky.law.columbia.edu/2020/04/14/large-corporations-did-not-need-a-bailout/amp/">these circumstances</a>. Limits on paying dividends, buyback of stock, and other terms would logically apply here, as in the earlier US bailout measures <a href="https://fortune.com/2020/04/15/airline-bailout-terms-stock-buybacks-dividends-ceo-pay-salaries-american-delta-united-southwest/">announced in March</a>. </p>
<p>While the US case may provide a helpful initial focus, the UK approach is likely to be highly influential, perhaps more so given the reduced resource level – and greater level of climate awareness – there. As Darren pointed out earlier, one model does not fit all but this may offer a useful comparative framework for other approaches that favour national champions or nationalisations. </p>
<p>The UK is reportedly considering partial nationalisation, such as in the case of <a href="https://www.thetimes.co.uk/article/british-airways-faces-bailout-as-coronavirus-crisis-engulfs-airlines-m50j2dvjn">British Airways</a>. British Airways has furloughed 35,000 employees, with many pay packets supported by the government – for now. British Airways appears better placed to cherry pick key routes, assets and companies as it ranks in the top group <a href="https://home.kpmg/xx/en/blogs/home/posts/2020/04/covid-19-and-the-global-aviation-industry.html">for liquidity</a>.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/328656/original/file-20200417-152563-1xzxcox.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/328656/original/file-20200417-152563-1xzxcox.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/328656/original/file-20200417-152563-1xzxcox.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/328656/original/file-20200417-152563-1xzxcox.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/328656/original/file-20200417-152563-1xzxcox.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/328656/original/file-20200417-152563-1xzxcox.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/328656/original/file-20200417-152563-1xzxcox.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">A grounded BA plane.</span>
<span class="attribution"><span class="source">Steve Parsons/PA Wire/PA Images</span></span>
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</figure>
<p>If Virgin Atlantic were to collapse, its size means it may fit in the too important to fail category. It appears that bailout talks are ongoing but Richard Branson’s life as an <a href="https://www.bbc.co.uk/news/business-52354865">offshore UK resident</a>, and Delta’s ownership of a 49% stake, present potential political clouds. Questions about <a href="https://www.twobirds.com/en/news/articles/2020/global/state-aid-and-the-covid-19-pandemic-in-the-aviation-sector">whether it should get state aid</a> given current crisis conditions also arise. This is generally forbidden, although the EU has temporarily indicated a <a href="https://ec.europa.eu/competition/state_aid/what_is_new/covid_19.html">COVID-19 relaxation</a> of the rules. No environmental strings have apparently been attached, as former EU officials and others <a href="https://www.theguardian.com/environment/2020/apr/01/financial-help-for-airlines-should-come-with-strict-climate-conditions">have suggested</a> should be the case.</p>
<p>Overall, the survival of the global industry therefore depends on bailouts, not only to keep airlines afloat but also for the wider travel and leisure ecosystem. </p>
<p>The lack of of sustainability conditions in UK and indeed US bailouts appears to be mirrored globally. But a <a href="https://www.theguardian.com/commentisfree/2019/jun/04/climate-change-world-war-iii-green-new-deal">Green New Deal</a> in a second recovery phase of aid could provide this. And <a href="https://www.vox.com/the-highlight/2019/7/25/8881364/greta-thunberg-climate-change-flying-airline">greater awareness</a> of the issue thanks to the likes of Greta Thunberg, an increased culture of working from home, and ongoing measures to increase accountability and reporting of emissions means this aspect may well play a vital role in the repackaging of airlines going into the future. Much of it begins with how emissions targeting interacts with the COVID-19 crisis.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/coronavirus-how-economic-rescue-plans-can-set-the-global-economy-on-a-path-to-decarbonisation-135909">Coronavirus: how economic rescue plans can set the global economy on a path to decarbonisation</a>
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<h2>Aviation and climate change</h2>
<p><em>Roger Tyers, Research Fellow in Environmental Sociology</em></p>
<p>As Jorge says, for the growing number of people concerned by aviation’s rising carbon emissions, this pandemic may be a rare chance to do things differently. When air travel is eventually unpaused, can we set it on a more sustainable trajectory?</p>
<p>Even before this pandemic hit, aviation faced increasing pressure in the fight against climate change. While other sectors are slowly decarbonising, international aviation is forecast to <a href="https://www.iata.org/en/pressroom/pr/2018-10-24-02/">double</a> passenger numbers by 2037, meaning its share of global emissions may increase tenfold to <a href="https://www.europarl.europa.eu/RegData/etudes/STUD/2015/569964/IPOL_STU(2015)569964_EN.pdf">22% by 2050</a>. </p>
<p>Most flights are taken by a relatively well-off <a href="https://www.vox.com/energy-and-environment/2020/3/20/21184814/climate-change-energy-income-inequality">minority</a>, often for leisure reasons, and of questionable <a href="https://www.dailymail.co.uk/sciencetech/article-7520409/Nearly-HALF-flights-deemed-unimportant-pointless-people-taking-them.html">necessity</a>. We might wonder whether it is wise to devote so much of our remaining carbon “allowance” to aviation over sectors like energy or food which – as we are now being reminded – are fundamental to human life.</p>
<p>Regulators at the UN’s <a href="https://www.icao.int/Pages/default.aspx">ICAO</a> have responded to calls for climate action with their Carbon Offset and Reduction Scheme for International Aviation <a href="https://www.icao.int/environmental-protection/CORSIA/Pages/default.aspx">(CORSIA)</a> scheme. Under this, international aviation can continue to expand, as long as growth above a 2020 baseline is “net-neutral” in terms of emissions.</p>
<p>While critics cite numerous <a href="https://flightfree.co.uk/post/behind-the-veil-what-the-aviation-industry-really-thinks-about-climate-change/">problems</a> with it, the idea is to reduce emissions above the 2020 baseline through a combination of fuel efficiencies, improvements in air traffic management and biofuels. The remaining, huge shortfall in emissions will be covered by large-scale carbon offsetting. Last year, IATA estimated that about <a href="https://www.iata.org/contentassets/fb745460050c48089597a3ef1b9fe7a8/paper-offsetting-for-aviation.pdf">2.5 billion tonnes</a> of offsets will be required by CORSIA between 2021 and 2035.</p>
<p>This plan has been thrown into disarray by the COVID-19 crisis. The emissions baseline for CORSIA was supposed to be calculated based on 2019-20 flight figures. But given that the industry has come to a standstill – demand may take a <a href="https://go.updates.iata.org/webmail/123902/1132265093/0f71e0a5afb5eda4c820a327d343e19139c83ac83cbba4afa4ed25e5e8177474">38%</a> hit in 2020 – that baseline will be much lower than expected. So once flights resume, emissions growth post-2020 will be much higher than anyone predicted. Airlines will need to purchase many more carbon offset credits, raising operating costs and passing these onto customers.</p>
<p>Airlines trying to get back on their feet will be hostile to any such additional burdens, and will probably seek <a href="https://www.edf.org/sites/default/files/documents/Coronavirus_and_CORSIA_analysis.pdf">methods</a> to recalculate the baseline in their favour. But for environmentalists, this might be an opportunity to strengthen CORSIA, which despite its flaws is the only current framework for tackling aviation emissions globally.</p>
<p>Some still consider CORSIA to be an elaborate sideshow. The real game-changer for sustainable aviation would be fuel tax reform, which might receive more scrutiny when attention shifts onto how to repay the eye-watering levels of public debt incurred during lockdown.</p>
<p>Since the 1944 Chicago Convention, which gave birth to ICAO and the modern aviation industry, putting VAT on flight tickets and tax on kerosene jet fuel has been effectively illegal. This is the primary reason why flying is relatively cheap compared to other transport modes, and arguably why the industry has <a href="https://twitter.com/rutherdan/status/1202761468241793024">under-invested</a> in research into cleaner fuels.</p>
<p>With the <a href="https://www.bbc.co.uk/news/science-environment-49349566">most-polluting</a> form of transport enjoying the lowest <a href="https://www.sciencedirect.com/science/article/abs/pii/S0966692314001586?via%3Dihub">taxes</a>, this regime has long been questionable in terms of emissions. It may soon become untenable in terms of tax justice, too. In 2018, France’s Gilets Jaunes movement was partly motivated by <a href="https://www.greeneconomycoalition.org/news-analysis/green-hearts-and-gilets-jaunes">anger</a> at increased fuel tax for cars and vans, while air travel continued to benefit from historic tax exemptions. This anger may return when governments inevitably raise taxes to repay their multi-billion-dollar COVID-19-related debts. </p>
<p>Campaigners are already <a href="https://stay-grounded.org/250-organisations-demand-red-lines-for-aviation-bailouts/">demanding</a> that any airline bailout be linked to tax reform, and there is huge potential there. <a href="https://www.transportenvironment.org/publications/leaked-european-commission-study-aviation-taxes">Leaked</a> EU papers in 2019 suggest that ending kerosene tax exemptions in Europe could raise €27 billion (US$29 billion) in revenues every year. Such sources of revenue may soon become irresistible, and national governments might seek to collect them unilaterally, with or without a coordinated ICAO response. </p>
<p><a href="https://www.aef.org.uk/2005/02/09/blair-rules-out-cheap-flight-tax/">Tony Blair</a>, the former UK prime minister, once said that no politician facing election would ever vote to end cheap air travel. But – to state the obvious – these are unprecedented times, and public attitudes to flying may well change. </p>
<p>On the demand side, once borders reopen, there could be a short-term travel boom as postponed flights are rebooked and stranded people fly home. But even after an official virus “all-clear”, those considering holidays may think twice before sharing cramped plane cabins with strangers. Business travellers, crucial to airline <a href="https://www.investopedia.com/ask/answers/041315/how-much-revenue-airline-industry-comes-business-travelers-compared-leisure-travelers.asp">profits</a>, may find that they’ve got so used to using Zoom, they don’t need always to fly to meetings in person.</p>
<p>As <a href="https://www.theguardian.com/business/2020/apr/06/easyjet-secures-600m-coronavirus-loan-from-uk-treasury-and-bank">members</a> of the industry admit, by the time passengers return to air travel in significant numbers, the airlines, routes and prices they find may look very different. Governments will face huge industry pressure to safeguard jobs and return to business as usual as soon as possible. But managed properly, this could be the start of a just and sustainable transition for aviation.</p>
<h2>The future’s up in the air</h2>
<p>All three of us feel the airline industry is at a key turning point. The size and scale of bailouts will vary. Government political will and philosophy, access to capital, and the viability of the industry itself are key factors that will inform whether a company is worth saving.</p>
<p>Any future must be based on the premise of preserving economic vibrancy while reducing climate risk. But not all governments will factor this in.</p>
<p>Events are moving fast, with Emirates in Dubai <a href="https://www.bloomberg.com/news/articles/2020-04-15/emirates-starts-rapid-testing-passengers-for-virus-before-flight">starting to</a> test passengers for COVID-19 before boarding. Meanwhile, easyJet is considering <a href="https://www.theguardian.com/business/2020/apr/16/easyjet-weighs-up-empty-middle-seats-once-coronavirus-rules-are-eased">social distancing</a> on planes as part of a “de-densification” policy, with fewer passengers and higher prices, albeit across more routes. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/328658/original/file-20200417-152607-126gxio.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/328658/original/file-20200417-152607-126gxio.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/328658/original/file-20200417-152607-126gxio.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/328658/original/file-20200417-152607-126gxio.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/328658/original/file-20200417-152607-126gxio.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/328658/original/file-20200417-152607-126gxio.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/328658/original/file-20200417-152607-126gxio.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Up in the air.</span>
<span class="attribution"><a class="source" href="https://unsplash.com/photos/zNQr2ijkVQQ">Hudson Hintze/Unsplash</a>, <a class="license" href="http://artlibre.org/licence/lal/en">FAL</a></span>
</figcaption>
</figure>
<p>Longer term, there are various ways this could play out. All depend upon the duration of the crisis and the confluence of political, legal and economic factors. </p>
<p>It is possible that market structure remains unchanged, with ownership of airlines staying relatively stable, supported by bailouts. Under this business-as-usual scenario, sustainability would incrementally be enhanced through airlines retiring older, less carbon efficient planes and replacing them with better ones. But this scenario is subject to tremendous uncertainty. </p>
<p>Or, sustainability might become more important after the crisis, thanks to increased environmental awareness, demand loss, and new green investment. This would take place at different speeds, with Europe perhaps being more proactive through government incentives and serious emissions targeting. The US would lag behind, but making some advances due to increased stakeholder concerns. In this scenario, there is some scaling down of travel to meet demand, which is <a href="https://fortune.com/2020/04/15/coronavirus-business-travel-covid-19/">reduced</a>. Increased sustainable investment emerges. Due to partial recovery, a new normal emerges.</p>
<p>It is also possible that prolonged, severe shortage of capital and an awareness of the climate crisis could, hypothetically, lead to massive change. But governments’ concern for jobs is likely to crowd out environmental concerns. Political forces on the left and right would have to mend fences and agree that, in a depression-like scenario, a new world is needed, not just a new normal.</p>
<hr>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/313478/original/file-20200204-41481-1n8vco4.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/313478/original/file-20200204-41481-1n8vco4.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=112&fit=crop&dpr=1 600w, https://images.theconversation.com/files/313478/original/file-20200204-41481-1n8vco4.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=112&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/313478/original/file-20200204-41481-1n8vco4.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=112&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/313478/original/file-20200204-41481-1n8vco4.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=140&fit=crop&dpr=1 754w, https://images.theconversation.com/files/313478/original/file-20200204-41481-1n8vco4.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=140&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/313478/original/file-20200204-41481-1n8vco4.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=140&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p><em>For you: more from our <a href="https://theconversation.com/uk/topics/insights-series-71218?utm_source=TCUK&utm_medium=linkback&utm_campaign=TCUKengagement&utm_content=InsightsUK">Insights series</a>:</em></p>
<ul>
<li><p><em><a href="https://theconversation.com/lockdown-lessons-from-the-history-of-solitude-134611?utm_source=TCUK&utm_medium=linkback&utm_campaign=TCUKengagement&utm_content=InsightsUK">Lockdown lessons from the history of solitude</a></em></p></li>
<li><p><em><a href="https://theconversation.com/what-will-the-world-be-like-after-coronavirus-four-possible-futures-134085?utm_source=TCUK&utm_medium=linkback&utm_campaign=TCUKengagement&utm_content=InsightsUK">What will the world be like after coronavirus? Four possible futures</a></em></p></li>
<li><p><em><a href="https://theconversation.com/the-end-of-the-world-a-history-of-how-a-silent-cosmos-led-humans-to-fear-the-worst-120193?utm_source=TCUK&utm_medium=linkback&utm_campaign=TCUKengagement&utm_content=InsightsUK">The end of the world: a history of how a silent cosmos led humans to fear the worst</a></em></p></li>
</ul>
<p><em>To hear about new Insights articles, join the hundreds of thousands of people who value The Conversation’s evidence-based news. <a href="https://theconversation.com/uk/newsletters/the-daily-newsletter-2?utm_source=TCUK&utm_medium=linkback&utm_campaign=TCUKengagement&utm_content=InsightsUK"><strong>Subscribe to our newsletter</strong></a>.</em></p><img src="https://counter.theconversation.com/content/135365/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Darren Ellis owns Qantas Airways (QAN) shares. He is a member of the Royal Aeronautical Society (MRAeS). </span></em></p><p class="fine-print"><em><span>Roger Tyers is an unpaid member of the FlightFree2020 campaign.</span></em></p><p class="fine-print"><em><span>Jorge Guira does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The airline industry has faced many crises before. But these pale in comparison to the economic hit that airlines are currently facing.Darren Ellis, Lecturer in Air Transport Management, Cranfield UniversityJorge Guira, Associate Professor of Law and Finance, University of ReadingRoger Tyers, Teaching and Research Fellow in Sociology, University of SouthamptonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1359092020-04-20T16:04:28Z2020-04-20T16:04:28ZCoronavirus: how economic rescue plans can set the global economy on a path to decarbonisation<figure><img src="https://images.theconversation.com/files/329125/original/file-20200420-152571-e224hd.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C7000%2C3937&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/solar-panels-city-china-709295557">Fuyu Liu/Shutterstock</a></span></figcaption></figure><p>As states contemplate how to <a href="https://theconversation.com/how-economies-can-survive-a-period-of-suspended-animation-to-deal-with-coronavirus-134846">restart</a> the global economy after the pandemic, it’s important to remember that we’ve been here before. The global financial crisis of 2008 didn’t cause as much social and economic harm as COVID-19 has, but it did force governments around the world to intervene in the economy, to limit the fallout from the crash.</p>
<p>Vital though these interventions are, states need to consider what a post-pandemic economy looks like. If handled correctly, it could be a once-in-a-lifetime opportunity to create a system that’s fundamentally fairer and more sustainable.</p>
<p>That would mean ensuring that climate action is <a href="https://www.iea.org/commentaries/put-clean-energy-at-the-heart-of-stimulus-plans-to-counter-the-coronavirus-crisis">baked in</a> to stimulus packages and bailouts. There were similar ideas floated in the wake of the 2008 crash, but they only amounted to investments in green energy and infrastructure of around <a href="https://www.ilo.org/wcmsp5/groups/public/---dgreports/---inst/documents/publication/wcms_194185.pdf">16% of total fiscal stimulus spending</a>. </p>
<p>Given <a href="https://theconversation.com/the-age-of-stability-is-over-and-coronavirus-is-just-the-beginning-136380">the mounting urgency of the climate crisis</a>, a post-pandemic recovery programme would need to be much more ambitious, ensuring a planned retreat from fossil fuels that reallocates employment into secure and socially useful work, while also making the global economy and supply chains more resilient to inevitable future shocks.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-age-of-stability-is-over-and-coronavirus-is-just-the-beginning-136380">The age of stability is over, and coronavirus is just the beginning</a>
