What I've been hearing on the internet is that companies are racing to lay off as many people as they need to now, before applying for their free bailout money from the government. It also sounds like businesses are trying to lay off more than they actually need to lay off, in order to get the maximum benefit.
The terms of the bailout loans are such that they can lay off people before they apply, get the money, and so long as they don't lay off any additional people after they get the money, the loan converts into a grant (i.e., a free bailout from the Federal government).
My personal opinion is that giving free money to companies is a terrible idea, and they should just give helicopter money to individuals. Companies are going to engineer this to their maximum benefit, and the amount of money going to companies is much much greater than the amount going to individuals.
Interesting times we live in. It's important to ignore what people say, and instead focus on what they actually do.
Business owner here. First, let me dispel the myth that business owners are wealthy. All of my friends from school have more liquid assets than I do. I am utterly broke unless you count for the paper wealth of my company shares.
When COVID hit, within a week we had customers dropping out of our sales funnel. Half of our expected revenue growth disappeared as customers decided to reduce risk and stick with existing solutions. This is what happens when the market goes “risk off”.
My company, like most, is leveraged. If I don’t earn positive cash flow, covenants on my debt will trigger a default, instantly ruining the firm. One default cascades to all the facilities, because that’s how debt works.
So, if I need to get to cash flow neutral, I am going to lay people off. I have no other option. It’s either that, or ruin.
This is why the government is supporting businesses by effectively becoming a lender of last resort. By tapping government loans, I can maintain my employees while we wait out what will probably be a short period of downturn. The money I have been offered is three year. Three years from now, we have either figured this thing out or we are living in caves. I’ll pay back the loan and my employees will keep their jobs. That’s how this works.
If I could provide feedback to policy makers: government should get something in return for the largesse. A small stake in each company, for instance, that we have the option of buying back at cost later. Because if society is supporting my business, society should have a stake in its recovery. I have not seen that happening anywhere.
If a 50% drop in expected revenue _growth_ causes you to default on your debt you are either a startup that had trouble raising money, in which case now you know that you do not have a viable business plan, or you are running a completely unsustainable business that only existed because of easy access to cheap debt the past couple of years.
Common misconception. It’s not uncommon for companies to use leverage to fuel growth. High yield venture debt is often tied to growth metrics. It’s not a mistake to operate a company using venture debt. In a highly competitive market, if you don’t lever up, your competitors will eat your market.
Something I often explain to customers (shadow.cat is a consultancy so we usually don't arrive until several years into a company's life) is that, yes, they've accumulated a shitload of technical debt, and yes, I get they're embarassed about it, but if you don't cut some corners in the early days your competitors who do will drive you out of business before it ever matters.
Then I politely point out to them that they're still in business, and their codebase is doing something sufficiently useful to customers that it's making enough money to be able to support a budget for us to help, so clearly they did something right and I'm not going to hold against them the choices without which they'd've never become a customer anyway.
(anybody doing similar work please feel free to steal my spiel, it's so nice to get the in-house developers to realise they're not going to be judged because it makes it much easier to get on with the part where you work with them to unfuck the codebase :)
> It’s not uncommon for companies to use leverage to fuel growth. High yield venture debt is often tied to growth metrics.
This is, of course, exactly my point. "High yield venture debt" only exists due to absurdly low interest rates and an abundance of capital being driven out of public markets and into private ones. Now that the free lunch is over do not be surprised that your lenders come calling now that your "high yield" (read: risky) loan is no longer profitable under current market conditions.
> In a highly competitive market, if you don’t lever up, your competitors will eat your market.
I.E. When capital is cheap and abundant it is possible to burn cash on an unsustainable business plan for marketshare, but when the entire market itself rapidly shrinks your business plan is horribly unviable.
Honestly most companies, not startups only, run on the idea that if you don't have debt, you're doing something wrong. It's not entirely false when the economy is neutral at least.
Ultimately, the explosion in venture debt products was probably an off shoot of quantitative easing and the general long term fall in interest rates. Investors seeking a yield from regular lending have not been getting it. The present financial crisis will test the hypothesis that the yield on all this venture debt was adequate to cover the risk of default.
It’s totally viable to have a no growth business. Trustful clients, steady income, no debts. I’m lucky but for now there is nearly no impact on my web agency. And even if activity dropped to 0 we have cash for a few months to pay salaries. I always aimed for a rock solid balance sheet, and a bailout of our over leveraged competitors would be very unfair.
Well you see it was a mistake to lever up because now your company's failed. Bailing out companies that got leveraged up to their eyeballs just rewards companies that take as much risk as possible. Does that sound healthy to you?
> It’s not uncommon for companies to use leverage to fuel growth.
Seems true.
> High yield venture debt is often tied to growth metrics.
Seems true.
> It’s not a mistake to operate a company using venture debt.
