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How should governments respond to economic impact Covid-19?

A Dutch politician once said that the refugee problems in the Netherlands needs a cool head and a warm heart, not a cold heart and a warm head. The economic response of governments to the corona crisis should be the same and we should learn from past crises. After 2008 governments saved the banks spending trillions. This was followed by a period of austerity hitting the poorest the hardest while the bankers still got their huge salary and bonuses. I believe that the result was that people lost the trust in the traditional political parties resulting in the rise of populism and anti-globalism.

The questions that should be answered are the following, who and how. On top of that the rules should be made clear.

The initial support should be as wide as possible. However, the risk is that small independent businesses will lose out. Looking at the response of the stock markets to the crisis, the stock market expects the government to bail out large listed companies. Therefore, the drop in share prices are a lot lower that the expected economic impact. Large companies might even take this opportunity to eliminate smaller competition by buying them out. This will be bad for the economy on the long run.

All businesses should receive immediate help especially the small and medium size. Focus should be on freezing the situation as much as possible. Cash handouts by the government should help companies stay afloat. The cash handout should be based on a formula applied consistently across all businesses. Businesses should be helped to retain staff at low cost. This can be done by temporary unemployment (or partial unemployment) and applying for unemployment benefits for these employees. How and if businesses top up the gap is up to them. All employees that lost their job or partially lost their job should get support. All of this can be done using the existing social security system. The question gets a lot more complicated once the initial support was given and a lot more political. And when politics gets involved the head get hot and the heart gets colder. This is the reason why I think any help should be given through government guaranteed loans, and cash handouts should stop at this moment. This should be done through the normal channels (yes, the banks, unfortunately). I’ll try to explain why and how. The government will not guarantee the full amount but a percentage. The banks will use existing processes to assess the risks and so reduce the risk that loans will be given to businesses that has no chance of surviving. The percentage is also the lever that the government pulls to increase the flow of money (or reduce it) and so manage the process. To support smaller businesses the government must have a higher % guarantee for smaller businesses. This will stimulate the banks to also process smaller loans as the risk on these loans will be smaller. The government can then increase the GAP between smaller and bigger companies if it seems that banks does not give loans to smaller companies.

The government should not get involved in approving individual loans to specific companies. No additional requirements should be added other than those required by banks. Green peace and Green political parties are calling for help to be linked to environmental requirements. This will be wrong as it will distort the market. The government should stimulate or mandate environmental issues through policies and legislation that will apply to all businesses equally, not only to businesses that received state backed loans.

Another way the government can support businesses is fiscal by allowing businesses to deduct estimated taxable losses from 2020 from taxable income of 2019. This will take away the risk that businesses need to pay a tax bill while already in a negative tax flow. This will not cost the government anything as it is a more a timing issue. Businesses are currently allowed to reduce taxable income with taxable losses in from prior years. The only risk for the government is that the business will not survive the crises and no future profits will be made. However, accountants, already required to state that a business is a going concern, can issue a statement to that effect and reduce that risk. Smaller businesses can do with a statement from the owners.

Finally, the rules businesses receiving government guaranteed loans or fiscal support must comply to are the following: 1.      No dividends or share buyback until loan is repaid or tax losses recouped. 2.      Restriction on salaries and bonuses of managers. A manager is not allowed to earn more than a certain amount. For example, the salary of the prime minister or 15 times the minimum wage until loan is repaid or tax losses recouped. Accountants can control that as part of the audit process. Smaller businesses not requiring audited statements can issue a separate statement from the owners to that effect.

I am very interested to hear what you think. Will this work, is it reasonable and does it comply to the statement that we should have learned from the 2008 crisis and government response? Should there be rules for the banks and what should those be? Is Greenpeace right to call for environmental requirements linked to help and how to deal with strategic important businesses?

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