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<h2>A post-COVID green new deal</h2>
<p>Before COVID-19, momentum around the world had been building for “<a href="https://theconversation.com/labours-green-new-deal-is-among-the-most-radical-in-the-world-but-can-it-be-done-by-2030-123982">a green new deal</a>” – a programme of state-led investment to rapidly reduce emissions and economic inequality by creating green infrastructure and jobs.</p>
<p>Amid the recent turmoil, investors are looking for safe assets. Governments could finance a green overhaul of the economy by encouraging them to invest in low carbon infrastructure through “green bonds”. These could be issued directly by central governments, or through national or regional green investment banks. That investment could help transform the electricity system to integrate renewable energy generation, roll out charging points for electric vehicles, and build cycle networks and low-carbon housing. </p>
<p>With the nine-to-five rhythm of the weekday grinding to a halt, the lockdown has affected <a href="https://theconversation.com/we-analysed-electricity-demand-and-found-coronavirus-has-turned-weekdays-into-weekends-134606">profound changes in energy demand</a>. While the UK approaches its record for the number of <a href="https://twitter.com/UK_Coal/status/1252220997614387202">days without generating energy from coal</a>, now is a good time to restructure national electricity grids away from a centralised model, with fossil fuel power plants radiating energy outwards, to a model where energy generation is distributed among many sources of solar and wind, like rooftop photovoltaic panels and community-owned wind farms. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/329119/original/file-20200420-152567-13ndrrn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/329119/original/file-20200420-152567-13ndrrn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=410&fit=crop&dpr=1 600w, https://images.theconversation.com/files/329119/original/file-20200420-152567-13ndrrn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=410&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/329119/original/file-20200420-152567-13ndrrn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=410&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/329119/original/file-20200420-152567-13ndrrn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=515&fit=crop&dpr=1 754w, https://images.theconversation.com/files/329119/original/file-20200420-152567-13ndrrn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=515&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/329119/original/file-20200420-152567-13ndrrn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=515&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The pandemic could profoundly reshape global energy supply.</span>
<span class="attribution"><a class="source" href="https://unsplash.com/photos/GrmwVnVSSdU">Zbynek Burival/Unsplash</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>The fossil fuel industry was <a href="https://www.theguardian.com/environment/2020/apr/01/the-fossil-fuel-industry-is-broken-will-a-cleaner-climate-be-the-result">already struggling</a> before <a href="https://www.wsj.com/articles/thirst-for-oil-vanishes-leaving-industry-in-chaos-11586873801">nationwide lockdowns caused a crash in consumer demand</a>. States should end <a href="https://theconversation.com/fossil-fuel-subsidies-reach-us-87-billion-in-eu-countries-and-theyre-growing-123733">the subsidies propping up the industry</a> and re-allocate that money to research and development funding for battery storage technologies and clean energy. Given how weak the sector is – with oil prices <a href="https://twitter.com/HeerJeet/status/1252049461150314496">plumbing new lows each day</a> – states could buy oil and gas companies out and take their reserves into public ownership, effectively keeping those fuels in the ground. Displaced workers could be compensated and retrained, which has happened <a href="https://www.energy-reporters.com/environment/spain-stops-using-its-coal-to-generate-power/">in the Spanish coal industry</a>. </p>
<p>The pandemic has also exposed the fragility of the <a href="https://theconversation.com/coronavirus-rationing-based-on-health-equity-and-decency-now-needed-food-system-expert-133805">UK’s food supply</a>, with its limited storage capacity, <a href="https://theconversation.com/supply-chains-expert-dont-panic-if-you-see-empty-shelves-more-stock-is-on-its-way-134615">a just-in-time supply model</a>, and dependence on imported food. Suddenly we’ve realised the social and environmental absurdity of flying and driving much of our food from big producers far away.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/we-simulated-how-a-modern-dust-bowl-would-impact-global-food-supplies-and-the-result-is-devastating-133662">We simulated how a modern dust bowl would impact global food supplies and the result is devastating</a>
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<p>Many people have taken the initiative during this crisis to <a href="https://www.independent.co.uk/life-style/coronavirus-how-to-help-local-small-business-order-online-a9418861.html">support small businesses</a> and <a href="https://www.eveningexpress.co.uk/fp/news/local/coronavirus-north-east-business-leader-hopes-shopping-local-becomes-new-norm/">buy food from local suppliers</a>. Economic stimulus measures could build on this by ensuring large public sector organisations that are anchored within communities, such as councils, colleges or hospitals, source their food from local producers. <a href="https://theconversation.com/preston-changed-its-fortunes-with-corbynomics-now-other-cities-are-doing-the-same-106293">The Preston model</a> of “re-localising” economic activity shows how it might be done.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/329115/original/file-20200420-152571-64vsh0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/329115/original/file-20200420-152571-64vsh0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=405&fit=crop&dpr=1 600w, https://images.theconversation.com/files/329115/original/file-20200420-152571-64vsh0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=405&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/329115/original/file-20200420-152571-64vsh0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=405&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/329115/original/file-20200420-152571-64vsh0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=509&fit=crop&dpr=1 754w, https://images.theconversation.com/files/329115/original/file-20200420-152571-64vsh0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=509&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/329115/original/file-20200420-152571-64vsh0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=509&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Encouraging local food supply chains could reduce greenhouse gas emissions and rejuvenate small businesses.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/people-buying-fresh-local-vegetable-farm-604302473">Rawpixel.com/Shutterstock</a></span>
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</figure>
<p>While many people are stuck in their houses, thoughts have inevitably turned to home improvement. It wouldn’t cost a great deal for governments to roll out <a href="https://theconversation.com/labours-low-carbon-warm-homes-for-all-could-revolutionise-social-housing-experts-126329">a mass home insulation effort</a> after the crisis, targeting households which are struggling most with fuel poverty first. This would pay for itself in energy savings, and warmer homes would improve the health and well-being of many, while also creating green jobs that can’t be outsourced.</p>
<p>Despite the numerous declarations of “climate and ecological emergencies” in 2019, the pandemic of 2020 has shown what a global emergency looks like in real time – and how public resources can be leveraged to rapidly deal with it. While green investment and climate action were afterthoughts in post-2008 economic recovery programmes, they must be the guiding principle behind rebuilding the economy after the pandemic.</p>
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<img alt="" src="https://images.theconversation.com/files/290123/original/file-20190829-106524-1w6rzla.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/290123/original/file-20190829-106524-1w6rzla.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=446&fit=crop&dpr=1 600w, https://images.theconversation.com/files/290123/original/file-20190829-106524-1w6rzla.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=446&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/290123/original/file-20190829-106524-1w6rzla.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=446&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/290123/original/file-20190829-106524-1w6rzla.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=560&fit=crop&dpr=1 754w, https://images.theconversation.com/files/290123/original/file-20190829-106524-1w6rzla.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=560&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/290123/original/file-20190829-106524-1w6rzla.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=560&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p><strong><em>This article is part of <a href="https://www.cjr.org/covering_climate_now/covering-climate-partnerships.php/">The Covering Climate Now</a> series</em></strong>
<br><em>This is a concerted effort among news organisations to put the climate crisis at the forefront of our coverage. This article is published under a Creative Commons license and can be reproduced for free – just hit the “Republish this article” button on the page to copy the full HTML coding. The Conversation also runs Imagine, a newsletter in which academics explore how the world can rise to the challenge of climate change. <a href="https://theconversation.com/imagine-newsletter-researchers-think-of-a-world-with-climate-action-113443?utm_source=TCUK&utm_medium=linkback&utm_campaign=TCUKengagement&utm_content=CoveringClimateNow">Sign up here</a></em>.</p>
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<p class="fine-print"><em><span>John Barry receives funding from the Economic and Social Research Council and is a former Green Party councillor. </span></em></p>An economic downturn as severe as the great depression is possible, but what should emerge out of it?John Barry, Professor of Green Political Economy, Queen's University BelfastLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1361062020-04-13T12:16:44Z2020-04-13T12:16:44ZWhat is the SBA? An unheralded agency faces the unprecedented task of saving America’s small businesses<figure><img src="https://images.theconversation.com/files/327341/original/file-20200412-123487-1amps0y.jpg?ixlib=rb-1.1.0&rect=57%2C0%2C4181%2C2644&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Most small businesses in New York have closed during the crisis.</span> <span class="attribution"><span class="source">AP Photo/Mark Lennihan</span></span></figcaption></figure><p>The coronavirus pandemic is devastating small businesses across the U.S. because of shelter-in-place orders that have <a href="https://www.uschamber.com/series/above-the-fold/new-poll-says-1-4-small-businesses-brink-of-permanent-closure">forced millions to temporarily close</a>. </p>
<p>So far, Congress has devoted more than US$375 billion to helping restaurants, retailers and other small companies endure the crisis, and lawmakers are currently <a href="https://thehill.com/homenews/senate/488810-small-business-rescue-package-expect-to-swell-to-350-billion-or-more">discussing spending hundreds of billions more</a>. </p>
<p>The Small Business Administration is at the center of these efforts. But early reports suggest the agency is struggling with the flood of requests it’s received for loans – more than 70% of U.S. small businesses <a href="https://www.washingtonpost.com/business/2020/04/09/small-business-coronavirus-emergency-loan/">have reportedly already applied</a> for assistance – leading to a lot of frustration among owners desperate for support. </p>
<p>From 2010 through 2014, <a href="https://www.american.edu/kogod/faculty/cbruck.cfm">I worked as general and then-chief counsel</a> to the U.S. Senate Committee on Small Business and Entrepreneurship, where I helped write laws to aid small businesses recover from the Great Recession. </p>
<p>Congress’ quick actions are encouraging, but I believe the SBA needs to do more to ensure aid goes to those most in need – including the more than 13 million small businesses owned by women that have <a href="https://cdn.www.nwbc.gov/wp-content/uploads/2019/12/20204228/NWBC-2019-Annual-Report-508compliant.pdf">challenges accessing capital even under normal circumstances</a>. </p>
<h2>An advocate for small business</h2>
<p>The Small Business Administration <a href="https://www.sba.gov/about-sba/organization">was established in 1953</a> as an independent agency dedicated to counseling and advocating for small businesses. It replaced existing lending and contracting programs established during the Great Depression and World War II. </p>
<p>At the time, there were <a href="https://crsreports.congress.gov/product/pdf/RL/RL33243">allegations of cronyism and political favoritism</a> that made it harder for smaller companies to compete for lucrative government contracts. The SBA was meant to help small businesses bid for more contracts and access capital, as well as <a href="https://www.govinfo.gov/content/pkg/STATUTE-67/pdf/STATUTE-67-Pg230.pdf#page=6">provide aid after a disaster</a>. </p>
<p>Over time, the SBA’s mission has grown to include a suite of lending programs, contracting and entrepreneurial development initiatives. </p>
<p>Its roots in helping small businesses compete for government contracts has resulted in a range of definitions as to what constitutes a small business. <a href="https://www.sba.gov/document/support--table-size-standards">SBA itself has different definitions</a> depending on industry, which can range from 100 to 1,500 employees or $750,000 to $38.5 million in annual sales. </p>
<p>The more than <a href="https://cdn.advocacy.sba.gov/wp-content/uploads/2019/09/24153946/Frequently-Asked-Questions-Small-Business-2019-1.pdf">30 million small businesses the SBA counts today</a> are vital to the U.S. economy. They <a href="https://advocacy.sba.gov/2018/12/19/advocacy-releases-small-business-gdp-1998-2014/">create two-thirds of net new jobs</a> and employ almost half of all private sector employees. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/327466/original/file-20200413-32369-friw35.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/327466/original/file-20200413-32369-friw35.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/327466/original/file-20200413-32369-friw35.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/327466/original/file-20200413-32369-friw35.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/327466/original/file-20200413-32369-friw35.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/327466/original/file-20200413-32369-friw35.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/327466/original/file-20200413-32369-friw35.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Jovita Carranza, administrator of the Small Business Administration, is responsible for ensuring her agency distributions hundreds of billions of dollars to small businesses.</span>
<span class="attribution"><span class="source">AP Photo/Alex Brandon</span></span>
</figcaption>
</figure>
<h2>Providing aid in a crisis</h2>
<p>One of the SBA’s main duties is providing aid to small businesses to help them recover following natural disasters such as hurricanes or tornadoes and other crises.</p>
<p>For example, the <a href="https://crsreports.congress.gov/product/pdf/RL/RL33243">SBA dispensed $3.59 billion</a> in disaster loan assistance in fiscal year 2018 following the devastation caused by hurricanes Harvey, Irma and Maria in 2017. </p>
<p>But the SBA has never done anything on the scale it’s being asked to do to help small businesses survive the coronavirus pandemic. </p>
<p>The <a href="https://www.congress.gov/116/plaws/publ123/PLAW-116publ123.pdf">first piece of legislation</a> Congress passed in response to the crisis in early March included $20 million in emergency supplemental funding for SBA’s economic injury disaster loan program, which offers loans of up to $2 million. </p>
<p>Realizing that small businesses that were being forced to shut down in droves would need significantly more aid, Congress added hundreds of billions more funding in the $2 trillion <a href="https://www.congress.gov/bill/116th-congress/house-bill/748/text">CARES Act</a>, which was signed into law on March 27. </p>
<p>The law gave $10 billion more to the SBA’s Economic Injury Disaster Loan Program to allow the SBA to hand out up to $10,000 grants immediately to applicants who are eligible for the program – even if they are ultimately denied.</p>
<p>In addition, it created the $349 billion paycheck protection program in an effort to encourage companies to continue to employ their workers during the pandemic. The program allows companies with fewer than 500 employees to receive as much as $10 million. <a href="https://www.law.berkeley.edu/research/business/cares-act-and-small-businesses/">Money used for “allowable” expenses</a> such as payroll and rent doesn’t have to be paid back as long as a few other conditions are met.</p>
<p>Lawmakers <a href="https://www.vox.com/2020/4/9/21214800/senate-democrats-block-small-business-funding-paycheck-protection-program">are considering ways</a> to provide small businesses with more support – perhaps another $250 billion or more – in another bailout package. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/327463/original/file-20200413-36910-g0xq60.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/327463/original/file-20200413-36910-g0xq60.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/327463/original/file-20200413-36910-g0xq60.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/327463/original/file-20200413-36910-g0xq60.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/327463/original/file-20200413-36910-g0xq60.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/327463/original/file-20200413-36910-g0xq60.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/327463/original/file-20200413-36910-g0xq60.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Lauren Friel, owner of Rebel Rebel Wine Bar in Somerville, Mass.,worries there will be less stimulus money for smaller businesses like hers.</span>
<span class="attribution"><span class="source">AP Photo/Steven Senne</span></span>
</figcaption>
</figure>
<h2>Unprecedented need</h2>
<p>But the unprecedented size of the need has led to many stumbling blocks in rolling out the programs. </p>
<p><a href="https://www.nytimes.com/2020/04/09/business/smallbusiness/small-business-disaster-loans-coronavirus.html">The New York Times reported</a> that applicants are waiting weeks for approval, while others are being told they will get a fraction of what they expected. </p>
<p>In addition, <a href="https://www.forbes.com/sites/allbusiness/2020/04/12/10-frequently-asked-questions-about-cares-act-loans/#6fda2faf5f8b">other reports</a> have found that the $10,000 emergency grants that were supposed to be available within three days haven’t gone out to at least some applicants. An SBA official said the agency <a href="https://www.washingtonpost.com/business/2020/04/08/video-sba-official-blasts-big-banks-over-failure-quickly-distribute-loans/">has already received</a> over 3 million applications for the grants, which would cost $30 billion, triple the amount originally set aside.</p>
<p>And there was confusion over the rules companies must follow. On April 3, the SBA <a href="https://www.sba.gov/sites/default/files/2020-04/PPP--IFRN%20FINAL_0.pdf">issued an interim final rule</a> that said 75% of the proceeds of the paycheck protection program loan must go to payroll costs, which wasn’t in the CARES Act. Retailers, restaurants and other companies <a href="https://www.cnbc.com/2020/04/07/this-part-of-paycheck-protection-program-could-reduce-forgivable-loans.html">with high rents and other overhead complain</a> that they won’t be able to meet that threshold. </p>