Is this true, or might it be more accurate that particular people, depending on their situation, would like to have us believe it is true?
If a company is operating using venture debt, or operating in any arbitrary fashion for that matter, and then a disruptive incident occurs and the company's finances are insufficient to sustain itself and must shut down (in turn losing at least a significant portion of the initial investment), is it accurate to say that "no mistakes have been made"?
If the business in question then goes hat in hand to the public (whose constituents are often lectured to "save money for a rainy day", and who also have serious financial issues of their own), asking for a bailout with this story as a justification of sorts, does this not seem a little bit absurd?
Am I looking at this the wrong way, because it kind of seems counter-intuitive to me?
> In a highly competitive market, if you don’t lever up, your competitors will eat your market.
> or you are running a completely unsustainable business that only existed because of easy access to cheap debt the past couple of years.
Or you planned for revenue growth by doing things like buying extra equipment, hiring more workers, increasing office space, etc.
When operating a business, you have to plan for growth, or lack of growth, or even for revenue to fall. And your planning often costs money, or commitments to pay money. If reality suddenly doesn't match your planning, then you are in trouble.
And I totally don't get why people are so negative on debt. If I'm running a relatively new company, and realize I have a good product that is going to increase in demand next year, but I don't have the money to build out a new factory - I can get a loan. If I happen to be, say, Apple, I don't necessarily need a loan - I can finance it myself using cash reserves from previous years. Why is it better to live in a world where the only companies who can build up for future growth like this are huge companies like Apple?
Uhhhhhh, are you talking about bank term loans? Bank term loans have repayment periods over decades (usually), and use the physical assets as collateral. Not what OP is talking about.
If you pay your employees and you pay taxes then saving your company is already a worthwhile investment for the taxpayer. Governments are typically not very good at owning companies.
They don’t have to own the whole thing. However at some point owning a small non voting stake... I just don’t see the downside. You want cheap money? Uncle Sam is going on your cap table.
My thought was that rather than going straight onto the cap table, the government would get a sort of option set where either you pay back the loan with interest or if for whatever reason you need to defer/reduce payments then they get the shares. Not honestly for your benefit so much as because accounting for and disposing of that shareholding is not something the government is set up to do efficiently so avoiding them needing to as much as possible seems sane.
(also a business owner here, but a purely bootstrapped one hence my vagueness around the terminology - but hopefully the idea makes some sort of sense and if it actually sounds useful then somebody who does grok the cap table side of things can flesh it out ;)
> A small stake in each company, for instance, that we have the option of buying back at cost later. Because if society is supporting my business, society should have a stake in its recovery.
If businesses can buy it back at cost later, is this not a textbook example of moral hazard?
Now I in no way believe you, or business people like you, are responsible for this debacle any more than the average person on the street - rather, it is these gigantic but incredibly fragile corporations that have optimized for profitability at the expense of stability/resiliency who have put the entire country in an extremely precarious place. Again. 12 years after the last one, which a lot of "non-expert" people saw coming, while the "expert" economists and policy makers poo-poo'd these warnings, patting these people on the head as if they were children who are unable to think on the same level as them. Technically, they are right, in a way - us regular folks truly do not think on the same level as them, in that we tend to not posses the magnitude of arrogance and self-confidence it requires to drive straight into a clearly visible wall at top speed, while ignoring all warnings.
Will we learn anything this time? I predict we won't, and I speculate that the core reason is that we have a fundamental problem in our culture. Our cultural axioms (the way we believe reality is, the way we believe society and commerce should be structured, etc) contain imperfections. Until we are willing to consider this possibility, and then proceed with a serious[1] post incident analysis, with a goal of honestly identifying shortcomings and setting out to fix them for good, I'm afraid we will repeat this whole process over again within 20 years.
Think about the magnitude of the aggregate intelligence that exists within the HN community, with broad expertise across many domains. And not just HN, but all the various communities out there. Imagine if these "non-experts" were to one day say: "We have had enough. Let's stop fighting among each other, put our heads together, and start writing policy papers of how this should be done, go through a standard process of review, criticism, refinement, etc (just like we do on any engineering project), and then publish and publicize the results of this work widely. Let's use our combined minds, and voices, to once and for all put some detailed and implementable ideas out into the public domain, and shine a light on them for all to see. Then, when "the experts" come up with their self-serving plan, we can start a process of compare and contrast, pointing out in extreme clarity, in words understandable to both layman and domain expert[2], exactly where they have hidden their backdoors."
Granted this is no small task, but is it impossible? And if we don't do it, what are the consequences of that choice (because doing nothing is a choice).
[1] By serious, I mean: no restrictions on access to information (and therefore no restrictions on who can get involved in an analysis - "many eyes"), no restrictions on speech, no single entity (corporations, lobbyists, mainstream media) dictating the narrative to citizens). The post 2008 analysis is not what I would call serious. A more appropriate word for that would be "theater", not unlike many other rituals our society engages in.
