Why Offer COVID Relief Money to Big Business?

“Not one dime of the relief funds should go to big business.”  I saw something on Twitter yesterday to this effect.  Most people relate to the sentiment.  Our primary concern should be the well-being of ordinary people, most of whom are workers and not owners of big businesses.

Why then do economists and policy makers include bailouts and loans in their prescriptions for addressing the economic fallout of the coronavirus pandemic?   Perhaps economists and policy makers are just heartless bastards that have sold out to the plutocracy.  Some are and have, but the vast majority are not and have not.  There are actaully sound reasons why relief to business helps workers.

The primary goal of economic policy in the face of the pandemic lockdowns is to “freeze” the economy.  Workers in many industries have been idled.  (Others are overworked.)  The duration of the lockdowns even if they last for a few months are relatively short periods of time.  During that time, workers need income to replace that lost from wages that would otherwise have been earned.  They also need jobs to return to when the lockdowns are done.

Firms or businesses are essentially entities where workers and capital meet to turn materials into sellable commodities or services.  Both labor and capital are needed for the production process.  Hotels cannot operate without workers to maintain the buildings and clean the guest rooms.  They also cannot operate without buildings and furniture.

Suppose a lockdown closes a large business.  Just like workers, businesses have expenses that come due in the short-run regardless of a lack of revenues coming in.  The first thing the firm will do is draw down its reserves of cash and other liquid assets.  Unless the business is sitting on a large cash reserve, after a short period of time it will need to sell some of its capital; selling furniture or other capital it owns (probably at a fraction of the value in normal times).  When the lockdown is lifted the firm will be left without the capital it needs to restart operations and that means it cannot hire all of the former workers back.  If workers and capital were like identical cogs in identical machines, then this might not matter much.  After all, if our hotel chain sold beds and desks, some other firm or individual must have bought them.  The new owners could hire the workers instead of the hotel chain.

However, workers and capital are not identical across firms.  There are specific types of equipment and ways to doing things that are unique to any given firm.  Workers at these firms build up a set of skills that cannot be used at other firms.  Hence, cutting the match between a worker and the firm that hires them can lead to losses productivity and to high fixed costs to retrain new workers.  Businesses of all types face fluctuations in the demand for their products and services and many engage in what economists call “labor hoarding.”  This is where they retain and pay workers even when they do not need them to actually produce.  They do so because in the short-run it is less costly to continue to pay workers even if they are idle, than it would be to fire them and then retrain a new set of workers later.

For us to freeze the economy during a lockdown of several weeks we need to encourage labor hoarding.  This means giving firms access to funds in the form of loans or payments that help them retain and maintain their capital.  Even if every single one of these businesses are owned and run by greedy, selfish plutocrats we need those businesses to hoard labor as much as possible. Whether or not big businesses should be bailed out when they are poorly managed or engage in blatant exploitation is a longer-run issue.  Those issues should be addressed once the immediate crisis is over.  In the short-run, relief to businesses, even big businesses will help workers.

Note that this post like all posts on this blog are my own personal opinions and mine only.