<h2>Challenges for women-owned businesses</h2>
<p>The situation is urgent as research shows that about half of small businesses <a href="https://institute.jpmorganchase.com/institute/research/small-business/small-business-cash-liquidity-in-25-metro-areas">typically have cash on hand to last 15 days</a>. At the same time, loans are distributed on a “first-come, first-serve” basis.</p>
<p>And for businesses owned by people of color or women, things can be even more acute. <a href="https://www.american.edu/kogod/research/publications/blindspot.cfm">My own research</a>, for example, found that <a href="https://theconversation.com/how-the-us-tax-code-bypasses-women-entrepreneurs-86039">women-owned businesses tend to lack access</a> to capital and often don’t benefit from tax breaks and other support intended for small companies. And because they <a href="https://www.sbc.senate.gov/public/_cache/files/c/c/cc4de80f-0976-448f-84bb-53af12e7570b/A52BA87EE1DEC7D97F3CC7ABA94D9EBF.ppp-implementation-underserved.pdf">are less likely to have banking relationships</a> with the lenders the SBA traditionally works with, women business owners may need special attention to ensure they get the support they need to weather this crisis. </p>
<p>While getting money out the door fast is critical, it’s equally important it gets to the companies that need it most.</p>
<p>[<em>You need to understand the coronavirus pandemic, and we can help.</em> <a href="https://theconversation.com/us/newsletters?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=upper-coronavirus-help">Read The Conversation’s newsletter</a>.]</p><img src="https://counter.theconversation.com/content/136106/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Caroline Bruckner does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Small Business Administration is the agency tasked with distributing hundreds of billions of dollars to keep millions of companies alive.Caroline Bruckner, Executive in Residence, Department of Accounting and Taxation, American University Kogod School of BusinessLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1356012020-04-09T12:07:22Z2020-04-09T12:07:22ZCoronavirus: Developing economies are getting crushed – here’s why their rich neighbors should help them<figure><img src="https://images.theconversation.com/files/326666/original/file-20200408-89615-1w6rsqu.jpg?ixlib=rb-1.1.0&rect=271%2C37%2C4022%2C3141&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Brazil and other developing countries are being hit hard by the pandemic.</span> <span class="attribution"><span class="source">AP Photo/Andre Penner</span></span></figcaption></figure><p>The entire global community is now facing the unprecedented triple crisis of a global health pandemic, economic recession and global financial meltdown – and the fates of rich and poor countries have never been so intertwined. </p>
<p><a href="https://www.economist.com/finance-and-economics/2020/03/05/commodity-economies-face-their-own-reckoning-due-to-covid-19">Commodity prices are collapsing</a>, <a href="https://www.wto.org/english/news_e/pres20_e/pr855_e.htm">international trade is slowing</a> and many developing countries that were <a href="https://www.imf.org/en/Publications/Policy-Papers/Issues/2020/02/05/The-Evolution-of-Public-Debt-Vulnerabilities-In-Lower-Income-Economies-49018">already in distress</a> are on the edge of <a href="https://www.un.org/development/desa/dpad/publication/un-desa-policy-brief-59-corona-crisis-causes-turmoil-in-financial-markets">full-blown sovereign debt crises</a>. </p>
<p>But while rich countries like the U.S. and those in Europe can afford to spend <a href="https://fortune.com/2020/04/08/divided-eu-finance-chiefs-fail-coronavirus-bailout-funding/">hundreds of billions</a> or <a href="https://www.washingtonpost.com/business/2020/04/05/what-2-trillion-coronavirus-bailout-is-really-going-cost/">even trillions of dollars</a> on massive bailouts, developing and emerging nations like <a href="https://www.nature.com/articles/d41586-020-00983-9">El Salvador</a>, <a href="https://www.cnbcafrica.com/videos/2020/04/03/how-the-covid-19-lockdown-is-impacting-ugandas-economy/">Uganda</a> and <a href="https://www.irrawaddy.com/news/burma/myanmar-unveils-70-million-stimulus-package-ease-economic-blow-virus.html">Myanmar</a> are much less able to rescue their own economies. </p>
<p>As an <a href="https://www.american.edu/sis/faculty/rowden.cfm">expert in development economics</a>, I believe it’s imperative that the richest countries find ways to shore up their poorer neighbors. </p>
<h2>Global calamity</h2>
<p>Although rich, Western countries have been <a href="https://www.nytimes.com/interactive/2020/world/coronavirus-maps.html?action=click&pgtype=Article&state=default&module=styln-coronavirus-world&variant=show&region=TOP_BANNER&context=storyline_menu">among the hardest hit</a> by the coronavirus pandemic, few countries have been left unscathed. </p>
<p>Brazil, for example, <a href="https://brazilian.report/coronavirus-brazil-live-blog/">has reported thousands of cases</a> and hundreds of deaths, even as its president continues to <a href="https://www.washingtonpost.com/world/2020/04/07/bolsonaro-may-be-worlds-coronavirus-skeptic-in-chief/">play down the threat</a>. As a result of measures to contain it, South America’s largest economy <a href="https://www.reuters.com/article/us-health-coronavirus-brazil/brazil-cuts-growth-sees-coronavirus-quickly-ravaging-health-system-idUSKBN2171T4">expects no growth this year</a> – which some economists consider optimistic.</p>
<p>Chaos recently erupted in <a href="https://news.trust.org/item/20200330221113-1hcfs/">El Salvador</a> after the government promised $300 in aid to informal workers like house cleaners and street vendors. Even though the country was in the middle of a 30-day lockdown order, thousands of people formed lines outside of a government office hoping for aid, resulting in police using pepper spray to disperse crowds. </p>
<p>Overall, <a href="https://www.jpmorgan.com/global/research/coronavirus-impact">analysts expect</a> economies across <a href="https://www.brookings.edu/blog/order-from-chaos/2020/03/26/as-coronavirus-hits-latin-america-expect-serious-and-enduring-effects/">Latin America</a> to contract 2 to 3 percentage points, with <a href="https://www.adb.org/news/developing-asia-growth-fall-2020-covid-19-impact">similar impacts in Asia</a>. </p>
<p>And while countries in Africa haven’t seen all that many cases so far, the <a href="https://www.weforum.org/agenda/2020/04/africa-covid-19-time-bomb-defuse/">World Economic Forum</a> warned that the region faces a “COVID-19 time bomb.” Already it’s been enough to <a href="http://whotogo-whoafroccmaster.newsweaver.com/JournalEnglishNewsletter/nex1504dthvy48iiujdam4?lang=en&a=2&p=56762256&t=31103707">threaten fragile health care systems</a> in countries such as the Democratic Republic of the Congo, Burkina Faso and Senegal, which will <a href="https://www.mckinsey.com/featured-insights/middle-east-and-africa/tackling-covid-19-in-africa">severely strain their economies</a> too.</p>
<p>Most developing countries <a href="http://www.rfi.fr/en/africa/20200403-lack-of-covid-19-treatment-and-critical-care-could-be-catastrophic-for-africa">do not have enough hospital capacity</a>, including intensive care units, or equipment like ventilators needed to treat large numbers of patients, which <a href="https://www.newscientist.com/article/2239612-coronavirus-will-play-out-very-differently-in-worlds-poorest-nations/">could prove be a disaster</a> for these countries. </p>
<p>But experiencing a outbreak isn’t necessary for a country to see its economy crushed by the crisis. Countries that rely on remittances sent home from abroad, imports and tourism, such as <a href="https://www.africanews.com/2020/04/07/africa-s-coronavirus-free-dozen/">Leosotho</a>, <a href="https://www.adb.org/news/tajikistan-economy-slow-down-sharply-2020-and-2021-weighed-covid-19-pandemic-adb">Tajikistan</a> and some small island nations <a href="https://www.bbc.com/news/world-52120439">have seen few cases</a> but are still suffering from the impact.</p>
<h2>An interconnected world</h2>
<p>While it should be enough to offer these countries aid because it’s the right thing to do, it’s also in the self-interest of the U.S. and other wealthy countries. </p>
<p>For example, a significant share of imports and exports for both the <a href="https://www.census.gov/foreign-trade/statistics/highlights/top/top2002yr.html">U.S.</a> and Europe come from developing countries other than China. So the ability of developing countries to continue producing the things we buy and buying the things we produce is dependent upon the health of their economies.</p>
<p>This becomes more critical now <a href="https://unctad.org/en/PublicationsLibrary/ditcinf2020d1.pdf">when it comes to essential goods</a> like prescription generic drugs from <a href="https://www.cnbc.com/2020/03/24/us-drug-shortage-fears-grow-as-india-locks-down-due-to-the-coronavirus.html">India</a> and manufactured goods such as communication equipment and office machinery from Taiwan. </p>
<p>But, just as <a href="https://www.marketwatch.com/story/the-economy-is-in-for-tough-times-but-heres-a-roadmap-for-recovery-from-the-coronavirus-2020-03-13">Western economies begin to recover</a> from the current coronavirus wave, they will continue to be affected by continued turmoil elsewhere and will likely face severe shortages of essential raw materials, for example of <a href="https://finance.yahoo.com/news/copper-gains-supply-shortage-fears-141702101.html">copper from mines</a> in Peru, Chile and Mongolia.</p>
<p>Beyond the economic effects and <a href="https://www.project-syndicate.org/commentary/coronavirus-debt-crisis-by-jayati-ghosh-2020-03">financial contagion</a>, there are also <a href="https://foreignpolicy.com/2018/01/09/the-only-force-that-can-beat-climate-change-is-the-u-s-army/">national security concerns</a>. The collapse of economies in Latin America and Africa could lead to <a href="https://www.aei.org/foreign-and-defense-policy/mitigating-the-impact-of-coronavirus-in-central-america">massive migrations</a> as people try to flee troubles at home. </p>
<p>In other words, the ability of rich countries to weather the pandemic is inextricably linked to the ability of developing countries to do the same – and they’re going to need massive assistance. </p>
<h2>A global bailout</h2>
<p>So far, though, we’re just seeing a trickle of aid. </p>
<p>The International Monetary Fund <a href="https://www.imf.org/en/News/Articles/2020/03/04/sp030420-imf-makes-available-50-billion-to-help-address-coronavirus">announced</a> it would make US$50 billion available to low-income and emerging market economies. And the World Bank and IMF <a href="https://www.worldbank.org/en/news/statement/2020/03/25/joint-statement-from-the-world-bank-group-and-the-international-monetary-fund-regarding-a-call-to-action-on-the-debt-of-ida-countries">are encouraging</a> their members to place a moratorium on foreign debt payments by African countries. </p>
<p>This won’t be enough. During the 2008 global recession and financial crisis, the IMF responded by <a href="https://www.imf.org/en/News/Articles/2015/09/28/04/53/sopol082809a">issuing $250 billion worth</a> of its in-house currency to aid developing countries. </p>
<p>The current crisis, however, <a href="https://foreignpolicy.com/2020/03/18/coronavirus-economic-crash-2008-financial-crisis-worse/">combines a recession, financial crisis and an unprecedented health pandemic</a> – a triple whammy that has <a href="https://www.nytimes.com/article/coronavirus-travel-restrictions.html">closed borders</a>, <a href="https://www.dw.com/en/as-the-coronavirus-triggers-a-global-economic-crisis-just-how-bad-could-it-get/a-53000638">shut down entire economies</a> and resulted in <a href="https://www.theguardian.com/world/2020/apr/07/covid-19-expected-to-to-wipe-out-67-of-worlds-working-hours">massive unemployment</a>. </p>
<p>A group of economists <a href="https://ftalphaville.ft.com/2020/03/20/1584709367000/It-s-time-for-a-major-issuance-of-the-IMF-s-Special-Drawing-Rights/">recently proposed</a> that the IMF should quickly deploy double that amount to help them <a href="https://www.brookings.edu/blog/future-development/2020/03/26/imf-special-drawing-rights-a-key-tool-for-attacking-a-covid-19-financial-fallout-in-developing-countries/">stabilize their economies</a>, stem financial outflows and finance domestic stimulus packages. Based on my own calculations, I believe that actual need could be more like $1 trillion. And using the IMF’s own currency, known as <a href="https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/14/51/Special-Drawing-Right-SDR">special drawing rights</a>, is a low-cost way to provide aid.</p>
<p>This is an unprecedented global crisis of truly historic proportions, and it is not hyperbolic to say that the decisions that must be taken in the next weeks literally hold millions of lives in the balance.</p>
<p>If the rich countries thought they only needed to worry about themselves, they should think again. </p>
<p>[<em>Get facts about coronavirus and the latest research.</em> <a href="https://theconversation.com/us/newsletters?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=upper-coronavirus-facts">Sign up for The Conversation’s newsletter.</a>]</p><img src="https://counter.theconversation.com/content/135601/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rick Rowden does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>While countries like the US and Italy have been among the hardest hit, the pandemic is severely straining the health systems and economies of countries across the world.Rick Rowden, Adjunct Professorial Lecturer, American University School of International ServiceLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1347222020-03-26T18:15:56Z2020-03-26T18:15:56ZThe Federal Reserve is promising to do everything it can to save the economy – but what is that, actually?<figure><img src="https://images.theconversation.com/files/323385/original/file-20200326-133001-11757re.jpg?ixlib=rb-1.1.0&rect=38%2C111%2C2077%2C1195&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Storm clouds are stirring over the Fed.</span> <span class="attribution"><span class="source">Fandrade/Getty Images</span></span></figcaption></figure><p>The United States Federal Reserve <a href="https://www.nytimes.com/2020/03/23/business/economy/federal-reserve-how-rescue.html">has committed to do everything it can</a> to save the financial system and the American economy from collapse. </p>
<p>Most recently, it <a href="https://www.bloomberg.com/news/articles/2020-03-23/fed-sidesteps-congress-s-bickering-with-sweeping-rescue-plan">began an unprecedented effort</a> to ensure banks, companies and now households have all the money they need by offering to buy unlimited amounts of securities, including bundled student loans and credit card debt. Even at the peak of the financial crisis in 2008, the Fed’s actions <a href="https://www.cnbc.com/2020/03/23/fed-is-helping-the-markets-more-than-it-did-during-the-financial-crisis.html">were much more limited in scope</a> – as well as speed. </p>
<p>My colleagues and I at the <a href="https://ibrc.kelley.iu.edu">Indiana Business Research Center</a> have been studying the Fed, its actions and the economic impact for over a quarter-century. Here’s a quick primer on the U.S. central bank, how it works and what it’s doing to keep the economy from sinking into depression.</p>
<h2>No guarantee of safety</h2>
<p>Before Congress created the <a href="https://www.federalreserveeducation.org/about-the-fed/structure-and-functions">Federal Reserve System</a>, the safety and soundness of U.S. banks was hardly a sure thing. </p>
<p><a href="https://www.investopedia.com/terms/b/bankrun.asp">Bank runs</a> – when a large number of customers withdraw their deposits simultaneously over concerns of a bank’s solvency – were common, such as during the <a href="https://www.federalreservehistory.org/essays/banking_panics_of_the_gilded_age">Gilded Age</a> from 1863 to 1907, when financial crises occurred frequently. </p>
<p>Yet many Americans <a href="https://www.federalreserveeducation.org/about-the-fed/history">were uncomfortable</a> with the idea of a powerful central financial authority. Alexander Hamilton’s short-lived <a href="https://www.minneapolisfed.org/article/2007/the-bank-that-hamilton-built">First Bank of the United States</a>, which was “dominated by big banking and money interests,” did little to help to allay those concerns.</p>
<p>Without a central bank, it fell to private financiers like <a href="https://www.businessinsider.com/morgan-1895-crisis-and-1862-gold-loophole-2013-1">John Pierpont Morgan</a> to avert financial crises by infusing their own capital into the economy. Recurring crises like these eventually led more people to believe that monetary policy and banking should be centralized, culminating in the <a href="https://www.federalreserve.gov/aboutthefed/fract.htm">1913 Federal Reserve Act</a>. </p>
<p>The act said the Fed would handle monetary policy and stimulus, keep banks safe and sound, and make sure the amount of money circulating was appropriate. </p>
<p>While initially successful at limiting bank runs, the Fed failed to prevent the speculative bubble that preceded the Great Depression – and the bankruptcy of nearly 10,000 banks. This led to the <a href="https://www.federalreservehistory.org/essays/glass_steagall_act">Glass-Steagall Act</a> in 1933, which separated commercial and investment banking and <a href="https://eh.net/encyclopedia/banking-panics-in-the-us-1873-1933/">created federal deposit insurance</a> to prevent bank runs. </p>
<p>Congress more clearly delineated the Fed’s purpose in 1977, when <a href="https://www.bloomberg.com/opinion/articles/2019-04-23/federal-reserve-dual-mandate-needs-updating">it passed the Federal Reserve Reform Act</a> and established what became known as the “dual mandate” of maximum employment and stable prices. </p>
<p>It continues to <a href="https://www.federalreserve.gov/aboutthefed.htm">perform other functions</a> in line with its founding purpose, such as identifying and neutralizing risks to the economy, protecting consumers and promoting the soundness of the financial system and individual institutions. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/323386/original/file-20200326-132965-1n6pjrp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/323386/original/file-20200326-132965-1n6pjrp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/323386/original/file-20200326-132965-1n6pjrp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/323386/original/file-20200326-132965-1n6pjrp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/323386/original/file-20200326-132965-1n6pjrp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/323386/original/file-20200326-132965-1n6pjrp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/323386/original/file-20200326-132965-1n6pjrp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Federal Reserve Chair Jerome H. Powell heads the Board of Governors.</span>
<span class="attribution"><span class="source">Mark Makela/Getty Images)</span></span>
</figcaption>
</figure>
<h2>The Fed’s two key tools</h2>
<p>The Fed consists of a group of seven economists – collectively known as the <a href="https://www.federalreserveeducation.org/about-the-fed/structure-and-functions">Board of Governors</a> – who have <a href="https://www.investopedia.com/articles/investing/093015/open-market-operations-vs-quantitative-easing.asp">two key tools</a> to affect monetary policy. The Board of Governors uses 12 regional banks of the Federal Reserve System to perform banking services.</p>
<p>The most well-known tool is the Fed’s ability to set short-term interest rates. When it lowers rates, the Fed aims to reduce borrowing costs for companies and consumers to encourage more lending and investment, thus stimulating the economy. It raises rates primarily when the economy is strong, when it wants to keep a lid on inflation. </p>
<p>The other key tool is its ability to buy and sell debt securities in <a href="https://www.newyorkfed.org/markets/counterparties/policy-on-counterparties-for-market-operations">open-market operations</a>.</p>
<p>The Fed used this tool for the first time in 1923 ostensibly to <a href="https://www.federalreserveeducation.org/about-the-fed/history">stem a recession</a>. By buying Treasury securities from private sellers, it was able to pump more money into the banking system, ensuring there was enough cheap credit for borrowers. </p>