[2] Ideally, the information would be presented in various levels of detail, catered to different demographics, not that dissimilar to those who do contribute documentation to open source projects.
I hope that we some day have competent, completely arms length people perform a proper systems analysis and produce competent, evidence-based recommendations, and then we implement those (because done correctly, these recommendations should be as close to the gold standard as humanity is currently capable of), plus, and extra say 0.5% skim off the top that goes into a kitty for a rainy day.
Why this seems like too much to ask (or even consider!) is another one of those things that I "just don't get".
People like to compare the current situation to wartime and I think some of the parallels are useful.
In wartime there is a much stronger moral backlash against perceived profiteering. We're seeing it in the UK with campaigns to boycott companies that have already shown no desire to share the nation's pain.
Hopefully companies that cynically abuse the bailout will find themselves tarnished in a way that is harder to shake off than it usually is.
Unfortunately there's little visibility into this, so we can raise our pitch forks and go after companies with angry mobs, but at the end of the day we don't really know what's going on inside every company.
The law makers are the ones who write the cheques and make the system the way it is. The real problem is how laws are made and how the government functions.
> The law makers are the ones who write the cheques and make the system the way it is. The real problem is how laws are made and how the government functions
Amen x 1,000,000. We elected these people whether we voted or not. As a people (whatever country we are in) it is our responsibility to hold them accountable because they will not hold themselves accountable. The whole system is completely broken.
I have but one concrete political belief / theory: Vote ‘em Out! Whenever I have to opportunity to vote I vote for whoever is running against the incumbent. The goal would be to ultimately create an ideological equilibrium instead of a mass polarization (as is currently happening in the US and abroad).
If a company is behaving unethically (but not necessarily illegally), whistleblowers can help in informing the public as to the abuse. It is especially needed in times of crisis (like this one), but because it's a time of crisis, I would assume the motivations of whistleblowers may be less strong if they don't feel entirely financially secure.
Which is a shame since our country continues to shame and discredit real whistleblowers, instead of giving them job loss immunity (or at least some form of protection that is equal or higher than the monetary loss that could befall them for speaking up).
This seems far too error prone for my liking, particularly considering the sub-optimal way in which we handle whistleblowers.
If we have such little control over our financial system that we have to literally rely on hope, wouldn't it make sense to maybe pull back the covers on this monstrosity and starting figuring out what's inside?
And if public policy makers once again deem the system "battle ready" and come asking for a handout again in 10 years, what then? If someone ran their family like this, we'd call them a bit of a dummy, wouldn't we? So why is this acceptable for the financial system upon which our society (aka: our individual lives) rests?
If we hadn't grown so accustomed to this madness, I think a lot of people would be more agitated by it, but it's been with us for so long we seem to just accept it.
It kinda happened with Gamestop here. They tried to classify themselves as essential business first ( I kinda bought the argument btw. - there are people who don't handle isolation well; entertainment helps ), but after backlash all of a sudden delivery @door came into being.
I will add that all of a sudden, I have way more respect for Amazon ( not for their employee practices ; it is a separate can of worms ). Their website just works. I tried to do similar things yesterday on BestBuy I did on Amazon and it was just made purposefully difficult.
In my darker moments, I want some of those companies to fail hard now so that something better may be ushered in. But then I remember people don't behave in a civilized manner then.
I'm kinda curious what role Gamestop would be considered essential when you have alternative ways to purchase games such as Steam, XBox/Playstation stores and just simply Amazon.
At this point it wouldn't be worth the risk to allow people to get games at a slightly better price because it is used at Gamestop.
They carry a lot of portable systems ( psp, various nintendos ). Some people also want physical copies ( me ).I get that internet as a gaming portal is here to stay ( I have Steam and GOG ), but I don't believe single ecommerce site should be the answer.
I doubt there will be any serious backlash or even a non-trivial amount of reporting about such cases. Also, not sure what kind of backlash there really was over war profiteering - plenty of American companies collaborated with Nazi Germany, and plenty of Nazi companies are still around and going strong today. Grassroots campaigns to boycott 'bad' companies seem to start, fizzle out and disappear all the time these days. There is no support for such boycotts from mainstream media or the powers that be.
> The terms of the bailout loans are such that they can lay off people before they apply, get the money, and so long as they don't lay off any additional people after they get the money, the loan converts into a grant.
This is false. The formula for the maximum amount of the loan is based on last years employment levels, or optionally, for companies that were not in business last year, based on January-February employment levels.
Any layoffs now do not help make the loan any larger, they will in fact reduce the size of the loan.
See Section 1102(a)(2)(36)(E) and 1106(d)(2).
