Andrew Sorkin Gets the Bailout Basics Right, but Debt Is Not a Problem

March 19, 2020

Andrew Sorkin used his column to make the basic point about a bailout, it has to be centered on keeping workers attached to their jobs, by keeping the paychecks flowing. His proposal is a no-interest bridge loan to any business, including the self-employed, to stay in business and continue to pay their workers. The businesses would have five years to pay back the loans.

This is a reasonable plan, although I am somewhat partial to the Danish system where the government picks up 75 percent of the wage bill, as long as the company picks up the other 25 percent. (Workers have to chip in by giving up five days of paid vacation [seriously].)

Anyhow, we can debate the relative merits of these proposals, but the basic point is right. We don’t know how long we will effectively have the economy in a freeze mode, but we need to make sure that workers can survive this period, and then companies are set to pick up and run again once it is over. That is why it is so important to have a plan that keeps workers on their companies payroll even if they are not actually working.

Sorkin does get the story badly wrong at the end. He tells readers:

“In truth, the plan’s entire aim is to return the economy to the state it was in before the crisis with as little change and interruption as possible.

“But once we do that, and the economy gets back on its feet, we need to have a very serious, almost grave, conversation in the country with our political and business leaders about financial responsibility and our policies. Over the past 20 years, we have lurched from bailouts to wars to rescue packages to bailouts again, and we never fill up our coffers during the best of times to pay for any of them.

“At some point, our debt will become the crisis that we can’t end with more money.”

Nope, this part is completely wrong. The rise in the debt is of very little consequence. What’s the bad story here, we end up with a debt to GDP ratio of 250 percent of GDP and then …. we end up making money on our debt because investors are willing to pay the government to lend it money?

Interest on the debt can be a burden, but we are way below the burdens we faced in the early 1990s (it was over 3.0 percent of GDP then, compared to less than 2.0 percent today), and that burden did not prevent the 1990s from being a very prosperous decade.

More importantly any honest accounting of the debt must include the copyright and patent rents the government commits us to paying. This comes to almost 2.0 percent of GDP each year for prescription drugs alone. Anyone who tries to tell us about the burden of the debt, without adding in these obligations the government makes for us, deserves only ridicule. They are either ignorant of economics or dishonest.

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