<p>The Fed reimagined this <a href="https://money.howstuffworks.com/fed10.htm">powerful</a> tool <a href="https://www.forbes.com/sites/greatspeculations/2015/11/16/quantitative-easing-in-focus-the-u-s-experience/">during the 2008 financial crisis</a>, when it began a program of “quantitative easing” to buy longer-term, riskier debt. At the program’s peak in 2015, the <a href="https://fred.stlouisfed.org/series/WALCL">Fed had accrued over US$4.5 trillion</a> in both safe and riskier debt on its balance sheet. </p>
<h2>The Fed’s plan to save the US</h2>
<p>Financial markets <a href="https://www.bloomberg.com/quote/INDU:IND">have been in a panic</a> since late February, when they began to reflect anxiety about the economic impact of the new coronavirus. </p>
<p>Since then, the Fed has engaged in a <a href="https://www.federalreserve.gov/newsevents/pressreleases.htm">variety of actions</a> to keep financial markets working and calm investors, including <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20200317a.htm">backstopping the commercial paper market</a> and supporting <a href="https://www.federalreserve.gov/monetarypolicy/mmlf.htm">money market funds</a>. </p>
<p>It has also been using its two tools in more traditional ways. </p>
<p>The Fed used its first tool in dramatic fashion recently when it cut rates twice, <a href="https://www.wsj.com/articles/federal-reserve-cuts-interest-rates-by-half-percentage-point-11583247606">first by half a percentage point</a> and <a href="https://www.marketwatch.com/story/heres-what-the-feds-surprise-interest-rate-cut-means-for-mortgage-rates-2020-03-03">then by a full point</a>, bringing its target rate to basically zero. Barring negative rates, <a href="https://theconversation.com/the-fed-will-have-to-do-a-lot-more-than-cut-rates-to-zero-to-stop-wall-streets-coronavirus-panic-133739">there’s very little it can do</a> to further stimulate the economy this way. </p>
<p>So it turned to its second tool and committed to essentially <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20200323b.htm">buy as many securities</a> as necessary to stave off <a href="https://fortune.com/2020/03/24/coronavirus-unemployment-claims-layoffs-jobs-lost-us-march-2020/">mass layoffs</a>, debt defaults, bankruptcies and depression. This includes buying bundles of investment-grade corporate bonds, student loans and credit card debt for the first time. More recently, <a href="https://www.nytimes.com/2020/04/09/business/stock-market-today-coronavirus.html?action=click&module=Spotlight&pgtype=Homepage#link-2aee4f20">it added junk-rated municipal and corporate bonds</a> to the list.</p>
<p>As a result, the Fed’s balance sheet, which had fallen below $4 trillion last year, has now swelled to a <a href="https://fred.stlouisfed.org/series/WALCL">new record of $4.7 trillion</a> – and <a href="https://www.bloomberg.com/news/articles/2020-03-25/fed-s-anti-virus-lending-firepower-could-reach-4-5-trillion?srnd=premium&sref=Hjm5biAW">could double in size</a> before it’s done, based on the new lending authority it’s being granted by the federal bailout. </p>
<p>Time will tell if this – alongside the <a href="https://www.nytimes.com/2020/03/25/world/coronavirus-updates-maps-usa-world.html?action=click&module=Spotlight&pgtype=Homepage">$2 trillion in fiscal stimulus</a> Congress is injecting – will be enough. </p>
<p>[<em><a href="https://theconversation.com/us/newsletters?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=upper-coronavirus-daily">Our newsletter explains what’s going on with the coronavirus pandemic. Subscribe now</a>.</em>]</p><img src="https://counter.theconversation.com/content/134722/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ryan Matthew Brewer does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Like Congress with its $2 trillion bailout, the Fed is engaged in an unprecedented effort to save the US economy and financial system from collapse.Ryan Matthew Brewer, Associate Professor of Finance, Indiana UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1339742020-03-18T17:54:25Z2020-03-18T17:54:25ZThe US owes $23.5 trillion – but can still afford a big coronavirus stimulus package<figure><img src="https://images.theconversation.com/files/321144/original/file-20200317-60885-16icuvd.jpg?ixlib=rb-1.1.0&rect=45%2C40%2C2958%2C1954&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">America's credit card has no spending limit. </span> <span class="attribution"><span class="source">photo168/Shutterstock.com</span></span></figcaption></figure><figure class="align-center ">
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<p>The U.S. government now <a href="http://www.treasurydirect.gov/NP/debt/current">owes over US$23.5 trillion in debt</a>, or about $71,000 for <a href="https://www.census.gov/popclock/">every man, women and child</a> living within its borders. It has risen $3 trillion since President Trump took office in 2017 and is almost double what it was just 10 years ago. </p>
<p>U.S. government officials <a href="https://www.nytimes.com/2020/03/17/us/politics/stimulus-package.html">are discussing another expensive stimulus package</a> – possibly as much as $1 trillion and <a href="https://www.thebalance.com/what-was-obama-s-stimulus-package-3305625">bigger than the one</a> enacted in 2009 during the midst of the financial crisis – to help the U.S. economy make it through the coronavirus pandemic. </p>
<p>But in light of its large debt, can the federal government really afford more spending? </p>
<p>The national debt represents the <a href="https://www.whitehouse.gov/omb/historical-tables">accumulation of past deficits</a> that the federal government has run, pretty much continuously, since 1931. Prior to that, surpluses were much more common, apart from the years following the Civil War. </p>
<p>But its size is not a problem. The amount of government debt simply reflects the timing of taxes. Higher spending and lower taxes today mean more borrowing that will need to be paid off by higher taxes in the future. </p>
<p>Not everyone will be happy about that, and the government’s resources are not unlimited. But because the economy grows over time, collecting those future taxes make spending today affordable. </p>
<p>In addition, the $23.5 trillion figure, while large, is a bit misleading because $6 trillion of this is owed to other government agencies like Social Security. While that’s real money, it’s a bit like owing your spouse. </p>
<p>As long as U.S. fiscal institutions are strong and effective, and the long-run productive capacity of the nation’s economy is secure, there is no economic reason to worry the government can’t afford a large stimulus package. </p>
<p>To remain solvent and ultimately pay what it owes, the Treasury – which sells notes and bonds to investors frequently to raise money to finance the deficit – need only balance its books over the long run, rather than over an arbitrary unit of time like a year. So annual national deficits are not always a cause for concern.</p>
<p><a href="http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-LongTerm-Rate-Data-Visualization.aspx">Historically low interest rates</a> on government debt suggest that bond market participants agree with this view. </p>
<p>And in times of crisis, U.S. debt is seen as a haven, <a href="https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield">pushing borrowing costs even lower</a>. Indeed, with these low rates, sufficient economic growth can allow the government to <a href="https://www.aeaweb.org/aea/2019conference/program/pdf/14020_paper_etZgfbDr.pdf">borrow indefinitely</a>.</p>
<p><a href="https://www.nytimes.com/2020/03/14/opinion/coronavirus-recession.html">Many economists</a>, <a href="https://scholar.google.com/citations?user=V8nHvIYAAAAJ&hl=en&oi=ao">including me</a>, argue that fiscal stimulus is needed now because the disruptions from social distancing and other necessary precautions against the coronavirus will likely drive the economy into recession. The state of the nation’s public health is a valid concern of the federal government, as is mitigating the harm recessions can do to workers and small business. </p>
<p>The pandemic will end – that we can be sure of – and the economy will get back on track over time. But worries about the debt should not prevent government actions from helping people now. We can afford it.</p>
<p><em>This is an updated version of an <a href="https://theconversation.com/why-the-22-trillion-national-debt-doesnt-matter-heres-what-you-should-worry-about-instead-111805">article originally published</a> on Feb. 14, 2019.</em></p>
<p>[<em>You need to understand the coronavirus pandemic, and we can help.</em> <a href="https://theconversation.com/us/newsletters?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=upper-coronavirus-help">Read our newsletter</a>.]</p><img src="https://counter.theconversation.com/content/133974/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>William D. Lastrapes does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Trump administration is asking for US$850 billion in stimulus spending. Given the debt’s already at record levels, can the US afford it?William D. Lastrapes, Professor of Economics, University of GeorgiaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1337692020-03-18T17:51:41Z2020-03-18T17:51:41ZTrump’s right: Congress should give Americans $1,000 right now to fight the coronavirus recession<figure><img src="https://images.theconversation.com/files/321374/original/file-20200318-1953-ts0hf8.jpg?ixlib=rb-1.1.0&rect=149%2C99%2C6510%2C4343&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">People need cash in hand.</span> <span class="attribution"><span class="source">Patrick Foto/Getty Images</span></span></figcaption></figure><p>Much of the U.S. economy <a href="https://www.nytimes.com/2020/03/16/business/economy/coronavirus-us-economy-shutdown.html">has effectively shut down</a> as America increasingly takes the coronavirus pandemic seriously. Retail stores and restaurants across the country are vacant. The entertainment and hospitality industries are on hiatus.</p>
<p>While necessary to slow the spread of COVID-19, this will have <a href="https://www.nytimes.com/2020/03/17/upshot/coronavirus-economy-crisis-demand-shock.html">grave consequences</a> for the economy as well as for the tens of millions of workers who <a href="https://fortune.com/2020/03/17/trump-mnuchin-coronavirus-emergency-funds/">depend on hourly wages</a> to buy food, medicine and put a roof over their heads. </p>
<p>The Trump administration is finally taking it seriously too and asking Congress to <a href="https://www.nytimes.com/2020/03/17/world/coronavirus-update-latest-news.html?action=click&module=Spotlight&pgtype=Homepage">pass an US$850 billion stimulus package</a>, including <a href="https://fortune.com/2020/03/17/trump-mnuchin-coronavirus-emergency-funds/">sending $1,000 checks</a> directly to all adult Americans. Some lawmakers are <a href="https://markets.businessinsider.com/news/stocks/senate-unveils-proposal-send-each-american-money-cash-coronavirus-economy-2020-3-1029004861">pushing for larger payments</a> and over several months. </p>
<p>This is welcome news. As a <a href="https://www.libarts.colostate.edu/people/pressman/">macroeconomist specializing in income inequality</a>, I know direct payments are just what low-wage Americans suddenly without a paycheck need to endure the crisis, which could last many months. </p>
<h2>Low-income Americans are hit hardest</h2>
<p>Unlike the <a href="https://theconversation.com/us/topics/global-financial-crisis-447">2008 financial crisis</a>, this is an economic crisis hitting working-class and low-income Americans hardest. </p>
<p>Professional, salaried workers <a href="https://www.bls.gov/news.release/flex2.t01.htm">are able to work from home</a>. They will continue to get regular paychecks and be in a good position to weather the economic storm created by the coronavirus. Professionals who lose some income <a href="https://www.pewsocialtrends.org/2020/01/09/trends-in-income-and-wealth-inequality/">likely have some savings</a> to rely on until the economy recovers.</p>
<p>On the other hand, the waiters, retail clerks, hospitality industry employees and other hourly workers who <a href="https://www.bls.gov/news.release/flex2.t01.htm">make up nearly 60% of the U.S. labor force</a> will be without work for an indefinite amount of time and rely on an unemployment insurance program that <a href="https://www.brookings.edu/opinions/when-the-next-recession-hits-will-unemployment-benefits-be-generous-enough/">is far too stingy</a>.</p>
<p>Furthermore, low-income Americans typically live paycheck to paycheck with virtually no savings. A recent survey by the Federal Reserve found that 40% of households <a href="https://www.federalreserve.gov/publications/2019-economic-well-being-of-us-households-in-2018-dealing-with-unexpected-expenses.htm">couldn’t come up with $400</a> to meet an unexpected expense.</p>
<p>Compounding this problem is excessive household debt, now <a href="https://www.newyorkfed.org/microeconomics/hhdc.htm">exceeding $14 trillion</a>. Highly indebted households are more vulnerable during an economic downturn. Their debt obligations must be paid, even when their income drops. <a href="https://doi.org/10.1080/00213624.2019.1603765">My own research</a> has found that many households were in financial distress well before the coronavirus hit. Now they are much more likely to default on loan repayments. </p>
<p>The bottom line is that people need money to survive. </p>
<h2>An economy of spending</h2>
<p>What’s more, the U.S. economy needs people to spend money. </p>
<p>Consumer spending <a href="https://www.inc.com/peter-cohan/consumer-spending-is-keeping-economy-from-shrinking-but-a-new-survey-of-10000-americans-says-that-might-end-in-2020.html">accounts for 70% of economic activity</a>. It <a href="https://markets.businessinsider.com/news/stocks/us-consumer-spending-unlikely-gain-2020-report-shows-confidence-index-2019-12-1028789820">was already slowing</a> and will slow much further now that people are losing their jobs and incomes.</p>
<p>Like the coronavirus, the problem of households in financial distress must be contained before things spiral out of control. Millions of retail clerks and bartenders suddenly without a job for several months can’t spend and can’t keep the economy growing. Their spending is others’ income, which means more companies will lose sales and other workers will lose their jobs.</p>
<p>They also won’t be able to repay their debts, whether a mortgage, auto loan or credit card. When lots of indebted consumers can’t repay their loans, financial institutions are at risk of going under, leading to a real financial crisis, as <a href="https://www.nytimes.com/2020/03/17/business/italy-banks-coronavirus.html">Italy now appears to be experiencing</a>.</p>
<h2>The basics of basic income</h2>
<p>That’s what makes quick payments to Americans so vital.</p>
<p>Unlike many other forms of stimulus, the U.S. can send citizens $1,000 very easily and without delay – the Trump administration hopes to do this within a couple of weeks. Ideally, it does it with no questions asked, no strings attached and for many months.</p>
<p>It’s basically just a temporary form of what entrepreneur <a href="https://www.politifact.com/article/2019/aug/12/andrew-yangs-universal-basic-income-proposal-expla/">Andrew Yang talked about a lot</a> during his run for the presidency, and <a href="https://www.bloomberg.com/opinion/articles/2019-06-21/universal-basic-income-backers-harm-their-case-with-bad-arguments">it’s hardly new</a>. When done on a permanent basis, it’s known as a basic income guarantee and has been proposed by a variety of people, from <a href="https://www.usatoday.com/story/opinion/2020/02/17/universal-basic-income-outlive-andrew-yang-2020-campaign-column/4751726002/">liberals like Yang</a> to conservatives like economist <a href="https://www.theatlantic.com/politics/archive/2014/08/why-arent-reformicons-pushing-a-guaranteed-basic-income/375600">Milton Friedman</a>. </p>
<p>While people have an urgent need for money to simply pay bills and buy food now, the basic income guarantee is usually pushed as a longer-term solution to reducing poverty and inequality, as well as to offset the <a href="https://www.cnbc.com/2019/01/25/these-workers-face-the-highest-risk-of-losing-their-jobs-to-automation.html">expected declines in employment</a> as a result of automation and other technologies in the coming decades. </p>
<p>It’s unclear for how long the White House wants to send out checks, but in my view they should be sent out each month until the economic crisis ends so that people can pay the rent, pay utilities and buy food. </p>
<h2>A vital injection</h2>
<p>A check in the mail is so very vital right now, but it’s not enough. </p>
<p>The U.S. should also expand <a href="https://www.brookings.edu/opinions/when-the-next-recession-hits-will-unemployment-benefits-be-generous-enough/">unemployment benefits and other social insurance programs</a>. <a href="https://www.cnbc.com/2020/03/16/sba-small-business-disaster-loans-never-met-test-like-coronavirus.html">Small businesses</a> whose customers have vanished will need more support so that they can survive. And some industries, like airlines, <a href="https://www.nytimes.com/2020/03/11/business/dealbook/coronavirus-bailouts.html">may need a bailout</a>. </p>
<p>But $1,000 would be a good down payment to help Americans <a href="https://www.politico.com/news/2020/03/17/coronavirus-layoffs-america-unemployment-134819">already struggling and losing their jobs</a>. </p>
<p>[<em>You need to understand the coronavirus pandemic, and we can help.</em> <a href="https://theconversation.com/us/newsletters?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=upper-coronavirus-help">Read our newsletter</a>.]</p><img src="https://counter.theconversation.com/content/133769/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steven Pressman does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>An economist specializing in inequality explains how a basic income guarantee is just what low-wage workers and the economy need.Steven Pressman, Professor of Economics, Colorado State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1210122019-07-31T19:56:52Z2019-07-31T19:56:52ZFed rate cut bails out Trump for policies that are slowing the economy<p>The Federal Reserve appears to be bailing out the president.</p>
<p>Responding to concerns of a <a href="https://www.reuters.com/article/us-usa-economy/u-s-economic-growth-seen-slowing-in-second-quarter-idUSKCN1UL0C1">slowing economy</a> – in part caused by President Donald Trump’s <a href="https://theconversation.com/us/topics/trade-wars-50746">trade wars</a> – the Fed cut short-term interest rates for the <a href="https://fred.stlouisfed.org/series/DFEDTAR">first time since 2008</a>, <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20190731a.htm">lowering its benchmark</a> rate 25 basis points to 2.25%. </p>
<p>The cut sends a message to financial markets and households that the Fed stands ready to give the economy a boost should it slow further. Given that it’s forced to do so by Trump’s own policies, the central bank is essentially signaling it’s now the administration’s insurer of last resort. </p>
<p>As an <a href="https://scholar.google.com/citations?user=RYY7tWEAAAAJ&hl=en&oi=ao">expert on monetary policy</a> and a former Fed economist, I believe the bank’s embrace of this role is bad for the economy. It could embolden Trump and other politicians to pursue policies that are even more reckless – the kind intended more to benefit narrow constituencies and help win their re-election than support the broader national interest. </p>
<h2>The message matters</h2>
<p>Judging the merits of a rate cut usually can only be done in hindsight. But the case for one seems to be more about what it signals than directly boosting growth. </p>
<p>By itself, a single quarter-point reduction in the overnight borrowing rate – the rate most directly affected by the Fed – will likely do little to alter directly the economic decisions made by consumers and companies. <a href="https://www.fhfa.gov/DataTools/Downloads/Pages/National-Mortgage-Database-Aggregate-Data.aspx">Virtually no households</a>, and very few businesses, borrow money for such a short term.</p>
<p>Most mortgages, for example, are of the 30-year, fixed-rate type. And while the Fed’s short-term “target” does eventually affect other interest rates in the economy, long-term borrowing costs typically react less to modest changes in monetary policy, especially if these changes are “one-off.” </p>