The formula for the amount of the loan which can be forgiven is based on the employment levels remaining at last year's levels. There is an exemption in the case of tipped workers, as long as any layoffs are hired back by June 30th. (that is to say, the number of employees, not the same employees)
The amount of loan forgiveness under this section shall be
reduced, but not increased, by multiplying the amount described
in subsection (b) by the quotient obtained by dividing--
(i) the average number of full-time equivalent
employees per month employed by the eligible recipient
during the covered period; by
(ii)(I) at the election of the borrower--
(aa) the average number of full-time equivalent
employees per month employed by the eligible recipient
during the period beginning on February 15, 2019 and
ending on June 30, 2019; or
(bb) the average number of full-time equivalent
employees per month employed by the eligible recipient
during the period beginning on January 1, 2020 and
ending on February 29, 2020;
(II) in the case of an eligible recipient that is
seasonal employer, as determined by the
Administrator, ...
The max loan is $10M though. And the amount of the loan is based on 2.5x the average monthly payroll costs for the year prior to the application date. So it seems like there are a few loopholes:
a) If you have monthly payroll that is higher than 4M a month (2.5x4m=10M), than you can cut payroll and not have your total loan amount impacted (although it might impact the amount of loan forgiveness)
b) If you hired a ton of people over the last year, your average monthly payroll costs is going to be lower than your current payroll costs. And seeing as how the comparison period for forgiveness is the first half of 2019, this gives companies a free pass to cut employment to those levels without punishment.
So yeah, not all companies would benefit from layoffs (particularly smaller companies that have no little or no employment growth in the past year), but it seems like at least some could. The caveat here is I am not very familiar with the bill, so I may be missing some clauses that protect against the above scenario.
EDIT: Also, its not clear to me how the 25% salary cut exemption and the max $100k clause play into this. It seems like the payroll ratios that are used to adjust the loan forgiveness amount don't get adjusted. So in the above loopholes, instead of laying off employees, you could cut salaries without penalty. Alternatively, you could cut salaries by 25% but add more employees to the payroll to get the same monthly total in order to qualify for the full forgiveness.
(3) REDUCTION RELATING TO COMPENSATION.—The amount of loan forgiveness under this section shall also be reduced by the amount of anyreductioninexcessof25percent of compensation in the most recent full quarter in which the employee was paid in compensation during the covered period of any employee who was compensated—
(A) in an amount less than $33,333 during the period beginning on March 1, 2019 and ending on June 30, 2019; or
(B) not more than $100,000 on annualized basis during 2019.
------------
IANAL, but that sounds like employers can reduce employee compensation by 25% without any reduction in loan forgiveness, for any employee making less than $100k/yr.
Also, unless the individual workers are being tracked, they could also fire the existing workers, and hire replacements at a 25% reduction in compensation. Especially at the more easily replaceable sectors of the labor force, there are a lot of people desperate for employment right now.
EDIT: The Application section states:
-------------
(e) Application.—An eligible recipient seeking loan forgiveness under this section shall submit to the lender that originated the covered 7(a) loan an application, which shall include documentation verifying the number of full-time equivalent employees on payroll and pay rates for the periods described in subsection (d), including—
(1) payroll tax filings reported to the Internal Revenue Service;
(2) State income, payroll, and unemployment insurance filings;
(3) financial statements verifying payment on debt obligations incurred before the covered period; and
(4) any other documentation the Administrator determines necessary.
-------------
So it says they are interested in the number and fulltime-equivalent employees and pay rates, but nothing about the replacement of existing workers, although that information should be available in the payroll, state, and unemployment tax filings. With all likelihood, they are just looking at totals, just for efficiency's sake in processing the number of loan applications. This seems to leave a loophole open for unscrupulous employers to dock employee pay 25% without cause.
This is all an emergency drill of course. We're all going to see how this shakes out.
Yes, the grant also provides some downside protection on actual compensation, not just employment count.
A vast number companies are hanging on to employees to pay them to do nothing right now. Stores closed, employees who cannot work from home, but still getting a paycheck. These grants basically allow the companies to keep these employees on payroll.
A significant amount of the terms of the loan forgiveness rely on employers "doing the right thing" by their employees: not docking their pay up to 25% while still claiming the full loan forgiveness. So in this case the lender and the employees are holding the bag for that 25%.
Why allow the employers to convert the full loan to a grant while reducing employee pay? Looking at it the other way, why wouldn't an employer reduce employee pay by up to 25% when they can pocket the difference?
The loan can only be used on qualified expenses, roughly rent, payroll, and utilities. And there is a $100k cap on qualifying salaries. So in the hypothetical scenario where revenue goes to 0, the owner can only use the money to pay their own salary up to $100k.
