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Mitch McConnell Is Robbing Taxpayers to Bailout the Rich

posted by Adam Levitin

There’s a lot of moving parts of the economic Rube Goldberg machine that is the latest McConnell bailout bill, but if you step back and look at the big picture, what becomes clear is that the bill is robbing taxpayers to bail out the rich. Everything in the bill is ultimately taxpayer funded. Yet the benefits of the bill are going disproportionately to the wealthiest households, which are precisely the ones which do not need assistance at this time.   

This massive handout for the wealthy is disguised because it involves the interaction of provisions in two separate titles of the bill, specifically the unemployment insurance provisions in title II and the $425 general billion bailout fund in title IV.  Because the government is picking up the tab for workers under title II and not requiring maintenance of employment by firms that receive the $425 billion under title IV, it is quite possible that the much of the $425 billion will just be used as a slush fund enrich corporate executives and shareholders, who happen to be overwhelmingly the wealthiest households in the country. 

[Update:  The $425 billion might actually be $4.25 trillion by the time the Fed gets done with it. The $425 billion might be a guaranty for an equity tranche that can be leveraged perhaps 10x.]

Specifically, title II of the McConnell bailout bill includes a massive expansion of unemployment insurance, basically making everyone who loses a job eligible for unemployment insurance benefits for up to four months.  That’s a good thing to do, even though four months really isn’t going to be long enough.

But if the government is picking up the tab for laid off workers via unemployment insurance, what is the purpose of the $425 billion in direct loans and loan guaranties?  It is not tied to maintenance of employment in the McConnell bill.  Indeed, the only condition on its use is a weak restriction on stock buybacks.  It could be used for executive compensation or for dividends.  That’s just inexcusably bad stewardship of taxpayer funds. 

Note that virtually none of the $425 billion will go to small businesses.  Small businesses are covered by the $300 billion in forgivable small business loan guaranties under title I of the bill, and that will likely render them ineligible for title IV funds because they are able to get credit elsewhere. 

The contrast between the terms of the $300 billion title I small business loan guaranty funds and the $425 billion title IV facility for big businesses are instructive.  The title I small business funds are tightly tied to payroll.  The loan amount is limited to 2.5x 2019 payroll for workers earning under $100,000, and the loan proceeds can be used only for payroll and related expenses. 

Similarly, the $75 billion in title IV airline/aerospace funds require the recipients to maintain their March 13, 2020 employment levels to the extent practicable while the loan is outstanding, to limit executive compensation, and to refrain from stock buybacks. The provisions for the $75 billion airline bailout are incredibly weak--look what a better deal Obama got from GM and Chrysler!--but compared to the $425 billion title IV fund, they are an absolute fortress of covenants. 

But the only restriction for the $425 billion in general title IV funds is a weak limitation on stock buybacks.  There is no requirement of maintaining employment and no executive compensation limitations, much less a limitation on dividends.  Now to be sure, some of the title IV recipients will be state and local governments, but given that this is a facility for non-creditworthy borrowers (that's why the Treasury guaranty is needed) that probably excludes most state/local governments. Instead, most of the recipients will be big businesses, including publicly traded companies. 

So what does this mean?  Imagine a business such as a hotel chain or cruise line that is looking at massively reduced business for some time going forward.  What is it likely to do?  It will take the federal money, lay off workers (who will get taxpayer funded unemployment insurance), and then increase executive compensation or pay dividends to shareholders with a cheap government loan.  Only about half the US population owns corporate stock in any amount, and most in very small amounts, and 84% of stock is owned by just 10% of households. Those happen to be the wealthiest households in the country, that is those households that are in the least need of assistance.

Now it is possible that some businesses will need funding for non-employment operating expenses, such as financing inventory. But surely we do not need $425 billion in inventory funding. The $425 billion slush fund for big businesses needs to be tightened up a lot more. If that means delaying it for a COVID 4.0 bill, that's what should be done. Because right now it looks like a massive giveaway of taxpayer funds to benefit corporate executives and shareholders. 

Comments

It does appear that are restrictions on pay- see pages 483-484 of version of bill that you linked- do you agree? Thanks.

There are restrictions, but they don't apply to the $425 billion.

The restrictions you reference are in section 4004 of the bill. They apply only to loans or guaranties under section 4003(b)(1)-(3). Those are the $75 billion in programs for passenger air carriers, freight air carriers, and businesses essential to national security. The 4004 pay restrictions do not apply to the $425 billion under section 4003(b)(4).

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