<p>Rather, it’s the message that matters. Stoking expectations that the Fed stands ready to provide additional monetary easing if necessary is a powerful tool. And although rates <a href="https://fred.stlouisfed.org/series/FEDFUNDS">are historically low</a>, the central bank still has another 2 percentage points it can cut to stimulate the economy, as well as similar tools like so-called <a href="https://theconversation.com/us/topics/quantitative-easing-3842">quantitative easing</a>. </p>
<h2>The Fed’s ‘insurance’ policy</h2>
<p>Furthermore, although the economy has slowed slightly, <a href="https://www.bea.gov/news/glance">it’s still growing</a>. <a href="https://www.marketwatch.com/story/greenspan-says-its-sensible-for-the-fed-to-think-about-insurance-cut-2019-07-24">Some argue</a> that the “<a href="https://www.bloomberg.com/news/articles/2019-07-31/fed-cuts-rates-by-quarter-point-and-signals-potential-for-more?srnd=premium">insurance</a>” of a rate cut – and the signal it provides that the Fed stands ready to do more – will help maintain that positive growth. </p>
<p>But the very reason the Fed feels the need to do this is because of the government’s own policies. <a href="https://ftalphaville.ft.com/2019/06/03/1559545796000/The-true-cost-of-trade-wars/">Most economists agree</a> that the current round of tariffs and the resulting disruptions to supply chains have been harmful. </p>
<p>Normally, <a href="https://fairmodel.econ.yale.edu/">economic conditions play</a> a big role in presidential elections. And as the political and economic costs of a bad policy mount, a president would be forced to switch course to avoid doing more harm – not to mention damaging his re-election chances. </p>
<p>Therein lies the problem of the Fed’s rate cut. Its commitment to reducing rates to stimulate the economy regardless of the source of the slowdown insulates the administration from the consequences of its actions, potentially leading to even more misadventures.</p>
<p>Not only that, cutting rates drives up the prices of risky assets – which could metastasize into something harmful, as <a href="https://www.stlouisfed.org/publications/inside-the-vault/spring-2011/low-interest-rates-have-benefits-and-costs">we saw ahead of the 2008 financial collapse</a> – and masks other structural problems in the economy. Furthermore, rate cuts tend to primarily benefit the upper middle class and the wealthy – the <a href="https://www.federalreserve.gov/releases/z1/20190606/html/default.htm#summary">group that owns most</a> of the financial assets in the economy.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/286513/original/file-20190731-186824-cllxs4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/286513/original/file-20190731-186824-cllxs4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=405&fit=crop&dpr=1 600w, https://images.theconversation.com/files/286513/original/file-20190731-186824-cllxs4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=405&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/286513/original/file-20190731-186824-cllxs4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=405&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/286513/original/file-20190731-186824-cllxs4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=508&fit=crop&dpr=1 754w, https://images.theconversation.com/files/286513/original/file-20190731-186824-cllxs4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=508&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/286513/original/file-20190731-186824-cllxs4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=508&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Americans experienced something similar in the 1970s.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Watchf-Associated-Press-International-News-Unit-/5c5edcb68e744c51a39fd1362829028a/2/0">AP Photo</a></span>
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<h2>Cuts have costs</h2>
<p>History shows that this kind of central bank insurance is not free. </p>
<p>In the 1970s, President Richard Nixon <a href="https://www.aeaweb.org/articles?id=10.1257/jep.20.4.177">pressured Fed Chair Arthur Burns</a> to keep interest rates low in order to help him win re-election in 1972. Ultimately, Burns acquiesced, Nixon won re-election, the Vietnam War continued for three more years, and the U.S. economy suffered high and disruptive inflation throughout most of the decade.</p>
<p>Something similar could happen if the Trump administration provides even more fiscal stimulus to bolster its 2020 election chances. Fed rate cuts in conjunction with additional fiscal stimulus could result in higher inflation – which could spook markets and lead to a nasty unwinding. </p>
<p>[ <em><a href="https://theconversation.com/us/newsletters?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=expertise">Expertise in your inbox. Sign up for The Conversation’s newsletter and get a digest of academic takes on today’s news, every day.</a></em> ]</p><img src="https://counter.theconversation.com/content/121012/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rodney Ramcharan does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Fed’s decision to cut interest rates for the first time since 2008 could lead to economic policies that are even more reckless.Rodney Ramcharan, Associate Professor of Finance and Business Economics, University of Southern CaliforniaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/976082018-06-05T20:05:49Z2018-06-05T20:05:49ZThe world’s economic crisis-fighting mechanisms are dangerously inadequate<p>It was only in January that the International Monetary Fund (IMF) was celebrating the strength of the global economy, <a href="https://www.imf.org/en/Publications/WEO/Issues/2018/01/11/world-economic-outlook-update-january-2018">heralding</a> “the broadest synchronised global growth upsurge since 2010”. </p>
<p>How quickly things have changed. </p>
<p>Argentina has since <a href="https://www.wsj.com/articles/imf-begins-negotiations-with-argentina-over-large-credit-line-1526664127">sought a bailout</a> from the IMF, Turkey is facing a potential currency crisis, Indonesia is seeing investors flee, alarm bells are sounding for Italy and Spain, China’s debt remains a serious concern, and the only thing more uncertain than the fallout from Brexit is the outcome of Donald Trump’s trade war.</p>
<p>It’s time to review the world’s capacity to respond to crises.</p>
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Read more:
<a href="https://theconversation.com/vital-signs-italy-is-broke-and-the-markets-have-lost-all-faith-in-its-elected-politicians-97535">Vital Signs: Italy is broke, and the markets have lost all faith in its elected politicians</a>
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<p>The “global financial safety net” refers to the mishmash of global, regional and bilateral institutions and mechanisms designed to help countries facing economic and financial crises and to prevent these problems from spreading. </p>
<p>The most well-known institution is the IMF, which has around US$1 trillion in crisis-fighting resources. The World Bank, with around US$263 billion, has provided assistance in previous crises. </p>
<p>There is also a range of regional mechanisms, such as Asia’s <a href="https://www.adb.org/sites/default/files/publication/156085/adbi-wp230.pdf">Chiang Mai Initiative Multilateralisation</a> agreement (with US$240 billion) and the <a href="https://www.esm.europa.eu/">European Stability Mechanism</a> (with US$600 billion). Bilateral currency swap arrangements, under which one country’s central bank can exchange its currency for that of another, are also an important part of the safety net.</p>
<p>Make no mistake, the safety net is big. In total it has about US$4.6 trillion in crisis-fighting firepower, seven times what it was in 1980. But this large number can be misleading and, as I argue in a <a href="https://www.brookings.edu/research/the-dangerous-inadequacies-of-the-worlds-crisis-response-mechanisms/">recent working paper at Brookings</a>, is both inadequate and causing a dangerous sense of complacency.</p>
<p>First, not all of this money is immediately available. Some of it is tied up in existing programs (such as in Greece) and central bank governors interviewed for my research (including former US Federal Reserve chairs Janet Yellen and Ben Bernanke, and current Reserve Bank of Australia governor Philip Lowe) warned that many currency swap lines would not be made available during a crisis. This shrinks the safety net to US$2.5 trillion.</p>
<p>Second, not all resources are available to all countries. The European Stability Mechanism won’t help you if you live in Latin America. And if your country wasn’t offered a swap line with a major central bank, well, that’s tough luck. </p>
<p>The size of the safety net depends entirely on the country. It is twice as large for some G20 countries as for others, or four times as large if you include foreign exchange reserves (which are more accurately described as domestic resources rather than part of the global safety net). </p>
<p>This fragmentation has made the safety net patchier, slower and less consistent, making crises costlier. Many countries have fallen between the cracks, particularly emerging economies such as Turkey and Argentina, which don’t have strong institutions or resilient capital markets like the ones operating in the United States, Canada or Australia.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-g20s-economic-leadership-deficit-80477">The G20’s economic leadership deficit</a>
</strong>
</em>
</p>
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<p><a href="https://bankunderground.co.uk/2016/07/22/stitching-together-the-global-financial-safety-net/">Recent research</a> has sought to assess the safety net’s adequacy by exploring what crises might occur in the future. But instead of trying to predict these things, I pose a simple question: can the safety net provide at least the same level of support today that has been required of it in the past? </p>
<p>To find out, I war-gamed three regional crises – the Asian financial crisis, the European debt crisis and the Latin American debt crisis – and six country-specific crises in Argentina, Turkey, Ecuador, Russia, Mexico and Chile. While financial systems are more resilient today than they were back then, my analysis produced some alarming results.</p>
<p>While the safety net works well for country-specific crises, it struggles to cope with widespread shocks. Providing the same level of support today that was provided during the Asian financial crisis would exhaust all currency swap lines, all regional mechanisms, all regional development banks and the entire World Bank, and would require exceptional access to the IMF’s resources. If the European debt crisis occurred today, the entire global financial safety net would be exhausted. </p>
<p>Second, most crises now require access to multiple components of the safety net. The IMF is no longer capable of providing assistance alone. Countries increasingly rely on regional mechanisms which, in Asia, have never been tested and, in Latin America, are small.</p>
<p>Third, despite the growth in non-global resources, countries often still have to go to the IMF. This means there must be seamless co-ordination of multiple institutions during a crisis, something the IMF warns (and recent history shows) is a “very strong assumption”.</p>
<p>Finally, most of these results hold even when foreign exchange reserves are included. There are also many alarming developments on the horizon. Foreign exchange reserves are declining, particularly in China, and the IMF’s resources <a href="https://www.brookings.edu/wp-content/uploads/2017/10/workingpaper109-economicriskresilienceineastasia-10-2017.pdf">will halve by 2022</a> unless the US Congress approves extra funding and countries like China agree to reloan the IMF money, despite getting no additional voting power. The 63 policymakers I interviewed suggest that neither is likely.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-how-likely-is-another-financial-crisis-it-comes-down-to-what-we-believe-80186">Vital Signs: how likely is another financial crisis? It comes down to what we believe</a>
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</em>
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<h2>What can be done?</h2>
<p>In the short term, countries must to bolster the IMF’s temporary resources and strengthen co-operation between safety-net institutions. Central banks must clarify whether swap lines are available in a crisis and, where possible, extend them to cover more economies. </p>
<p>In the long term, the IMF’s centrality in the safety net must be reaffirmed. It needs larger, permanent funding and more flexible lending arrangements. </p>
<p>The lead-up to the 2008 crisis was characterised by a dangerous sense of complacency. That complacency should not be allowed to take hold again.</p><img src="https://counter.theconversation.com/content/97608/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Adam Triggs does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Some US$4.6 trillion has been made available to stave off financial crises across the world. The problem is that much of this funding is now spoken for, and the list of stricken nations is growing.Adam Triggs, Research fellow, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/922232018-02-21T16:55:44Z2018-02-21T16:55:44ZNo more mercy for bad behaviour at South Africa’s state owned companies<figure><img src="https://images.theconversation.com/files/207312/original/file-20180221-132680-xnoxi4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa's Finance Minister Malusi Gigaba arrives to deliver his budget address.</span> <span class="attribution"><span class="source">Reuters/Mike Hutchings</span></span></figcaption></figure><p><em>South Africa’s <a href="http://www.treasury.gov.za/documents/national%20budget/2018/">2018 national budget</a> was presented amid growing concern about the financial sustainability of key state owned enterprises such as the power utility Eskom and South African Airways. Sibonelo Radebe asked Misheck Mutize and Sean Gossel to set out what the budget means for them.</em></p>
<p><strong>What is your general impression of the budget speech?</strong></p>
<p>Coming on the back of the <a href="https://theconversation.com/why-ramaphosas-moment-of-hope-is-built-on-a-fragile-foundation-92043">state of the nation address</a> presented by the new President Cyril Ramaphosa, the 2018 national budget has renewed hope about the future of the country’s economy. Combined with the pledge by Ramaphosa to root out the ills bedevilling state owned enterprises, there is optimism that South Africa’s economy is turning the corner.</p>
<p>There were signs of the rebound from the numbers presented by the minister – even though there’s still huge weakness in the economy. Last year’s economic growth projection has been revised, up from 0.7% to 1% and growth in 2018 is projected at 1.5% rising to 2.1% 2020. Of course the country needs much more robust growth than this. The hope is that things will improve with the interventions promised by the new president.</p>
<p>It was a tough budget, especially for the poor. But the tax hikes and other measures are necessary given the need to narrow a R42 billion revenue shortfall, which was widened by the need for a funding solution for fee free higher education. </p>
<p>Overall the budget presented a solid step towards arresting the fiscal deficit and stabilising government debt. Fiscal prudence is painful. But it’s necessary to save the country from further downgrades, and from sliding deeper into debt. </p>
<p><strong>What do you think about the treatment of state owned enterprises?</strong></p>
<p>Finance minister Malusi Gigaba underscored the commitment to dealing with patronage, corruption and incompetence in state owned enterprises. (This is rather <a href="https://www.news24.com/SouthAfrica/News/is-gigaba-mr-state-capture-20170528-2">ironic</a> as he has been fingered as one of the architects of state capture as the opposition vocally pointed out before the speech got underway). Nevertheless, this must be commended. The looting and mismanagement has caused a great deal of damage to the economy as well as business confidence.</p>
<p>The message is that there will be no mercy for misbehaviour in this space. Time has also run out for those who justified mediocrity in parastatals. Gigaba’s statement that state-owned companies are expected to fund their own operations must also be welcomed. Although similar calls have been made in the past, this time there may be political will.</p>
<p>This means that the government’s limited resources can now be allocated to other more important things. Hopefully the emphasis will shift towards finding long-term solutions to the country’s ills. </p>
<p><strong>What must happen to get state owned enterprises right?</strong></p>
<p>It is refreshing that the new president has indicated his commitment to appointing qualified and experienced people to lead state owned enterprises. This is a welcome substitute for the disastrous policy of cadre deployment – the practice of appointing people to state owned enterprises largely for their political connections.</p>
<p>But it’s also time the government actively reconsidered its interest in state owned enterprises. The cost of maintaining ownership has become too high. Over the past 24 years state owned monopolies have been the site of gross inefficiencies and high social costs which in turn have hampered the economy’s performance. The time is ripe for the government to begin unpacking monoliths such as Eskom, Transnet and the Passenger Rail Agency of South Africa in preparation for partial privatisation or public listings on the stock exchange. </p>
<p>The options would be to either partially privatise the entities, or to open up the space for private players to buy equity stakes. Government might in fact be considering these options given Gigaba’s comment that: </p>
<blockquote>
<p>In the coming year, government may be required to provide financial support to several state owned enterprises which could be done through a combination of disposing of non-core assets, strategic equity partners, or direct capital injections.</p>
</blockquote>
<p>It is good that the minister mentioned these refinancing options. But there’s still talk of government support and guarantees for several state owned enterprises. </p>
<p><strong>What general advice would you give to the new administration following this budget?</strong></p>
<p>As the government goes about meeting the spending cuts it announced (by R85.7 billion) over the next three years and increasing revenue by R36 billion this year, it urgently needs to wean state owned enterprises from the fiscus. Opening the public sector to participation by private players would be the optimal way to go about this. </p>
<p>Allowing these enterprises to continue operating as monopolies in key sectors will simply allow inefficiencies and market distortions to continue. We would argue that the unions and politicians that have campaigned against privatisation have exaggerated the negative impact on the poor. <a href="https://hbr.org/1991/11/does-privatization-serve-the-public-interest">Evidence</a> from other countries suggests that introducing private ownership doesn’t necessarily lead to massive job losses nor expensive services. </p>
<p>The new administration should depoliticise the issue and face the reality that state owned enterprises need an immediate and realistic response to save both the economy and the fiscus. Without that, the government will not be able to wean them from guarantees and bailouts, and their failure will be eminent.</p>
<p>We would also urge the government to follow up on the promise to hold corrupt public servants to account and to ensure tender processes aren’t abused by closing loopholes in public procurement.</p><img src="https://counter.theconversation.com/content/92223/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sean Gossel receives funding from the University of Cape Town.</span></em></p><p class="fine-print"><em><span>Misheck Mutize does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>South Africa’s 2018 national budget makes it clear that the slumber and corruption that has hampered state owned enterprises must come to an end.Sean Gossel, Senior Lecturer, UCT Graduate School of Business, University of Cape TownMisheck Mutize, Lecturer of Finance and Doctor of Philosophy Candidate, Graduate School of Business (GSB), University of Cape TownLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/905482018-01-23T14:54:47Z2018-01-23T14:54:47ZWhy shaking up South Africa’s power utility matters for the economy<figure><img src="https://images.theconversation.com/files/203050/original/file-20180123-182973-1b61qkn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Cyril Ramaphosa, South Africa's deputy president who was recently elected as the leader of ruling party, is seen to be fighting corruption.</span> <span class="attribution"><span class="source">EPA</span></span></figcaption></figure><p><em>South Africa’s power utility Eskom has seen a remarkable leadership shake up in the past few days. Almost the entire board has been replaced with seasoned businessmen. And a well respected acting CEO has been put in place, too. The developments appear to reflect resolve by the country’s deputy president Cyril Ramaphosa, who was elected as president of the African National Congress in December. Sibonelo Radebe asked Jannie Rossouw to discuss what the changes at Eskom mean.</em></p>