Of course, in the real world, I assume revenue for most companies won't go to 0. So there are probably cases where they could offset payroll costs with the loan while pocketing the revenue that would have been used for payroll. In the grand scheme of things though, the loan is only ~2.5 months of payroll, and the businesses that won't feel the impact of this coming recession will be few and far between.
Companies (with enough lobbyists) will take advantage of things sure. But thats a small subset of companies that will definitely need help restarting.
Many businesses forced to shutdown ops thanks to the lockdown continue to pay staff, bills, rents, suppliers etc etc even though there is zero cash flowing in. Everyday the loss mounts. And its not like govt paying the employees directly wipes that loss out when they return to work.
Most business aren't run by people just sitting around waiting for Godzilla to show up, to lay people off and get bailouts from govt.
Let's remember that the businesses need this bailout because state and local governments forced them to cease operations for an unspecified amount of time.
It's entirely reasonable for businesses to be compensated by the government in this situation. It's also reasonable to point out that the compensation is not enough, and it won't come soon enough, and some businesses will need to lay off staff to survive until they get the check.
They are also getting help from the government, in addition to the normal unemployment benefits which have always been available. It's not like nothing is being done for them.
Both businesses and workers are getting some help, which may not be enough. But let's not act like the government is only helping businesses.
There's a good reason to support businesses: if you airdrop money to individuals, businesses will go under because they don't have any revenue. That'll result in job losses, and when the virus is under control, there won't be jobs for people (you can't start a business and ramp up to a large number of employees overnight--it's a big organizational problem).
But the support for businesses should be limited to those that aren't laying off people. Not with some window to lay them off now, and meet a requirement later.
Support for businesses needs to be designed to help workers.
A huge number of folks, perhaps an overwhelming majority of americans, are living paycheck to paycheck[1]. When they get "airdrop" money, these folks tend to pay their outstanding bills or make large purchases that they would otherwise need to save up for. Who's getting that money in the end? Businesses whose services are in demand. This, in turn, incentivizes hiring and maintaining capacity to deliver their services.
But what's happened when we've airdropped money on businesses? They pocket the cash. Executives get bonuses, companies buy back stock and cut dividends to their shareholders. And to show their commitment to belt-tightening, they punish consumers and lay off workers. Trickle-down economics does not work. Paying companies does not help the workers as much as paying the workers directly.
It's a hard pill for people to swallow that they deserved to be laid off because their employer was non-essential. In an advanced economy, an enormous number (maybe even the majority) of jobs are non-essential. If they all disappear overnight, we'd have to rebuild the majority of the economy, and we'd extend the economic crisis by years.
"Non-essential" businesses that are in trouble under major social distancing include: most retail, gyms, yoga studios, massage therapy, most things related to office supplies/maintenance/provisioning, hotels, auto mechanics (they'll have some business but a lot less), airlines, coffee shops, restaurants, probably some manufacturing...there's really no way I can give a complete list.
Some large corporations will go out of business, though lots will be fine. The real hit will be small businesses, which typically have less than 2 months of cash reserves.
Note that I'm not advocating that more should be given to businesses than individuals, just that keeping businesses from closing is an important part of having an economy to recover. Giving money to individuals is the most important thing--it has an immediate impact, and targets the most vulnerable people now. But avoiding business closures is also important, and is important to ensuring we don't have 25% unemployment 12 months from now.
I do see how my original post wasn't strong enough in saying helping individuals is the most important thing. But please don't confuse the claims "the current stimulus is a poorly targeted shitshow full of bailouts for wealthy corporations" (true) with "nothing needs to be done for businesses" (false).
To the first point: maybe they’ll eventually make that money back, but they also may need help to survive the crisis.
As for the second point, I’m a bit confused whether you think you’re disagreeing with me. Giving companies loans on terms they couldn’t otherwise get is a form of supporting them. I was disagreeing with an OP who said we should only care about individuals.
Businesses that are crucial will be recipients of that air drop spending, as will the employees of those businesses. Cat litter task management SaaS apps? Not so much.
This is totally backwards and makes no sense, I agree.
Bailout money should come only for those who keep the work force in place. European countries have a thing called "short-time work", where you put staff on restricted schedules and the government pays e.g. 80% of the difference between the normal and the shortened hours. This is thightly coupled to not being able to do mass layoffs while "short-time work" is in place.
Yeah all this "keep the payroll going" is an excuse to keep all the existing ownership in place. Helicopter money and let the firms go bankrupt, or if you must (ugh) take equity and create a sovereign wealth fund or disburse the shares among the people.
We can't keep the old oligopoly and bail them out. Loans and grants are both bailouts.
This. The money needs to go to individuals/families so they can survive and stimulate demand. Corporations are nothing more than fictitious entities that organize people for particular tasks and goals. If equity goes to zero, that is simply creative destruction and new corporations can be organized to fulfill the needed roles.
Some may do that, but if we don’t offer loans or bailouts to many companies (as well as bolster unemployment for the individuals) companies will surely lay even more people off, no?
