Richard Branson

Our government’s fiscal strategy seems designed to exacerbate already-worsening economic conditions and pick up where the failures of 2008 left off.

In the coming weeks, months, years the CEOs of the biggest corporations will see the companies they lead collapse under tightening credit conditions. Amidst the Covid-19 crisis, these CEOs won’t have enough cash to service their debt and will walk cap in hand to the government, pleading for taxpayer money.

But why should we, the taxpayers, bailout companies that have taken on too much debt and spent all their cash on share buybacks rather than on responsible management and crisis buffers?

The UK government was told to stock up on personal protective equipment (PPE) by respiratory virus threat advisory group Nervtag in 2016. The response was that we didn’t have cash to spend on this vital equipment due to austerity. Austerity measures will be doubled down on after the current crisis to pay for the unprecedented fiscal stimulus, further decreasing our ability to deal with future exogenous shocks. We are on a dangerous path with a bailout
scheme that rewards, and therefore incentivises, corporate dishonesty, irresponsibility, and mismanagement, at the risk of lives.

Since 2008, the economy has been addicted to the liquidity and cheap credit being pumped in by central banks and the subsequent asset price bubbles. Many nations pursued debt-fuelled expansion instead of addressing deeper issues like stagnating productivity growth. Now we have even more public debt and even less room for monetary stimulus. Any money we give out needs to go to the most deserving. This is exactly the kind of crossroads at which we must decide to stop the trend of ever-increasing debt, public and private, and make businesses safer.

The CEOs will plead helplessness. They will say things like “how could we know this would happen?” to justify their incoming burden on society. No one could expect CEOs to have foreseen the outbreak of a pandemic, but they should understand that we operate on an economic cycle made of busts as well as booms. These companies take all the profits on the upside then sheepishly look to government to step in, with society bearing the cost, in the case of downturns for which they should have prepared.

They will also say “we are too big to fail,” covering up the fact that they could be replaced with people that plan ahead and think about the risks they are taking. Some companies must be saved to prevent damage to livelihoods and supply chains, but we must choose these beneficiaries very carefully. In the words of former chair of the Federal Reserve, Alan Greenspan: “if they’re too big to fail, they’re too big”.

The aviation industry is currently one of the hot topics. Can we afford to allow such large and interconnected companies to fail? Sir Richard Branson has lobbied heavily for a bailout of his project Virgin Atlantic, having chosen to put all his staff on unpaid leave due to, he would say, meagre cash reserves that don’t compare to those of his rivals. A well-managed company looks after its staff, for practical as well as moral reasons. The self-proclaimed “tax exile” – the entrepreneur resides in the British Virgin Islands and has thusly avoided millions in tax through the UK’s lack of international taxation – wants taxpayer money, which he does not contribute to, to save him from his lack of preparation. Nassim Nicholas Taleb recently tweeted that “Planes will fly [with] new owners!”.

Covid-19 is a grievous shock to the whole world. With monetary policy in the United Kingdom lacking in scope, an  unprecedented fiscal response is required, but this money needs to go to the hardworking people and families in the UK who have lost their jobs through no fault of their own, not to CEOs looking to shift all their downside onto society.

Think of the precedent of corporate invincibility this would cement after countless bailouts, and the repercussions for long-term financial stability and trust in institutions. The Babylonians knew this almost 4000 years ago; Law 232 of their Hammurabi Code summarises our position nicely:

If [the builder] destroys property, he shall restore whatever he destroyed, and because he did not make the house which he builds firm and it collapsed, he shall rebuild the house which collapsed at his own expense.

I hope our leadership chooses very carefully – more carefully than currently touted – which organisations receive bailouts, given the tendency of such “remedies” to backfire. The last decade has shown us the effects of misguided stabilisation policy and the stickiness of corporate irresponsibility. CEOs have failed to build their houses firmly and should be rebuilding their houses at their own expense, not ours.

Let’s not pay for our own impoverishment.

Image credit: UNClimateChange – Creative Commons