<p><strong>What do you make of the shake up at Eskom?</strong></p>
<p>The announcement of a <a href="https://www.enca.com/south-africa/eskom-appoints-new-board">new board at Eskom</a> is welcome for a number of reasons. </p>
<p>Firstly, the previous board and top executive layer proved to be incompetent if not downright destructive. Secondly, the power utility had sunk into dire <a href="https://www.fin24.com/Economy/Eskom/eskom-could-collapse-sa-economy-warns-gigaba-20180118">financial difficulties</a> on their watch. Recent reports suggested that the power utility has <a href="https://www.fin24.com/Economy/Eskom/exclusive-eskoms-cash-dries-up-20171113-2">run out of funds</a> and wouldn’t be able to meet its obligations unless government stepped in with another huge bailout. This, after the government <a href="https://www.ujuh.co.za/brian-molefe-the-ceo-of-south-africas-power-utility-is-overrated/">injected</a> R23 billion in equity and and wrote off about R60 billion over the past five years.</p>
<p>Over the past five years or so, Eskom has been hit by a series of corporate governance breaches of the worst kind. These included the former CEO Brian Molefe trying to secure a <a href="http://www.702.co.za/articles/265740/public-protector-to-probe-brian-molefe-s-r30-million-pension-pay-out">R30 million payout</a> for only 18 months at the helm.</p>
<p>And it’s become clear from the <a href="http://amabhungane.co.za/article/2017-06-09-guptaleaks-how-eskom-was-captured">Gupta leaks</a> that the power utility had come to play a central role in a raft of activities related to state capture. It appears to have served as <a href="https://www.ujuh.co.za/state-of-capture-public-protectors-report/">a conduit to transfer government resources</a> to well-connected and corrupt individuals and families in South Africa.</p>
<p>Given the damage that’s been done, the previous board at Eskom simply could not continue. It had <a href="http://ewn.co.za/2018/01/18/gigaba-treasury-can-t-afford-more-eskom-bailouts">no plan</a> to turn the company around or stop corruption. Its only strategy was to lean on the South African government for more financial assistance.</p>
<p>The Eskom shake up is also significant because it’s a signal that the new president of the ANC Cyril Ramaphosa is committed to fighting <a href="http://ewn.co.za/2018/01/19/ramaphosa-we-re-dead-serious-about-addressing-corruption">corruption</a> in both the public and private sectors.</p>
<p><strong>Why does Eskom matter?</strong> </p>
<p>Eskom is arguably South Africa’s most important state owned enterprise. The South African economy depends on continuous and uninterrupted power supply. This puts Eskom in a different league to other embattled state owned enterprises like the national airline, South African Airways (SAA).</p>
<p>SAA is also dependent on government <a href="https://www.fin24.com/Economy/live-out-of-cash-saa-faces-parliament-20170804">bailouts</a>, but the South African economy will continue to function without it. Eskom, on the other hand, is a monopoly power supplier. All South Africans depend on it for power. </p>
<p><strong>There seems to have been an urgency to make changes. Why?</strong></p>
<p>It seems that Ramaphosa moved quickly to wrap up the Eskom shake up before he left for the World Economic Forum in Davos. It’s not difficult to understand why. South Africa has had some very bad headlines over the past few years, including downgrades by international rating agencies, and its economy is in the doldrums. </p>
<p>A significant portion of South Africa’s economic pressure originates from declining confidence of local and international investors in the country’s economy. This is evident from the South African <a href="https://tradingeconomics.com/south-africa/business-confidence">business confidence index</a>, which has plummeted. Since 2013 business confidence has been on a declining trend from above 50 to a current level below 35.</p>
<p>Replacing the Eskom board before the Davos meeting was a smart and necessary move. Davos is a rare occasion to showcase South Africa as an investment destination of choice for international investors. One condition for attracting international investment is a clear commitment to addressing corruption and instilling sound management in government enterprises.</p>
<p><strong>What in your view is the long term solution around Eskom?</strong></p>
<p>The long term solution to the problems at Eskom and other troubled state owned enterprises is a rethink of their role in the South African economy. </p>
<p>Some, such as South African Airways, are really unimportant and their disposal or even their closure would have little impact on the domestic economy. Disposal or closure are necessary options as these entities add an unnecessary burden on the national fiscus.</p>
<p>But others, like Eskom, are more strategic and matter enormously and the government should retain them. </p>
<p>It has also become necessary for South Africa to rethink the <a href="https://businesstech.co.za/news/wealth/194164/ceo-vs-employee-salaries-at-eskom-saa-and-other-state-companies/">remuneration policies</a> for executives of state owned enterprises. They earn salaries that aren’t commensurate with the risks they face. The consequences of failure are much more severe for executives in the private sector. Executives of state owned enterprises simply apply for bailouts when they’re in trouble. </p>
<p>So there’s no justification for exorbitant remuneration at state owned enterprises. And no executive at any state owned enterprise should get a bonus: how can a bonus be justified when the South African government provides the bailout in the event of financial difficulty?</p>
<p>The new Eskom board should urgently revise the company’s remuneration policy to restore some sanity in the level of remuneration. The board should also review business practices to ensure that Eskom remains financially viable without any financial assistance from the government.</p>
<p>It is also important that the South African government and the board of Eskom should make it clear to the general public and to investors that the proposed <a href="https://awethu.amandla.mobi/petitions/campaign-for-a-just-energy-future?gclid=EAIaIQobChMI58iX0pnu2AIVzr_tCh3WcwUoEAAYASAAEgLYwfD_BwE">nuclear procurement project</a> plan will not go ahead: neither the South African fiscus nor Eskom can afford such a project.</p><img src="https://counter.theconversation.com/content/90548/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jannie Rossouw is a NRF C3-rated researcher and receives funding from the NRF. </span></em></p>The shake up at South Africa’s power utility, Eskom, sends a good signal about where Cyril Ramaphosa is taking the country.Jannie Rossouw, Head of School of Economic & Business Sciences, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/874282017-11-14T21:11:10Z2017-11-14T21:11:10ZNobody is going to bail out Venezuela<p><em>Leer <a href="http://theconversation.com/china-rusia-y-el-fmi-compiten-para-rescatar-financieramente-a-venezuela-86599">en español</a>.</em></p>
<p>Venezuela, the South American country convulsed by <a href="https://theconversation.com/inside-venezuelas-economic-collapse-80597">economic</a> and humanitarian catastrophe, has <a href="http://money.cnn.com/2017/11/14/news/economy/venezuela-debt-default-sp/index.html">defaulted</a> on some of its debt after missing an interest payment due in October. </p>
<p>Even as investors meet in Caracas to discuss restructuring <a href="http://americasquarterly.org/content/what-make-venezuelas-last-minute-debt-negotiations">US$60 billion in foreign debt</a>, the country is in urgent need of <a href="https://www.nytimes.com/roomfordebate/2016/06/28/how-to-save-venezuela/venezuela-needs-international-assistance-to-recover">international financial assistance</a>. </p>
<p>Yet few nations are rushing in to aid the ailing country. Under the authoritarian regime of Nicolás Maduro, Venezuela is <a href="https://www.reuters.com/article/us-venezuela-politics-region/venezuela-called-dictatorship-by-peru-condemned-by-new-bloc-idUSKBN1AO2NL">isolated</a> in Latin America, and the <a href="https://www.reuters.com/article/us-usa-venezuela-sanctions/trump-slaps-sanctions-on-venezuela-maduro-sees-effort-to-force-default-idUSKCN1B5216">United States</a>, <a href="http://www.international.gc.ca/sanctions/countries-pays/venezuela.aspx?lang=eng&_ga=2.177192485.1698760013.1510071967-449799799.1508254687">Canada</a> and the <a href="http://www.reuters.com/article/us-venezuela-politics-eu/eu-readies-sanctions-on-venezuela-approves-arms-embargo-idUSKBN1DD0UN?il=0">European Union</a> have all imposed sanctions against Venezuelan officials. Maduro has at times suggested he would not even accept <a href="https://www.wola.org/analysis/venezuela-humanitarian-crisis-aid/">humanitarian aid</a>. </p>
<p>Still, no indebted nation is totally alone in this world. As a financial analyst, I know there are always international players who see opportunity in the problems of others. And for Venezuela, my home country, all hope of a bailout rests with China, Russia and the International Monetary Fund. </p>
<p>Will they do anything to help?</p>
<h2>Venezuela’s debt: By the numbers</h2>
<p>Before exploring a possible Venezuela rescue, it is useful to understand how the country’s debt became such a burden. </p>
<p>In 1998, the year before the late Hugo Chávez came into power, Venezuela <a href="http://www.independent.co.uk/news/long_reads/how-venezuela-went-from-the-richest-economy-in-south-america-to-the-brink-of-financial-ruin-a7740616.html">was rich</a>. It produced roughly 60 barrels of oil per inhabitant per year. By late 2017, my projections – based on data compiled from Venezuela’s <a href="http://www.ine.gov.ve/evitalesjsp/evitales.html">National Statistics Institute</a> and BP’s <a href="https://www.bp.com/content/dam/bp/en/corporate/pdf/energy-economics/statistical-review-2017/bp-statistical-review-of-world-energy-2017-full-report.pdf">World Energy Report 2017</a> – show that production will have dropped to 20 barrels per capita. That’s a 66 percent drop in 20 years. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/194617/original/file-20171114-26426-4er2ac.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/194617/original/file-20171114-26426-4er2ac.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/194617/original/file-20171114-26426-4er2ac.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=395&fit=crop&dpr=1 600w, https://images.theconversation.com/files/194617/original/file-20171114-26426-4er2ac.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=395&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/194617/original/file-20171114-26426-4er2ac.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=395&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/194617/original/file-20171114-26426-4er2ac.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=496&fit=crop&dpr=1 754w, https://images.theconversation.com/files/194617/original/file-20171114-26426-4er2ac.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=496&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/194617/original/file-20171114-26426-4er2ac.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=496&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Oil output per capita in Venezuela has dropped significantly in the past several decades.</span>
<span class="attribution"><span class="source">Henkel Garcia/BP Statistical Review of World Energy 2017/National Statistics Institute</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Even as output steadily shrank, Chávez benefitted from relatively high oil prices, which allowed him to boost revenue from petroleum exports. And as oil sales rose, so did <a href="https://www.economist.com/news/finance-and-economics/21720289-over-past-year-74-venezuelans-lost-average-87kg-weight-how">government expenditures</a>, as well as imports of food and other goods. </p>
<p>Eventually, excess spending took a toll on Venezuela’s <a href="http://www.imf.org/external/np/fin/tad/exportal.aspx?memberKey1=1050&date1key=2017-09-30&category=SDRNET">international reserves</a>. Rather than cut expenditures and imports, the Chávez regime <a href="https://fred.stlouisfed.org/tags/series?t=venezuela">piled up foreign debt</a>.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/194626/original/file-20171114-26429-10u0f9q.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/194626/original/file-20171114-26429-10u0f9q.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/194626/original/file-20171114-26429-10u0f9q.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=405&fit=crop&dpr=1 600w, https://images.theconversation.com/files/194626/original/file-20171114-26429-10u0f9q.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=405&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/194626/original/file-20171114-26429-10u0f9q.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=405&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/194626/original/file-20171114-26429-10u0f9q.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=509&fit=crop&dpr=1 754w, https://images.theconversation.com/files/194626/original/file-20171114-26429-10u0f9q.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=509&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/194626/original/file-20171114-26429-10u0f9q.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=509&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">As exports (US$ per capita) rose, so too did government spending and imports.</span>
<span class="attribution"><span class="source">Banco Central de Venezuela, FRED (Federal Reserve Bank of St. Louis), National Statistics Institute and Econométrica IE, C.A.</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Then, in late 2014, international oil prices began to plunge. Today, <a href="http://especiales.prodavinci.com/deudaexterna/">estimates indicate that</a> Venezuela’s public sector debt tops $184.5 billion, including $60 billion in foreign debt, though the <a href="http://www.bcv.org.ve/c2/indicadores.asp">Venezuelan Central Bank</a> claims it’s much lower.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/194627/original/file-20171114-26465-1ga8tcj.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/194627/original/file-20171114-26465-1ga8tcj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/194627/original/file-20171114-26465-1ga8tcj.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/194627/original/file-20171114-26465-1ga8tcj.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/194627/original/file-20171114-26465-1ga8tcj.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/194627/original/file-20171114-26465-1ga8tcj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/194627/original/file-20171114-26465-1ga8tcj.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/194627/original/file-20171114-26465-1ga8tcj.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Venezuela’s foreign public debt, in US$ million, is at an all-time high.</span>
<span class="attribution"><span class="source">Venezuelan Central Bank</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>To service this debt, the government must pay $16 billion to $20 billion a year through at least 2022. Shouldering that huge expense has meant slashing imports, causing <a href="https://www.washingtonpost.com/news/global-opinions/wp/2017/06/01/venezuelas-hunger-crisis-is-for-real/?utm_term=.6b50fe00b919">food</a> and medicine shortages. As a result, almost <a href="http://rpp.pe/mundo/venezuela/venezuela-el-54-de-los-ninos-padece-desnutricion-noticia-1073023">54 percent of Venezuelan children are malnourished</a>. </p>
<p>To ensure its citizens’ basic well-being, Venezuela must be able to import, on average, $1,000 a year per inhabitant – or roughly $33 billion a year. My data show it’s currently bringing in about half that. </p>
<h2>No Chinese largess</h2>
<p>As an oil producer, Venezuela’s desperation rouses geopolitical interests. </p>
<p>Venezuela owes <a href="http://www.businessinsider.com/russia-and-china-are-propping-up-maduros-regime-in-venezuela-2017-9">$28.1 billion to China and $9.1 billion to Russia</a>, its main creditors. In recent years, both countries have been eager to prop up the Maduro regime, with little concern for its authoritarian tendencies. </p>
<p>China, at least publicly, has remained decidedly mum on <a href="http://www.el-nacional.com/noticias/mundo/afp-venezuela-mas-lejos-una-salida-crisis-tras-comicios_208008">Venezuela’s political crisis</a>. According to a spokesperson from the Chinese Ministry of Foreign Affairs in October, Beijing “believe[s] that the government of this country is able to appropriately handle its domestic affairs within the law, maintaining stability and prosperity.” </p>
<p>So far, though, Chinese financial institutions have not further opened their coffers. They have, however, granted <a href="http://www.petroguia.com/pub/article/pdvsa-ahorra-6725-millones-en-2016-y-2017-al-postergar-despachos-china-por-dos-a%C3%B1os">Venezuela a grace period of at least 18 months to pay off the debt</a> it owes them. This modest concession gives the government a bit of breathing room.</p>
<p>China has also allowed Venezuela to use shipments of crude <a href="https://www.theguardian.com/world/2013/mar/26/china-latin-america-resources-concern">to pay off some of its debt</a>, revealing China’s main interest in Venezuela: its oil.</p>
<p>But, in my view, Venezuela shouldn’t count on Beijing for significant additional financial help. For China to issue new loans, insiders have told me, Maduro’s government would have to show clear signs of fiscal discipline. Nothing indicates it is <a href="http://especiales.prodavinci.com/deudaexterna/">capable of that</a>. </p>
<p>I believe a more likely next step is that Venezuela will bring in much-needed cash by selling off existing <a href="https://oilprice.com/Energy/Crude-Oil/Venezuelas-Oil-Fire-Sale-To-Benefit-Russia-China.html">stakes in oil companies and resource-extraction ventures it co-owns with China</a>.</p>
<h2>Putin to the rescue?</h2>
<p>Russia has been somewhat more generous with Venezuela, and its geopolitical interests here are clear. </p>
<p>The Kremlin benefits from having <a href="https://news.vice.com/story/russia-is-using-cheap-oil-to-undermine-the-u-s-around-the-world">a trustworthy ally on this side of the world</a> – especially one that is avowedly anti-U.S. and ranked as the <a href="https://www.eia.gov/beta/international/data/browser/#/?pa=00000000000000000000000000000000002&c=ruvvvvvfvtvnvv1vrvvvvfvvvvvvfvvvou20evvvvvvvvvvvvuvo&ct=0&tl_id=5-A&vs=INTL.57-1-AFG-TBPD.A&vo=0&v=H&start=2014&end=2016">11th-largest oil producer worldwide</a>. </p>
<p>Plus, Russia already has many oil interests in the country, including <a href="http://www.pdvsa.com/index.php?option=com_content&view=article&id=7167:pdvsa-inauguro-base-operacional-perforosven-en-la-faja-petrolifera-del-orinoco-hugo-chavez&catid=10:noticias&Itemid=5&lang=es">joint exploration projects with Petróleos de Venezuela</a>, the state-owned oil company. </p>
<p>Indeed, Russia and its state-funded oil venture, Rosneft, have already helped the country <a href="https://www.nytimes.com/2017/10/29/business/energy-environment/russia-venezula-oil-rosneft.html?_r=0">avoid default at least twice</a>, providing Caracas with $10 billion in financial assistance. In an Oct. 29 New York Times article, oil expert <a href="https://www.nytimes.com/2017/10/29/business/energy-environment/russia-venezula-oil-rosneft.html?_r=0">Francisco Monaldi said</a> Russia is “the only country that can toss Venezuela a lifeline.” </p>