Not all firms are leveraged out their asses. Those firms with stronger balance sheets will be producing all the stuff we'll need. The other kind of firm will be quickly forgotten.
Some people will invest portions of that $15k to produce things that other people in their community need. Isn’t this how capitalism is supposed to work?
Instead, we will artificially prop up large corporations.
I don't think it's fair to call it a trickle-down experiment. We're bailing out companies because we think it would be bad for society if they all went bankrupt, not because we expect that money to trickle down as such.
How is propping up the “top” of the economy not a trickle down approach? It’s the definition. The opposite approach would be “bottoms up” aka propping up the workers.
It will be bad for society if the companies at the top all go bankrupt.
It will likely be worse for society if the results are even remotely similar to the previous crisis: further concentration of assets/wealth resulting in increased income disparity and loss of workers rights.
I'm not sure there's a clear definition of "trickle down". When people say that, I normally imagine something like a huge tax cut for the rich, and people arguing "well maybe they'll use that money to create jobs or something". It's a very different story to say "you know, many businesses are being legally mandated to shut down, let's give them some life support so they'll be there for all the workers they employ".
I don’t know how this works in the US, but in Iceland they are offering loans with 50% backing from the state. Meaning that if they fail to pay back the state will pay 50%. This is effectively a grant in all but name since the company has no intensive to pay, but full incentive to have have the state pay.
In the US, small businesses (<= 500 employees) can get loans (among other things). Any portion of it can be forgiven, depending on how the funds are used.
> Forgivable loans: There is $350 billion allocated for the Small Business Administration to provide loans of up to $10 million per business. Any portion of that loan used to maintain payroll, keep workers on the books or pay for rent, mortgage and existing debt could be forgiven, provided workers stay employed through the end of June.
"And the principle of really existing free market theory is: free markets are fine for you, but not for me. That’s, again, near a universal. So you — whoever you may be — you have to learn responsibility, and be subjected to market discipline, it’s good for your character, it’s tough love, and so on, and so forth. But me, I need the nanny State, to protect me from market discipline, so that I’ll be able to rant and rave about the marvels of the free market, while I’m getting properly subsidized and defended by everyone else, through the nanny State."
First, this is nothing like 2008, to which it's being compared.
In 2008 you had misbehaving companies taking huge risks with the (correct) assumption that they were too big to fail.
But what we have now is the government forcing businesses closed. It only makes sense that the government provide some assistance to those companies.
It feels great to quote Chomsky and to feel morally pure, I've certainly done it. But the truth is you would not like the result of that purity should the government follow that advice. The Federal Government and Federal Reserve acted in a ideologically pure fashion in 1929, and it caused a depression and hurt working people the most.
Secondly, we do have assistance programs for workers that have been laid off.
...you would not like the result of that purity...
The marketing, at least, is exactly like 2008. With the benefit of hindsight, we find that we don't like the results of impurity. The logical response is to choose more purity this time.
> But the truth is you would not like the result of that purity should the government follow that advice.
I would prefer companies that buy back stock, pay ridiculous salaries and bonuses to execs, have giant golden parachutes, and so forth use the capital to secure themselves for situations like these. I think bailing out companies that have demonstrated that the government bailout is their risk mitigation strategy should be allowed to die. Yes, that would suck more right now, but it would mean that from here on out companies have to act 'just a little bit more' responsibly.
To Chomsky's point, in America we don't even have capitalism- we have "socialism for the rich," and when you propose "real capitalism" the capitalists run for their pitchforks and knives. My favorite fact about capitalism, is that in a truly free market society, there's zero economic profit. What most people consider "profit" (or as I know it "the cream") is actually a sign of market manipulation whereby those profiting are paying less than they should for their labor, rent, and/or supplies.
Recommending socialism in America is always met with resistance, but I have no idea... Workers who claim to be capitalists, and I would think want to maximize their realized revenue, don't want to be paid what their worth going against their own philosophy. They accept the market as it is as pure and perfect when that is empirically not the case. Right now "socialism" would be a market correcting force, returning a lot of power and money to labor.
I could literally go on for hours... so I'll stop here.
In this case the victims would be the workers. So you could either buy the company out, nationalize it, or let it go bankrupt and pay the employees directly.
None of those solutions incentivize the kidnapper like a ransom payment (bailout, no strings) does, and they’re likely cheaper.
That’s a straw man. Big corporations that love regulatory capture and government bailouts rarely make free market arguments. They tout things like important regulations for their industry and how closely they work with the government to ensure a safe society or whatever.
I agree with you with the first point, giving money to companies isn't a good idea but I think it's also a bad idea to give it to "the people". I think it would be better to change. My opinion is most people are going to buy thing they don't need. Instead we could focus on better ideas for the future.... I don't know maybe I'm too utopist...
