Brilliant analysis. Thank you for your insightful words.
In reality, there are very few economists who believe that a company should have 6 months of expenses in the bank for emergencies. I realize you are probably about to explain to me how those economists are wrong and companies are wasteful and whatnot. Frankly, they have their reasons and their reasons aren't do bad.
More importantly, most companies are not spending their money on frivolous things, like avocado toast. This isn't an HBO shocking sitcom/drama. Do companies make mistakes with their money, of course. But in my experience working with VC's, most companies are using all of their money on either marketing and sales, or R&D. Period. Maybe a bit on parties and morale but by percentage, 99% goes to sales and marketing or R&D. Large companies, on the other hand, spend their cash on all sorts of other things. Huge amounts of cash have still gone into sales and marketing, R&D, but also stock buy back, and investment.
> there are very few economists who believe that a company should have 6 months of expenses in the bank for emergencies
Economics is largely a study of game theory. When The Federal Reserve and Congress throw money at all companies, no matter the risk, doesn't this erode the future incentive for companies to be self-reliant and increase the expectation of similar monetary policy in the future?
Also, I read your comment's parent as if it was on The Colbert Report, dripping with sarcasm.
It's not at all clear that we would want most companies to be self-reliant enough to weather a coronavirus level storm. That self reliance would come with a very high cost that probably isn't worth it.
While everyone (biz or not) should have an emergency fund, this is not always possible. For example, restaurants - they already operate on razor thin margins, creating a 6 month emergency fund might not be that easy.
Plus, this virus is likely going to last more than six months - even if some businesses did have 6 month savings, what happens after?
The money may be coming from the Fed, but very little of it is going to small businesses. [1] What's more, PPP makes up a tiny fraction of the Fed's current coronavirus response.
Not sure I agree that every business needs 6 months of expenses, but what you do is let them fail, or raise capital from investors on terms that may not be so favorable to them (would dilute existing shareholders).
This would incentivize future companies to operate a bit more conservatively. The pattern of corporate irresponsibility followed by taxpayer-funded bailouts is a moral hazard.
The employees should get unemployment benefits. We should take some of the money we use for corporate welfare and shift it to individual welfare until jobs come back.
On your second point, no we should not. Do you think it's hypocritical to give humans government benefits that companies don't get?
Big business: It's not actually good for the economy to have untold trillions in rainy-day payroll costs locked up in bonds or other safe funds. That money is best reinvested into the economy, through wages, growth, or whatever. Apples $200B or whatever cash stockpile wasn't doing useful work in safe bank.
Small business: Have you ever actually run a small business, or even known anyone who did? Do you understand how ridiculous it is to tell a local coffeeshop "Oh, just have six months of payroll and rent in a safe"? These business contribute a lot to communities, and telling them "oh, you don't deserve to exist unless you are capable of withstanding once-in-a-lifetime pandemics" is asinine.
Yet this is the advice politicians, businesspeople, and landlords dole out to ordinary citizens in the face of not only threats like eviction but just their day-to-day immiseration...
Yes, ordinary citizens are different. What is your point? Are you suggesting companies really should keep 6 months of operating capital in the bank? Can you even imagine what would happen to the economy at that point.
The US GDP last year was $21 Trillion dollars. The gross revenue was about $2.1 Trillion dollars. This is all back of the envelope math but imagine if 50% of the difference between those numbers was the operating cost in the US of 6 months, or about $9.5 Trillion dollars. If we take that money out of the market and put it into a bank for a rain day fund, imagine all of the people not receiving that money. Imagine how many consumers would go down. This is all just an estimation but we are talking huge amounts of money not being put into the economy and frankly, our economy runs on consumption. Consumption doesn't happen without capital.
People should definitely safe. Have a 6 month personal supply. But companies need to spend.
> Are you suggesting companies really should keep 6 months of operating capital in the bank?
That's exactly what we're suggesting. Rather than going through this whole song and dance at least once a decade where the public has to bail out private business ventures, those private businesses should be able to fend for themselves against regular economic disruptions. This bailout and QE money isn't free and it comes with costs of its own. It would be better for the stability of the whole system if these companies could fund their own operations the next time there is a disruption.
What makes you think that the costs that trcollinson describes would be worth the benefit of "the stability of the whole system if these companies could fund their own operations the next time there is a disruption"?
You seem like you are trolling and trolls aren't well loved here but I will attempt to answer your rather flippant and not useful comment with something somewhat useful.
Companies and the economy cannot handle having a 6 month reserve of cash, that is the assumption and there are plenty of economic theories that show that doesn't work.
Bailing out with taxpayer dollars is one solution and it's the easiest dial to turn. It will bail out a lot of companies that aren't "shitty" and are just handling a time that is unprecedented and needs to be handled. As with most things, it will also bail out some "shitty" companies. We don't have a great metric for "shitty" vs "non-shitty". Those taxpayer dollars to companies are not free (though with inflation they basically are free). They have to be paid back with a minor amount of interest over a 2 year period. Will everyone pay it back? Nope. But many will.
The point to remember here is this is unprecedented and we are attempting to solve a future problem. Let's imagine we don't bail anyone out with very cheap loans. A bunch of "shitty" companies go out of business. A WHOLE bunch of "non-shitty" businesses go out of business. When the world opens up again the people who have lost their job have no where to go. There are no "shitty" or "non-shitty" companies to go back to. They went out of business. Unemployment stays at record highs for as long as is necessary for new companies, both "shitty" and "non-shitty" to come back and start hiring. A bailout allows companies to hang on and then bring back employees ASAP after the virus situation stabilizes.
Are there better ways? Probably. Will be find them? Probably. We can learn from this situation and become better. It will require a set of new methods and economic tools to get through in the future.
Your argument is founded on the idea that this is an extraordinary event, but this is clearly becoming a recurring pattern due to the increasingly risky and fragile way businesses are operated. If this were 2008, I might agree with you, but we are starting to form a trend here. We'll have yet another round of public-private wealth transfers for the "absolutely unprecedented" 2031 US earthquake.
What companies are getting bailed out besides the airlines and even that was half loans and the other half for payroll so just a roundabout way of keeping people employed? I guess you could call the small business loans a bailout but that was mainly forgivable for payroll also so another way of keeping people employed. Any that I am missing?
Businesses optimize to produce goods and services and sell them to the world.
People optimize for health, happiness, and personal utility.
(1) It's reasonable for us to guide society towards different financial goals for people vs businesses. Business failure is part of life (not that we should try to make it happen). Personal failure is catastrophic. The risk/reward tradeoff is different.
(2) You'll notice I'm also not advocating for letting people starve in the streets, if they don't have savings. Help people. Help businesses. We're adults, we can do both.
Given your reasoning I should setup “Burrows Household Ltd.” to hold my assets. Then when the economy goes tits up I’ll say, “I don’t have 6 months savings, but that’s okay because I’m a business not a household.”
In reality, there are very few economists who believe that a company should have 6 months of expenses in the bank for emergencies. I realize you are probably about to explain to me how those economists are wrong and companies are wasteful and whatnot. Frankly, they have their reasons and their reasons aren't do bad.
More importantly, most companies are not spending their money on frivolous things, like avocado toast. This isn't an HBO shocking sitcom/drama. Do companies make mistakes with their money, of course. But in my experience working with VC's, most companies are using all of their money on either marketing and sales, or R&D. Period. Maybe a bit on parties and morale but by percentage, 99% goes to sales and marketing or R&D. Large companies, on the other hand, spend their cash on all sorts of other things. Huge amounts of cash have still gone into sales and marketing, R&D, but also stock buy back, and investment.