<p>In my opinion, even its public declarations defending Venezuela’s politics are <a href="http://www.eluniversal.com/noticias/politica/rusia-considera-inaceptables-sanciones-contra-venezuela_675578">more incisive</a> than China’s. Russia’s Foreign Ministry has called international sanctions against Venezuela “unacceptable.”</p>
<p>Still, thus far, Russia has <a href="https://www.nytimes.com/2017/11/08/business/energy-environment/russia-venezuela-debt.html">agreed only to restructure its bilateral debt with Venezuela</a>. While the terms weren’t disclosed, I don’t believe anything like a real bailout is on offer.</p>
<h2>Last resource</h2>
<p>This could lead Venezuela to its last resort: the <a href="http://www.imf.org/external/index.htm">International Monetary Fund</a>. In my opinion, this global lender would be the most appropriate source of a bailout. </p>
<p>Neither China nor Russia is willing or able to offer the huge sum Venezuela needs to stay afloat, at least $30 billion. Nor is any country likely to match the super-low 2 percent interest rate that the <a href="http://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/20/33/Stand-By-Arrangement">IMF offers to emerging economies in crisis</a>. </p>
<p>Bondholders typically look askance at this type of financial assistance. Countries receiving support from the IMF and other multilateral lenders are generally “<a href="https://www.project-syndicate.org/commentary/ricardo-hausmann-and-miguel-angel-santos-pillory-the-maduro-government-for-defaulting-on-30-million-citizens--but-not-on-wall-street">advised to renegotiate foreign debt</a>,” which can leave investors with empty pockets.</p>
<p>And today, Venezuela has no official relationship with the organization. The Chávez administration <a href="https://www.youtube.com/watch?v=wVs5TB0xEPU">loved to disparage the IMF</a>, saying it should “close down” or “vanish.” </p>
<p>Even so, there are signs that the IMF is <a href="https://www.ft.com/content/3908e5c0-b19b-11e7-a398-73d59db9e399">sketching out a possible rescue plan</a> for the country. Bank officials have <a href="https://es.panampost.com/sabrina-martin/2017/10/25/rescate-economico-para-venezuela/">expressed concern</a> with both Venezuela’s humanitarian crisis and the possible spinoff effects of its economic collapse on other Latin American economies. </p>
<p>Since the multilateral organization is unlikely to bail out the current regime – which has previously <a href="https://www.telesurtv.net/news/Maduro-rechaza-que-la-derecha-negocie-a-Venezuela-con-el-FMI-20151015-0065.html">rebuked its possible intervention</a> – the IMF probably hopes to work with some future transition government that’s more democratic and open to international aid. If so, help may be a long time coming.</p><img src="https://counter.theconversation.com/content/87428/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Henkel García is the director of Econométrica IE, C.A., a Venezuelan economic analysis firm.</span></em></p>China, Russia and the International Monetary Fund are among those contemplating a Venezuela bailout. But help for this debt-stricken nation seems far from assured.Henkel Garcia U, Finance Instructor, Professional Studies Extension Programme, Universidad Católica Andrés BelloLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/838222017-09-11T19:59:17Z2017-09-11T19:59:17ZSouth Africa needs to sober up to save itself from sickly state-owned enterprises<figure><img src="https://images.theconversation.com/files/185465/original/file-20170911-1336-jvnh8u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa needs to decide if it will continue to waste public money on its national carrier, or incur the costs of letting SAA go bankrupt.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p><em>The South African government is said to be seriously considering selling its stake in telecommunication firm, Telkom, <a href="https://www.businesslive.co.za/bd/companies/transport-and-tourism/2017-08-23-secret-gigaba-plan-to-rescue-bankrupt-saa-exposed/">in order to save the troubled South African Airways (SAA)</a>. This has brought back debates about what is the right thing to do around the country’s state owned enterprises. Sibonelo Radebe asked Seán Muller to weigh up the options.</em></p>
<p><strong>What does financial support to SAA actually involve?</strong></p>
<p>There are two basic forms of assistance government has provided to <a href="https://theconversation.com/south-africa-must-free-itself-from-the-burden-of-owning-a-national-airline-64004">SAA</a>. The first “government guarantees”, in which the Treasury provides a guarantee to support SAA’s borrowing from private lenders. These guarantees mean that if SAA is unable to pay its debt costs or repay the full loan when required, the Treasury must pay. As of February 2017, SAA held <a href="https://www.timeslive.co.za/sunday-times/business/2017-08-07-gigabas-bid-to-stall-repayment-of-r69bn-saa-loans/">R19.1 billion</a> in government guarantees. These pose a risk to public finances, but strictly speaking do not require any funds immediately.</p>
<p>The second type is a “cash injection”, where Treasury directly transfers cash to SAA. This is what is more commonly known as a “bailout”. </p>
<p>In the current case the lines between these two forms of support are blurred. One of Treasury’s reasons for giving SAA cash is apparently to prevent it defaulting on all debt that is called in by SAA’s creditors.</p>
<p><strong>Is selling a Telkom stake and redirecting the money towards saving SAA a good idea?</strong></p>
<p>There are two aspects to this question. First, is injecting more public money into SAA a good idea? Second, is selling government’s stake in Telkom a good idea? </p>
<p>It is hard to see the case for putting further public money in SAA. At various points it may have made sense to do this in order to stabilise SAA as a public enterprise, or prepare it for large scale privatisation. However, this scenario has been repeated so many times that the argument is no longer credible. </p>
<p>Of course, the government has an obligation to prevent the harm that would result from a state-owned enterprise going bankrupt. The direct effects via SAA’s operations, and indirect effects on the economy and investor sentiment in relation to state owned enterprises, could be severe. The <a href="https://theconversation.com/south-africa-must-free-itself-from-the-burden-of-owning-a-national-airline-64004">failure</a> to implement a successful turnaround strategy at SAA, which appears to be linked to the determination to keep <a href="https://citizen.co.za/news/south-africa/1426649/gordhan-to-fire-saa-chair-dudu-myeni-today/">Dudu Myeni</a> as board chair, has placed South Africans in a bind: either the country wastes public money, or it incurs the costs of letting SAA go bankrupt.</p>
<p>With regards to Telkom, it is useful to remember that government previously committed to only bailout state-owned enterprises using funds raised through the <a href="https://www.ujuh.co.za/nene-2015-medium-term-budget-policy-statement/">sale of state assets</a>. There are two advantages of this approach. First, it focuses minds on the consequences of state owned enterprises failure – as is happening in the case of SAA. Second, it means that the main national budget is not affected, so Treasury can still meet its commitments like the planned budget deficit.</p>
<p>But there is no good case for bailing out SAA. At best, it is simply to avoid an even worse scenario in which SAA’s guarantees are called in by creditors. Wherever the money comes from, the social cost is significant and arguably unjustified.</p>
<p>Some have suggested that there are additional costs because Telkom is now a <a href="https://www.businesslive.co.za/bd/companies/telecoms-and-technology/2017-06-05-telkom-rewards-shareholders-as-net-profit-jumps/">profitable</a> enterprise and represents a government success story, but this is <a href="https://mybroadband.co.za/news/business-telecoms/209176-telkoms-adsl-monopoly-crippled-ecommerce-in-south-africa.html">debatable</a>. South Africa’s ICT development has been unsatisfactorily slow and arguably one reason is that government’s stake in Telkom meant that it ended up protecting a firm with monopoly power in fixed line infrastructure. </p>
<p>Contrary to an increasingly popular narrative, the fact that Telkom has become profitable by moving into the mobile space and slashing employment does not make it either a privatisation, or a state ownership, success story. From this perspective, government selling its stake could be a good thing for ICT development in the medium to long run.</p>
<p><strong>What does the consideration say about ANC’s attitude towards privatisation?</strong></p>
<p>There is an obvious tension between the claim that SAA cannot be privatised, while effectively privatising government’s remaining stake in Telkom. Such <a href="http://www.politicsweb.co.za/documents/economic-transformation-anc-discussion-document-20">inconsistencies</a> are characteristic of ANC policy in the last two decades. This is partly due to differences within the alliance and partly the result of policy incoherence, along with a failure to act on advice and implement decisions. </p>
<p><a href="https://www.gov.za/sites/www.gov.za/files/Executive%20Summary-NDP%202030%20-%20Our%20future%20-%20make%20it%20work.pdf">The National Development Plan</a> and the Presidential <a href="https://www.gov.za/documents/report-presidential-review-committee-prc-state-owned-entities-soes">Review</a> Committee on State-Owned Entities both provided fairly clear direction, but many recommendations appear to be inconvenient for the president and those around him – who appear to see state owned enterprises as vehicles for personal enrichment rather than economic development.</p>
<p><strong>Clearly the Telkom model works. Should it be replicated?</strong></p>
<p>It is actually not at all clear that the Telkom model “works” in the sense of advancing economic growth and development in the broader public interest. It was <a href="http://www.sciencedirect.com/science/article/pii/S0308596105000467">arguably the wrong model</a> for the country’s ICT sector. </p>
<p>However, even if it had been the right model for that sector, simply replicating it would be a bad idea. State ownership, privatisation and regulation strategies need to take into account the characteristics of particular sectors. What works for telecoms will be different to what works for energy or for airlines.</p>
<p><strong>And what do you make of the state of Eskom?</strong></p>
<p>The state of <a href="http://www.eskom.co.za/IR2017/Pages/default.aspx">Eskom</a> is of grave concern. Load shedding and price increases, combined with more energy efficiency options for businesses and consumers, have led to much lower electricity demand than originally forecast. </p>
<p>Meanwhile, Eskom is bringing <a href="https://www.dailymaverick.co.za/article/2016-07-07-medupi-kusile-and-the-massive-costtime-overrun/">massive</a> new coal power stations online that have vastly exceeded their original budgets. The result is that Eskom faces a “<a href="http://www.heraldlive.co.za/business/2017/07/17/eskom-denies-facing-funding-crisis/">death spiral</a>” where it needs to increase prices to prop up revenue and bolster its finances, but doing so leads to customers reducing demand (through increased efficiency and implementing alternative options like decentralised solar power). </p>
<p>Eskom holds up to <a href="http://www.treasury.gov.za/documents/national%20budget/2017/">R350 billion in government guarantees</a> and is in an increasingly precarious situation. If one adds the lingering possibility of an unnecessary and ill-advised nuclear deal into the mix, the fear is that Eskom could end up in a similar state to SAA now. </p>
<p>SAA may be a waste of public funds, but the threat it poses can probably be contained. That would not be true of Eskom. The main debate between many analysts now is not whether a crisis is looming but whether there remains any chance of avoiding it, given repeated failures to make and implement critical policy decisions.</p>
<p><strong>And so, what should happen to SAA and Eskom?</strong></p>
<p>In the absence of a clear developmental mandate for SAA, and it being repeatedly bailed out with public money that could be better used elsewhere, the objective must be to minimise the cost of SAA to citizens: if privatisation is the best option then so be it. Eskom is a much more strategically critical enterprise and its problems are more complex, so privatisation would just create a range of different problems. Each state owned enterprises requires tailor-made solutions but one thing they all require is basic good governance, which is not currently in place.</p><img src="https://counter.theconversation.com/content/83822/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Seán Mfundza Muller previously worked for the Parliamentary Budget Office, during which time he conducted analysis of, and provided advice to members of parliament on, the financing of state-owned enterprises.</span></em></p>There is no good case for bailing out South African Airways, it’s simply a matter of avoiding a potentially catastrophic debt default.Seán Mfundza Muller, Senior Lecturer in Economics, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/820272017-08-08T19:43:45Z2017-08-08T19:43:45ZWhy South Africa shouldn’t turn to the IMF for help<figure><img src="https://images.theconversation.com/files/181015/original/file-20170804-2386-ro9o9n.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Two men sit at the roadside in the hope of being offered work. South Africa's unemployment is moving towards 30%.</span> <span class="attribution"><span class="source"> EPA/NIC BOTHMA</span></span></figcaption></figure><p>The view that South Africa should look towards the International Monetary Fund (IMF) to be rescued from the unfolding economic meltdown seems to be <a href="https://theconversation.com/south-africa-should-consider-help-from-the-imf-to-fix-its-economy-81701">growing by the day</a>. It has been touted in the most unlikeliest of places. Even the new Finance Minister Malusi Gigaba, a proponent of the so-called <a href="http://www.fin24.com/Economy/mps-grill-gigaba-on-radical-economic-transformation-20170509">radical economic transformation</a>, has expressed willingness to <a href="https://www.timeslive.co.za/sunday-times/business/2017-06-30-gigaba-may-need-to-seek-outside-help-to-get-economy-going/">engage the IMF</a>.</p>
<p>There is no doubt about the seriousness of South Africa’s economic crisis. The country entered a technical recession after the economy contracted in the fourth quarter of last year and <a href="https://theconversation.com/south-africas-in-a-recession-heres-what-that-means-78953">first quarter of this year</a>. Unemployment seems to be rising towards <a href="https://tradingeconomics.com/south-africa/unemployment-rate">the 30% mark</a>. </p>
<p>And global credit rating agencies are uneasy about South Africa’s economic prospects. After a spate of <a href="https://www.thesouthafrican.com/moodys-downgrades-south-africa-to-one-notch-above-junk/">downgrades early this year</a>, they have <a href="https://businesstech.co.za/news/banking/189281/sa-central-bank-under-increasing-political-pressure-moodys/">threatened further downgrades</a> which will take the country deeper into junk status.</p>
<p>While the South African situation is getting more desperate, which calls for desperate measures, the idea to turn to the IMF is a bad idea and must be dismissed. There are a number of reasons why I think this is the case.</p>
<p>First, historical evidence suggests that IMF administered rescue programmes are actually a <a href="https://www.cato.org/publications/speeches/why-imf-should-not-intervene">recipe for disaster</a>. They worsen rather than rescue the situation.</p>
<p>Second, to suggest that South Africa’s problems are financial in nature is a <a href="https://theconversation.com/how-corruption-is-fraying-south-africas-social-and-economic-fabric-80690">dangerous misdiagnosis</a>. It will distract the government from <a href="http://mobius.blog.franklintempleton.com/2017/03/16/south-africa-key-issues-and-challenges/">the critical issues</a> it needs to address which have little to do with the finances. </p>
<p>Third, one of the main driving factors of the current economic predicament is a loss of investor confidence. This is linked to other factors like policy uncertainty, political instability within the ruling party and mismanagement of public resources mixed with corruption. An IMF bailout won’t address these problems.</p>
<p>And lastly, hopping onto the IMF programme would disturb the country’s commitment to reforming the global multilateral financial world. South Africa is part of the BRICS bloc which is grooming a new and perhaps alternative multilateral development finance institution called <a href="https://theconversation.com/the-brics-plan-for-a-new-world-order-begins-with-a-bank-29251">New Development Bank</a>. If anything, South Africa must look to BRICS if it needs financial rescue. </p>
<p>I believe that the solutions to the country’s economic crisis are within. It needs internal discipline to address them – not an external force.</p>
<h2>Bad record</h2>
<p>The IMF does not have a good historical record. A view of the many countries which have subjected themselves to the IMF doesn’t inspire confidence. Instead of bailing out countries, it has created a list of countries suffering from debt dependency.</p>
<p>Of all the countries across the world that have been <a href="http://www.zerohedge.com/news/2013-07-06/41-imf-bailouts-and-counting-%E2%80%93-how-long-entire-system-collapses">bailed out by the IMF</a>:</p>
<ul>
<li><p>11 have gone on to <a href="https://www.cato.org/publications/congressional-testimony/international-monetary-fund-challenges-contradictions">rely on IMF aid</a> for at least 30 years </p></li>
<li><p>32 countries had been borrowers for <a href="https://www.cato.org/publications/congressional-testimony/international-monetary-fund-challenges-contradictions">between 20 and 29 years</a>, and </p></li>
<li><p>41 countries have been using IMF credit for <a href="https://www.cato.org/publications/congressional-testimony/international-monetary-fund-challenges-contradictions">between 10 and 19 years</a>. </p></li>
</ul>
<p>This shows that it’s nearly impossible to wean an economy from the IMF debt programmes. Debt dependency undermines a country’s sovereignty and integrity of domestic policy formulation. The debt conditions usually restrict pro-growth economic policies making it difficult for countries to come out of recession.</p>
<p>IMF’s poor record is partly influenced by the policy choices that it imposes on countries it funds. The IMF policy choices for developing countries, known as a <a href="http://www.whirledbank.org/development/sap.html">structural adjustment programme</a>, have been <a href="http://www.e-ir.info/2015/03/01/conditional-development-ghana-crippled-by-structural-adjustment-programmes/">widely condemned</a>. The main reason is that they insist on austerity measures which include; cutting government borrowing and spending, lowering taxes and import tariffs, raising interest rates and allowing failing firms to go bankrupt. These are normally accompanied by a call to privatise state owned enterprises and to deregulate key industries. </p>
<p>These austerity measures would cause great suffering, poorer standards of living, higher unemployment as well as corporate failures. The current technical recession would be magnified into a full-blown crisis, leading to even greater shrinking of investment. </p>
<h2>South Africa and the IMF</h2>
<p>South Africa has always been aware of the dangers of taking IMF money. In December 1993, five months before the country became a democracy, the National Party government, under the guise of transitional executive committee, signed an <a href="http://www.news24.com/elections/opinionandanalysis/how-mandelas-anc-sold-out-the-economic-struggle-20140422">IMF loan agreement</a>. </p>
<p>When the African National Congress (ANC) came to power after the elections in April 1994 it walked away <a href="http://www.news24.com/elections/opinionandanalysis/how-mandelas-anc-sold-out-the-economic-struggle-20140422">from the IMF offer</a>. Its concern was mainly that the IMF would undermine the sovereignty of the newly established democracy by imposing inappropriate, policy choices that would have further <a href="https://www.nelsonmandela.org/omalley/index.php/site/q/03lv01508/04lv01530/05lv01531.htm">harmed poor people</a>.</p>
<p>Over the past 23 years South Africa has stayed away from the IMF. There is no reason to change this. In fact there are more reasons today for South Africa to maintain its position.</p>