In the meantime, what do you propose people do who have been displaced from their jobs? Or who are unable to work due to social distancing and stay at home orders? Sure, some billers have stated “we will not disconnect/cancel due to nonpayment” but what answer do you have for those people?
This corporate welfare is garbage, and they’re then being stingy with what they’re giving to individuals? Fuck the politicians.
"Bad idea" vs. "Good idea" seems too restrictive to me. I think there are pros and cons to it and the sum total of those pros and cons may be different depending on your circumstances, finances, and personal beliefs. There are some people who need economic relief now and not a moment later. Giving money to 'the people' can help with this but also carries long term consequences like inflation of the currency. Not to mention, the range of people getting money may be too broad - for example, I'll be receiving a check but I don't think I need it at all. Creating a more restrictive or specific criteria for the delivery of this relief though would likely become somewhat of a bureaucratic nightmare and would inevitably slow things down. We've had similar stimulus packages in the past and whether they were effective in their goals is up for debate.
> My opinion is most people are going to buy thing they don't need.
That's... kind of a large part of the point as far as I understand. It doesn't matter where the money gets spent (rent, necessities, luxuries, hobbies, whatever) - the important thing is to keep the economy moving. When large portions of the economy are disrupted all at once (jobs lost, businesses failed) there's the potential for a domino effect.
Stewart Butterfield (Slack CEO) was asked if he'd commit to not doing layoffs and I appreciated his response[1]. Effectively pointing out that it's easy to just say yes in their position, and that it's presumptuous of Salesforce to be asking for no-layoff pledges. It's pretty meaningless and comes off as shallow or self-serving PR for types of businesses that are doing better than ever right now or can easily weather the event.
The CEO of Texas Roadhouse, a chain of restaurants, gave up his salary and bonuses to redirect to employees[2]. A particularly noteworthy example, I think.
The author of the original tweet is the CEO of Gravity Payments, a Square competitor that mostly serves smaller retail and restaurant businesses. In further tweets he talks about how they're losing tons of revenue right now. I agree that it's shallow for Slack and Salesforce to pledge not to have layoffs but in this case I think it's a pretty meaningful commitment.
Almost everyone I know who has run a business (myself included) has made similar sacrifices. This is not that rare. This guy seems to serially try to generate PR by making himself out to be a selfless CEO. In doing so, he is implying that most other CEOs/business owners are bad people.
It’s important there are vocal leaders showing the sacrifices they are making — otherwise it’s easy for others to pretend it isn’t possible to make the same sacrifice.
I think it’s counter-productive. He is making this seem like a huge sacrifice when, in fact, it’s par for the course. I wish if he wanted to talk about it, he would make it less about himself and more about “what it takes to run a business”. In many cases, people pay themselves nothing, take on debt (without having ever made millions of dollars per year), and don’t guilt-trip/lord it over their employees.
(Ok I’ve said my piece, I won’t continue to be a hater :P)
I would be very surprised if any significant fraction of CEOs and business owners had cut their personal compensation to this degree. Sure there are a few here and than, but probably, what, less than 5%?
This guy is clearly trying to garner some promotion out of his sacrifice, but he did still make the sacrifice and I think it benefits our society to laud people who do this.
You are definitely right for CEOs of large companies. But for small (aka most) businesses, including startups, you might be surprised. It’s also important to note that some business owners don’t have the luxury of being able to cut their own salaries (because they are already living at subsistence levels) and sometimes don’t even take any salary to begin with. By paying himself nothing, he shows he already has resources accumulated (which is not a bad thing!). This is a luxury some business owners have and others do not.
I don't think the second sentence follows. Good people existing does not imply that everyone else is bad.
What's more, signaling corporate responsibility + personal ethics is a part of his company in the same way that Elon Musk's flamboyancy is a part of Tesla.
I'm confused as to how he managed to parlay a tsunamic reaction of 500M social media interactions into a 16yo company whose finances are in need of slashing the CEO's salary to zero.
> ...company whose finances are in need of slashing the CEO's salary to zero.
You're only looking at one side of the equation. The CEO wanted to ensure that his employees were all making a living wage. He's so committed to that that he's taking the same wage. To spin that as a foundering business is rather disingenuous.
I wish more executives would take more modest wages. My employer would have a lot more runway if our execs were making the same as the rest of us. Hard to buy into "belt-tightening exercises" where we sack a dozen qualified and necessary employees whose salaries don't add up to a single executive salary...
> My employer would have a lot more runway if our execs were making the same as the rest of us.
He was making the same as the rest of his staff so where is his runway? First serious crisis in 5 years since that article and he's scrounging for $70K.
Not to be pessimistic but I assume when a CEO cuts their salary there are other forms of compensation like stock. Maybe someone here with more experience can weigh in?
