Over 200 top academics, led by Jonathan B. Berk, The A.P. Giannini Professor of Finance at Stanford GSB, have issued a scathing public letter denouncing plans in Washington for massive bailouts of businesses hurt by the coronavirus pandemic.
“Spending taxpayer money to bail out large corporations is a huge mistake,” the letter declares. “The money should instead be spent on the people who are most affected” — people who live from paycheck to paycheck and have suddenly lost their jobs.
“It does not make sense to count on corporations and their bailed-out investors to act as middlemen and pass on this government relief to those who are truly affected,” the letter continues.
The letter has been signed by economic, legal, and financial scholars from across the political spectrum. Among the signatories are two Nobel Prize laureates: William F. Sharpe, the STANCO 25 Professor of Finance, Emeritus, at Stanford GSB, and Lars Peter Hansen, the David Rockefeller Distinguished Service Professor of Economics at the University of Chicago.
The letter was released on March 24, just as the Senate neared approval of a $2.2 trillion emergency bill that includes $500 billion in loans and loan guarantees for large and small corporations alike. The package would authorize $58 billion to airlines, another $17 billion for companies “deemed critical to national security” and $425 billion for loans to businesses, states, and municipalities.
In an online news conference, the letter’s organizers argued that corporate bailouts are unfair.
“Bailing out corporations is bailing out investors,” noted Berk. “And who pays to bail out investors? It’s taxpayers … We’re essentially moving money from poor people to rich people. Rich investors are asking their Uber drivers to bail them out.”
Supporters of the huge bill, including President Trump, say that business bailouts are necessary to keep workers employed and to avoid a larger financial crisis. Many supporters also want to shore up the stock market, which has plunged nearly 30% from its peak in mid-February.
But in their letter, the economists argue that corporate bailouts are misguided and pose a host of other problems.
On the subject of fairness, they say, the bailouts would mainly benefit investors who reaped big returns when the economy was strong and will now be protected when the economy goes south. The overwhelming bulk of corporate stock is held by people in the top 10% of earnings.
“This bill is sad commentary on the financialization of our economy,” said Anat R. Admati, the George G.C. Parker Professor of Finance and Economics at Stanford GSB and a leading critic of the porous banking regulations that were enacted in the wake of the financial meltdown of 2008. “Instead of addressing the most urgent issues and directly helping those who need it the most, it prioritizes corporations and their investors, which is deeply misguided policy.”
As a practical matter, they said, corporations have ways to get through hard times. Jonathan Parker, professor of finance at MIT’s Sloan School of Management, noted that large corporations often go into bankruptcy but keep operating as they restructure and often rebound on the other side.
Paul Pfleiderer, the C.O.G. Miller Distinguished Professor of Finance at Stanford GSB, warned that massive business bailouts could also reinforce public mistrust about both business and political leaders.
“One of the legacies of the bailouts in 2008 and 2009 was that we were left with a lot of people who thought the system was rigged — from the Tea Party to Occupy Wall Street,” Pfleiderer said. “There was a general feeling among a lot of our population that our system is rigged to benefit the top 1%. We don’t want a repeat of that.”
Admati concurred: “There is going to be pain and the pain has to be minimized for people who [need] a safety net,” she said. “The people who can afford to take a hit should take a hit.”