<h2>The BRICS factor</h2>
<p>South Africa is set to assume the rotational chair of the BRICS bloc in 2018. The BRICS bloc was formed, in part, to challenge, the dominance of western Bretton Woods institutions – the IMF and the World Bank. </p>
<p>It would be politically naive and economically counterproductive for South Africa to give itself to the IMF. It would undermine South Africa’s integrity and tarnish its place within the BRICS bloc. And it would undermine the idea that the BRICS’ New Development Bank can offer an alternative to the Bretton Woods institutions.</p>
<p>BRICS promises to yield real economic benefits to South Africa because it can leverage trade between the member countries as well as public and private investment from within the bloc. </p>
<h2>A better way to deal with the crisis</h2>
<p>Advancing any financial assistance to South Africa without addressing the current bad policies would not address the current economic turmoil. Rather, it would result in the country sliding deeper into debt.</p>
<p>And any assistance would be entrusted to a government that has created the crisis because of imprudent policies. The result would be an extension of the crisis because the pressure would have been taken off the government leaving the architecture of the meltdown intact. </p>
<p>What needs to happen is that policymakers need to turn their minds to the real problems. This can simply be done without a bailout.</p><img src="https://counter.theconversation.com/content/82027/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Misheck Mutize does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The idea that South Africa must look towards the International Monetary Fund to rescue itself from the prevailing crisis must be dismissed.Misheck Mutize, Lecturer of Finance and Doctor of Philosophy Candidate, Graduate School of Business (GSB), University of Cape TownLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/797922017-06-20T20:33:52Z2017-06-20T20:33:52ZPursuing a 30-year old bailout is sending South Africa on a wild goose chase<figure><img src="https://images.theconversation.com/files/174768/original/file-20170620-32355-7nhgnn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Public Protector Busisiwe Mkhwebane has lit a grass fire in South Africa's financial circles.</span> <span class="attribution"><span class="source">Reuters/Mike Hutchings</span></span></figcaption></figure><p>South Africa’s Public Protector, Busisiwe Mkhwebane, has ignited a flaring grass fire with recommendations around a <a href="http://www.iol.co.za/news/politics/mkhwebane-absa-must-pay-back-the-money-9865770">R1.2bn bailout</a> paid to a local bank between 1986 and 1995. Known as the “Bankorp/Absa lifeboat”, the payment has been a bone of deep contention, with investigations and reports stretching back to the first presidents of South Africa’s democracy, Nelson Mandela and Thabo Mbeki.</p>
<p>The public protector’s recommendations on the bailout – set out in a <a href="https://www.ujuh.co.za/the-public-protector-in-her-own-words-on-the-bankorpabsa-matter/">report</a> released this week – are provocative. The first is that there should be a new investigation by the country’s elite investigative team into the obligations of one of South Africa’s largest banks, Absa, to pay back the considerable sum. Absa was formed in 1991 following the <a href="http://cib.absa.co.za/AboutUs/Pages/History.aspx">amalgamation</a> of eight banks, including Bankorp. Absa was later acquired by Barclays and currently trades as Barclays Africa. Essentially, this means calling on Barclays Africa to pay for the sins of one of its distant ancestors.</p>
<p>Even more provocatively, the Public Protector called for changes to the South African Reserve Bank’s remit. Her report says that Parliament should make changes to the country’s constitution to make this possible. </p>
<p>There are two quite complex issues here. Does Absa still owe the state (or the people) funds deriving from the “lifeboat” issued to Bankorp in the late apartheid era? And is the constitutional framework for the central bank appropriate?</p>
<p>The context for the report is an economy punch drunk from endless political infighting, where levels of trust between business and government are abysmal, and ratings are plummeting. Amid all the turmoil is the country’s Reserve Bank which remains one of the few core economic institutions still intact and uncaptured. </p>
<p>In these circumstances one cannot help ask the questions: why is the Public Protector reopening a case which has been thoroughly investigated, and why is it presuming the right to rewrite the constitutional mandate of the South African Reserve Bank?</p>
<h2>The lifeboat saga</h2>
<p>The issue has bounced in and out of the headlines over the past 30 years. </p>
<p>Two respected judges, Willem Heath and Dennis Davis found in two separate investigations – and for different reasons – that it was not practical or feasible to recover the funds. Heath delivered his report in <a href="http://www.huffingtonpost.co.za/2017/01/17/the-heath-report-absa-sanlam-liable-but-pursuing-them-expens_a_21656652/">1999</a>, Davis in <a href="http://www.gov.za/sites/www.gov.za/files/gov_panelexperts_bankorp_0.pdf">2000</a>.</p>
<p>Both judges found the transaction illicit because it protected shareholders rather than depositors and because of its long duration. But they both came to the conclusion that there was no appropriate way for the lifeboat to be repaid. </p>
<p>Heath felt it was risky while Davis found that the beneficiaries, policy holders in one of South Africa’s biggest insurance companies Sanlam, could not effectively be tapped for the funds. Sanlam owned Bankorp at the time it got into trouble.</p>
<p>The bailout saved Bankorp from collapse. Absa then entered the fray and bought Bankorp presumably at fair value from Sanlam. This meant that, in the end, Sanlam policyholders were the beneficiaries of the lifeboat. </p>
<p>The complication is that Sanlam is today a very different kind of company, owned by shareholders and no longer by its policyholders.</p>
<p>The Public Protector found otherwise.</p>
<h2>The Reserve Bank</h2>
<p>How this matter relates to the proposed constitutional amendment is something the public protector would have to explain very slowly and carefully. The link isn’t obvious.</p>
<p>It is also not at all obvious that it is appropriate for the Public Protector to instruct Parliament to change the Constitution. It seems extremely peculiar and beyond the mandate of the office, although constitutional experts rather than economists would be better placed to comment definitively.</p>
<p>Nevertheless, the constitutional proposal of the Public Protector raises, or resurrects an interesting question: is the constitutional mandate of the South African Reserve Bank appropriate? </p>
<p>The most contentious change Mkhwebane proposes is that clause 224 (1) of the constitution be amended. This clause currently reads: </p>
<blockquote>
<p>The primary object of the South African Reserve Bank is to protect the value of the currency in the interests of sustained and balanced growth.</p>
</blockquote>
<p>The Public Protector says it should be replaced with: </p>
<blockquote>
<p>The primary object of the South African Reserve Bank is to promote balanced and sustainable economic growth in the Republic, while ensuring that the socioeconomic well-being of the citizens are protected. </p>
</blockquote>
<p>This change is inappropriate, not because it introduces the socioeconomic well-being of the citizens into the mandate, but because it removes any reference to the responsibility of the central bank in regard to the value of the currency.</p>
<p>In my 2005 book <a href="http://www.gsdpp.uct.ac.za/sites/default/files/image_tool/images/78/Files/Pubs/61-season-of-hope-economic-reform-under-mandela-and-mbeki.pdf">“Season of Hope”</a> I also raised concerns about the absence in the constitutional mandate of the bank of a reference to the welfare of the people. After all, even the mandate of the US’s Federal Reserve Bank places the value of the currency and maximum employment as its twin <a href="https://www.federalreserve.gov/aboutthefed/structure-federal-reserve-system.htm">responsibilities</a>.</p>
<p>It could be argued that even without this clause, the South African Reserve Bank has occasionally acted as if it has a social mandate. This was particularly evident in the <a href="http://www.news24.com/Archives/City-Press/Who-will-replace-Gill-Marcus-20150429">Gill Marcus era</a> when as governor she kept interest rates lower than ostensibly justified by the inflation rate because of the dire state of the economy in the post-financial crisis period.</p>
<p>A welfare or employment element in its mandate could, at least in the abstract, bring a suitable balance to the responsibilities of the bank. But the Public Protector’s proposal to drop any reference to monetary stability would be extreme, utterly unconventional, and hopelessly foolish.</p>
<h2>Now what?</h2>
<p>As a bundle of proposals, the Public Protector’s findings have created a great stir. </p>
<p>It is very doubtful that Absa (now Barclays Africa) could be made to pay for Sanlam’s benefit and beyond even the realms of the post-truth era that monetary stability would be entirely removed from the constitution. It is hard to imagine that the Public Protector actually saw these proposals as viable.</p>
<p>The cynical among us might speculate that the ignition of such a grass fire is a wonderful way to deflect attention from pertinent state capture issues, and to implicitly support the radical economic transformation version of the <a href="https://theconversation.com/white-monopoly-capital-an-excuse-to-avoid-south-africas-real-problems-75143">“white monopoly capital”</a> thesis that so much that is wrong with South Africa can be blamed on a few immoral capitalists.</p><img src="https://counter.theconversation.com/content/79792/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alan Hirsch does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>South Africa’s Public Protector, Busisiwe Mkhwebane has touched on two highly contentious issues: the unresolved bailout for a local bank three decades ago. And the role of the country’s Reserve Bank.Alan Hirsch, Professor and Director of the Graduate School of Development Policy, University of Cape TownLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/675932016-10-25T13:53:26Z2016-10-25T13:53:26ZWill Germany flout Europe’s bail-in rules if Deutsche Bank needs rescuing?<figure><img src="https://images.theconversation.com/files/143079/original/image-20161025-31489-twz1t6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Troubled towers: the HQ in Frankfurt.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/xingxiyang/13568965704/in/photolist-mF3uLy-7ft4dF-9pzhx7-djvQ4m-7yaxPh-e7dDr5-aBA6JJ-7fK6oT-2N1sSa-osPyao-pk2LCy-89tXH-g8xTQz-7RYt47-f6fq2-iz15s-5gt8nn-9AFCXP-8W3tnr-7yay9J-7AeBzU-49C6Ro-d2si4-4cAwah-9ocaaM-qCb9-aH4tbP-4Tws41-cmfhYb-5iSTTR-6PqKBE-9MXaHr-9oVcVi-aWxvs2-gjPCso-9fFFfy-9H33Dr-bVSdFW-NhuML-ppxzDB-hKggUH-qPPT6L-avjozw-6Bvcsr-qVk8V-eqWDmB-9pzdHE-mS4fv-4cBURH-7V3XA">Kiefer</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>Will Deutsche Bank need rescuing? It’s a question that is being asked as this big beast of global banking gears up to announce its third quarter results on October 27. With losses <a href="http://www.hitc.com/en-gb/2016/10/24/deutsche-bank-predicted-to-reveal-a-loss-this-week/">expected</a> to be north of €600m (£534m), the backdrop is dismal: Deutsche Bank is in talks with the US Department of Justice (DoJ) about a massive fine following an investigation into mis-selling toxic assets by the bank’s US division in the run up to the financial crisis of 2007-08. </p>
<p>The DoJ <a href="http://fortune.com/2016/09/16/deutsche-bank-doj-mortgages-case/">requested</a> US$14 billion (£11.4 billion) from Deutsche Bank to settle the case last month. The final settlement, which is due any time, <a href="http://www.cnbc.com/2016/10/20/deutsche-bank-vs-doj-heres-why-its-all-taking-so-long.html">may come in</a> somewhere around half that. But that would still be more than the €5.5 billion Deutsche Bank has set aside as a litigation reserve, and there are further losses still expected. </p>
<p>With shares <a href="http://www.cityam.com/252061/deutsche-bank-predicted-reveal-loss-week-and-doesnt-look">down by</a> close to half since the start of the year, albeit recovered a bit recently, there have been <a href="http://www.bbc.co.uk/news/business-37496268">reports that</a> the German government is planning a rescue by buying a stake if the DoJ fine is too onerous. The government denied this, but it raised an interesting question about what will happen if Deutsche Bank does fail. </p>
<p>Under <a href="https://www.ft.com/content/8ad2ed98-d0a0-11e5-986a-62c79fcbcead">EU rules</a> that came into effect in January, there can be no government bailouts of banks until there has been a bail-in – meaning other creditors to the bank such as bondholders and large depositors taking a share of the pain. The rules are highly controversial and I suspect the Germans will not want to impose them. If so, it will set the scene for an almighty row about double standards. </p>
<h2>Bailouts and bail-ins</h2>
<p>The new bail-in rules, known as the <a href="http://eur-lex.europa.eu/legal-content/en/TXT/?uri=CELEX%3A32014L0059">Bank Recovery and Resolution Directive</a>, are a response to the 2007-08 banking collapses. They were inspired by the UK’s <a href="http://www.legislation.gov.uk/ukpga/2009/1/contents">Banking Act 2009</a>, which was passed in the wake of the bailouts of the likes of RBS and Northern Rock. </p>
<p>Britain had previously been shamefully lacking in legislation to cope with bank insolvencies. The new act gave the Bank of England draconian powers to cope with future crises, including the right to modify the amounts owed to creditors on a struggling bank’s balance sheet. This was designed to avoid the need to inject public money in future by making others foot the bill instead. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/143080/original/image-20161025-31504-1kgxxh1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/143080/original/image-20161025-31504-1kgxxh1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/143080/original/image-20161025-31504-1kgxxh1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/143080/original/image-20161025-31504-1kgxxh1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/143080/original/image-20161025-31504-1kgxxh1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/143080/original/image-20161025-31504-1kgxxh1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/143080/original/image-20161025-31504-1kgxxh1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/143080/original/image-20161025-31504-1kgxxh1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Who rescues who?</span>
<span class="attribution"><a class="source" href="http://www.shutterstock.com/pic-312411911/stock-photo-an-emergency-tire-floating-in-a-pool-symbolic-photo-for-rescue-and-crisis-management-in-the-financial-crisis-and-banking-crisis.html?src=T2JJO0oqd57lXaO3EaFeHQ-1-44">Lisa S.</a></span>
</figcaption>
</figure>
<p>Under the EU’s 2014 directive, there can be no government bailout of a bank until at least 8% of its liabilities have been absorbed. This is a complete break from the past. It means that if a bank becomes insolvent and can’t raise fresh funds from its shareholders, certain liabilities may be reduced by the management in consultation with the country’s financial authority. </p>
<p>One of the main ways in which banks and other businesses raise capital is to issue bonds. Saving vehicles such as pension funds buy these in the expectation they will get the full amount back with interest at the maturity date. But not any more. Now even in a better scenario, the right of these most cautious of savers to be repaid might merely be downgraded to rank the same as all the ordinary creditors waiting to get their money back. The only bank liabilities that cannot now be modified are customer deposits up to roughly £90,000 and a few untouchable exceptions such as employee salaries. </p>
<h2>Double standards?</h2>
<p>Bailouts essentially protect bondholders to the detriment of the taxpayer, whereas bail-ins do the opposite. Before the new rules were introduced, several test cases showed how divisive bail-ins can be. Cypriot depositors were furious to <a href="http://business.inquirer.net/112981/savings-account-seizure-plan-draws-fury-in-cyprus">lose savings</a> en masse when Brussels insisted on a bail-in as a condition of bailing out Cyprus in 2013. There was <a href="https://www.ft.com/content/8ad2ed98-d0a0-11e5-986a-62c79fcbcead">similar uproar</a> and threats of lawsuits when bondholders of Novo Banco of Portugal had their assets written down last year. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/143084/original/image-20161025-31486-18sx2an.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/143084/original/image-20161025-31486-18sx2an.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/143084/original/image-20161025-31486-18sx2an.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=643&fit=crop&dpr=1 600w, https://images.theconversation.com/files/143084/original/image-20161025-31486-18sx2an.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=643&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/143084/original/image-20161025-31486-18sx2an.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=643&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/143084/original/image-20161025-31486-18sx2an.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=808&fit=crop&dpr=1 754w, https://images.theconversation.com/files/143084/original/image-20161025-31486-18sx2an.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=808&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/143084/original/image-20161025-31486-18sx2an.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=808&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Italians do it different.</span>
<span class="attribution"><a class="source" href="http://www.shutterstock.com/pic-172285184/stock-photo-piggy-bank-with-flag-coating-over-it-isolated-on-white-italy.html?src=m0osssv7EzLDXUIbCo_otA-1-8">Niyazz</a></span>
</figcaption>
</figure>
<p>And while it might make sense from a northern European legal perspective that taxpayer interests should prevail over bondholders, not all countries see it that way. In my native Italy, for instance, public saving has been heralded as a fundamental value for decades. Italy’s banking association <a href="http://www.politico.eu/article/italy-bank-crisis-renzi-bail-in-commission/">questioned whether</a> the EU bail-in mechanism is consistent with the country’s constitution. </p>
<p>There is also the feeling in southern Europe that there are double standards at play with the new rules. Where German and British banks needed bailed out after 2007-08, goes the narrative, the likes of the Italian banks weathered the crisis. They caught a different virus from 2011 onwards after being forced to buy toxic sovereign bonds issued by their governments to stay solvent during the eurozone crisis. </p>
<p>The sense is that British and German politicians and their respective bankers cleaned their respective “houses” with bailouts and promoted the bail-in once the job was done, thinking their banks wouldn’t have to deal with it. </p>
<p>Yet as Deutsche Bank is finding out, you never know what is around the corner. If the worst comes to the worst, I doubt the Germans will follow these Anglo-Saxon rules. It is more likely that there will be a German exception. </p>
<p>If so, it will be a classic example of how hard it is to make rules for the whole of the EU. I can hear the objections from the south of Europe already. Had it been an Italian or Spanish bank, they will say, it would have sparked the traditional tantrum against the peculiar Mediterranean way of interpreting rules and ultimately circumventing them. Unfortunately it will be hard not to agree with them.</p><img src="https://counter.theconversation.com/content/67593/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pierre Sinclair de Gioia Carabellese does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>If Berlin doesn’t apply divisive rules that inflict pain on savers, expect cries of double standards from southern Europe.Pierre Sinclair de Gioia Carabellese, Associate Professor of Business Law, Heriot-Watt UniversityLicensed as Creative Commons – attribution, no derivatives.