Cutting $70k only helps one person keep their job. How many employees do they have?
Anyways, I still applaud his desire to keep 100% of his employees. It is noble. Board and shareholders might disagree but it is nice to see someone looking out for the people ahead of the business in this time.
He revealed to Inc. that he has sold all his stocks, emptied his retirement accounts, and mortgaged his two properties -- including a $1.2 million home with a view of Puget Sound -- and poured the $3 million he raised into Gravity. As majority owner, he is not exactly penniless.
I always wonder - when they calculate the dollars and cents of layoffs vs. hiring etc. Do they factor in the cost of losing employees, expertise, talent?
There's probably financial value that's hard to model/capture in the balance sheet by retaining employees and building up the average years of experience in your workforce, etc.
Longer answer: it doesn't matter as much as you'd think. These companies making huge layoffs are facing an existential crisis, not slimming down for a revenue shortfall.
I don't know much about this guy but when I hear a founder CEO cutting his pay to $0, I have to roll my eyes. Vast majority of CEO comp is in equity so cutting base pay to $0 has no material meaning. In addition, successful founder CEOs have typically already cashed out to the tune of millions of dollars while still retaining significant stock. With that much cash in the bank + ownership stack, the annual salaries or bonuses are icing on the cake. No CEO without a significant ownership stack is going to settle with $0 or even $70k.
I am aware of this, of course, and always find it interesting ...
According to my own understanding of US tax code(s), one must not reduce their w-2 income to zero - or even relatively small numbers that do not befit their position or responsibilities.
The issue here is that a funding for welfare programs, such as social security, are taken from wage earnings. It is, in fact, preferable for me, as a business owner, to reduce wages to zero and take compensation in the form of dividends or distributions.
But I cannot legally do that. I have been advised by multiple tax professionals that not only can I not do that, but I cannot have a conspicuously low salary. At the very least I need to hit the max social security threshold to avoid scrutiny.
So I always wonder how these $1 and $0 earners make this work on their personal tax returns ...
The $1 earners put a lot more than $1 on their W2s. Zuckerberg for example has $1 salary, $0 stock, and $22 million "other compensation" including security and jet costs.
That's not how a W2 works. All of those other forms of compensation are, of course, in their 1040 but are probably on a K1 or other amendment.
Social security contributions (to pick the most important one) can only come from wage income so the question remains: how are they paying into social security and, if they are not, why is that allowed when it is generally assumed that it isn't ?
That's the idea, no? Ownership is optionality, you can end up with 0 or with billions. Employment is security, you're "guaranteed" your salary but no more (or fired).
Sounds like he's promising security to his employees, and eating the variance himself - taking a hit in bad times and, conversely, making bank in good times. Sounds fair to me!
These days I wold argue that especially in small businesses and startups the first employees are the real risk takers. The owners/founders will usually find a way to get some money when a company is failing while the employees get nothing.
How are owners of small businesses able to make money while their company fails? I would like to know because I plan on starting a business in the coming year.
The point of starting a company is that you pay time-limited salaries to employees while accumulating investments in systems, tools, and processes that allow for/increase the efficiency of the generation of profits through doing something valuable for others. The portable assets among those investments remain valuable if that value can be harnessed for some context somewhere. Often, these values are far lower than they would be if you had a functioning organization operating them but something is better than nothing.
I think there is small class of founders who fail and end up better off than their employees but it is not the majority of cases. If you factor in resume/connections/experience, that number is certainly higher -- but that seems fair to me.
I wonder why we aren't hearing about companies selling more stock for funding. Sure it's at a huge discount, but better dilution than destruction, right? Is it just because the bailout loans offer them a better path? Or because they'd rather lay folks off than dilute?
There's no less cash in the market than a month ago, so at the right price there should be buyers? But since alongside cash, there's also credit and assets, I actually have no idea how much less cash-like "value" there is, even if the fed or somebody helped turn it all into cash. I suppose the government could always be the buyer instead of giving loans.
Are we really patting people on the back for cutting their own pay to allow employees to be paid more? That's how economics work: if you want to pay X then you have to find that money somewhere.
I did not downvote you, but paying people more is not a zero-sum game. The pay rate of an employee is not necessarily contingent on the salary of a CEO. More money can be attained through the creation of value in an economy - this value will add wealth - this added wealth could allow for both the employee and the CEO to be paid more.
The terms of the bailout loans are such that they can lay off people before they apply, get the money, and so long as they don't lay off any additional people after they get the money, the loan converts into a grant (i.e., a free bailout from the Federal government).
My personal opinion is that giving free money to companies is a terrible idea, and they should just give helicopter money to individuals. Companies are going to engineer this to their maximum benefit, and the amount of money going to companies is much much greater than the amount going to individuals.
Interesting times we live in. It's important to ignore what people say, and instead focus on what they actually do.