Improving the Next Round of Covid Relief
With the Coronavirus pandemic registering rising numbers of cases and deaths, the debate about additional federal aid continues; and while Congress has yet to agree on a final figure or even the make-up of how any additional funds will be allocated, the Trump administration has arranged by fiat for farmers to enjoy a special, new distribution of funds, independent of any Congressional approval. With these additional funds, federal payments to farmers are expected to reach a record of $46 billion this year.
I have two primary reactions to this latest administrative action.
First of all, according to statistics compiled by the US Department of Agriculture, as of September 2, 2020, net farm income for 2020 was projected to reach 22.7% above the 2019 figure. [Source: https://www.ers.usda.gov/data-products/farm-income-and-wealth-statistics/data-files-us-and-state-level-farm-income-and-wealth-statistics/] Perhaps things may have deteriorated for farmers since early September, but given the state of the overall economy, the agricultural sector seems to be holding up relatively well. Agriculture appears to be one of the economy’s brighter spots.
Second, and perhaps even more important, is the design of the program, which authorizes payments of $250,000 for eligible persons or entities, allowing more generous payouts when beneficiaries “actively provide personal labor or personal management for the farming operation.” The program imposes a constraint that the recipient’s adjusted gross income must fall below $900,000 unless at least 75 percent or more of income is derived from farming, ranching or forestry-related activities.
Irrespective of the end-run around Congress in connection with this latest program expansion, the orientation underlying the program happens to be fully consistent with the way Congress thinks about supporting businesses. Support businesses by throwing money at their owners. That’s what was done under the Payroll Protection Plan in the Cares Act; and it seems to be what’s being contemplated in connection with support for the airline industry. That approach is trickle-down economics, pure and simple. It may be expected that Republicans would embrace this solution, but I would have hoped that the Democrats would be a bit more circumspect.
As a bit of an aside, I direct your attention to another story that came out this week about Edward Stack, CEO of Dick’s Sporting Goods. Stack has enjoyed an estimated appreciation of $60.4 million on his stock holdings in the company, all the while the company was laying off personnel. This episode has nothing to do with federal subsidies, but it certainly highlights the limitations of trickle-down economics. The example showcases the tension between greed and the welfare of others, and greed comes out the winner. Undoubtedly, some benefits will trickle down to some, but the vast majority of any transfer payment benefit will accrue to those who directly receive the funds.
Beyond that specific example, the dramatic expansion of the CEO-to-worker-compensation ratio in the US over recent years, is further testimony to my point. [See https://www.epi.org/publication/ceo-compensation-2018/#:~:text=Using%20the%20stock%2Doptions%2Drealized%20measure%2C%20the%20CEO%2D,1970s%2C%201980s%2C%20or%201990s.] If money goes to the top of an organizational structure, you can pretty well expect those at the top to give priority to taking care of themselves at the expense of taking care of those at the bottom.
So… what do you do to support businesses in a time of economic contraction? The first thing you do is recognize the basis of the contraction. In the current situation, the pandemic has fostered a widespread reduction in demand. Businesses that are suffering today are those for which customer demand has been curtailed. The right economic remedy, then, should be to support demand. In contrast, direct payments to owners would increase supply. Increasing supply in the face of declining demand is both ill-considered and unsustainable. The airline industry is a great example of the foolhardiness of this approach. Given the pandemic, people are shunning airline travel, and it’s likely to be quite a while before the public returns to anything like its pre-pandemic pace of flying.
Direct payments to airlines — i.e., to owners — totally ignores this reality. The industry needs to scale down, and any policy that’s enacted should be one that eases this transition — not one that ignores this necessity, altogether. Rather than broadly supporting an industry that needs to scale back, we should allow the market to work, whereby the weaker, less efficient players drop out. This winnowing out of the suppliers will give the remaining entities a better chance to survive, profitably.
And how do you support demand? That’s easy. Transfer payments should go to individuals and households. Such payments would increase consumers’ disposable income, allowing their buying decisions to support the business activities that are most valued. Whether that support works to the benefit of farmers, airlines, or restaurants should be determined by the market — not by administrative fiat. This process won’t be easy for firms in transition and their respective work forces; but I expect it to be the most effective way to alleviate the pain of the current economic slowdown, as well as the fairest.