It's a somewhat noble sentiment, but an absolutely terrible idea in practice.
Letting large businesses (airlines etc.) go bankrupt isn't just a disaster for the rich -- it's a disaster for retirees who hold a majority of savings in equities (index funds etc.), as they've been told is the responsible thing to do.
Don't throw the baby out with the bathwater -- or grandma out with the billionaires.
We want to reduce inequality? Great. But do it in a targeted way, through taxation that takes into account people's income and overall wealth. Not in a blunt-instrument way that harms middle-class savers along with hedge funds.
And not through letting a host of major corporations go bankrupt through zero fault of their management/board.
(Remember, it's not like an airline can buy insurance against a months-long pandemic, nor are public companies supposed to retain unnecessary cash in times of profit -- the IRS virtually requires them to distribute it to shareholders either through dividends or buybacks.)
EDIT (in response to comments): OK, I exaggerated a little -- retirees shouldn't be holding a majority of savings in stock. But since one common rule of thumb is to hold a percentage in equities that is 100 minus your age, a 70-year-old still has 30% in equities. And your 50-year-old saving up for retirement has half. The main point still stands: normal middle-class folks hold equities as a significant part of their savings. It's not just billionaires who own equities.
> it's a disaster for retirees who hold a majority of savings in equities
This is somewhat of a red herring, often used to deflect from the fact that the top 1% of the wealthy own about 50% of all equities, and the top 10% own about 80%. The top 20% own more than 90%.
We can do things to address people's retirement savings without giving trillions of dollars to the richest people in the world.
It does matter. We can easily repair retirement programs without enriching the rentier class.
If we don’t allow the funds and enterprises to go bankrupt we are damaging capitalism and just running socialism for the rich. We have to allow these enterprises to fail and have their equity be wiped out to have a functioning capitalist economy.
Again, fixing the lower 80% of America’s retirement programs directly, without bailing out enterprises they hold capital in, would be far cheaper than giving trillions to millionaires.
> We have to allow these enterprises to fail and have their equity be wiped out to have a functioning capitalist economy.
That is utterly absurd.
COVID-19 isn't the fault of an airline or hotel company. There is zero reason these enterprises need to fail, any more than your local restaurant ought to go out of business and be replaced by another in a few months.
And people's savings for retirement aren't part of any "program". They're spread over all sorts of investments. Trying to let corporations go bankrupt yet somehow "make up the different" in a fair way to individuals would be convoluted and frankly impossible.
So no. Punishing corporations is the wrong target. Corporations aren't rich people. Keep the corporations going together with the corner restaurant... and tax the rich.
Seeing COVID-19 as some kind of solution to economic inequality is dangerous confusion, and frankly bizarre. You want to lessen inequality? Bankrupting companies is one of the absolute dumbest ways to do it. Just tax the rich directly. Institute a wealth tax. It's simple, targeted, effective, and doesn't have the horrible side effects that bankrupting major corporations has.
> COVID-19 isn't the fault of an airline or hotel company
Airlines spent a decade doing stock buybacks, some with past bailout money. The amount they spent on buybacks is just about exactly how much they want from the US bailout.
SXSW didn't buy pandemic insurance. They'll be asking for a bailout.
These companies need to go through bankruptcy and loss of equity so that they can behave as properly functioning entities in a capitalist system. Anything else is -again- socialism for the rich.
Yes, corporations are rich people. Undisputably so. We should not bail them out. Let them go into receivership. If they aren't liquid, let the US re-capitalize them in return for equity, and then sell the shares over 5-10 years to return it to the public market.
Make capitalism work and get rid of the enormously unjust moral hazard that is a lot of why capitalism is so broken right now.
Buybacks are returning money to investors, same as dividends. When companies make profits that's literally what they're supposed to do. Look up the Accumulated Earnings Tax -- the IRS will actually tax companies to penalize them from holding onto profits. They're not supposed to hold on to profits, and no company is expected to set aside a year's worth of revenue in case of a global pandemic. That money is the shareholders', which is why buybacks return it to them as soon as it's made.
And you can't buy pandemic insurance generally, because no insurance company can cover "Acts of God" at a scale that will bankrupt the insurance company.
It is absolutely dumb and counterproductive policy to let companies, no matter if they employ 10,000 people or 10, to go bankrupt because of a global pandemic no business could or should reasonably foresee.
"Moral hazard" is a very specific term you are using incorrectly here. It refers to exceptionally and intentionally risky behavior by banks (usually) that the government deems "too big to fail". But airlines and other companies did not take overly risky behavior. So there's no moral hazard in this case.
There is zero evidence that companies like airlines, hotels or cruise ships were not "properly functioning". I don't know why you think they were improper or deserve to be punished. But there's no basis for it.
Wimbledon has been buying pandemic insurance for 24 years. $2 million per year. They're going to be paid by their insurer about $141 million.[1] There is a whole industry of re-insurance that exists to insure high-consequence, low-probability events, such as natural disasters, war, and pandemic.
SXSW didn't buy pandemic insurance. Why on earth should they be made whole for their bad decisions?
The airlines made bad decisions that put their stockholder's equity at risk. There is no reason that now, having received $50 billion or so in profit from buybacks we should give them another $50 billion, while leaving their employees penniless.
Moral hazard is exactly the right term. It describes a perverse incentive to cause someone else to incur expense for your benefit without any benefit to them in return.
Improperly planning for pandemic, when everyone, and I do mean everyone who does risk analysis believed that one was inevitable, particularly after SARS, MERS, and Ebola, is BAD PLANNING that equity holders should bear the responsibility for. They took the risk, reaped some profits, now it's time to take the losses.
Anything else is simply socialism for the rich, and something worse than laissez-faire capitalism for everyone else.
> as they've been told is the responsible thing to do.
This is absolutely NOT the responsible thing to do. Every retirement fund, target date fund etc. constantly rebalances your portfolio so that as you get closer to retirement your holdings shift to bonds and other low-risk securities. Retirees should be holding little to no stock.
>> And not through letting a host of major corporations go bankrupt through zero fault of their management/board.
I cant not wrap my head around this. How is it NOT their fault? If you are the one at the wheel, you are in charge, thus you are fault. They could have been planing for a rainy day instead of spending the capital, its entirely their fault! I keep 6 months wages in a savings account because its smart... Corporations can do the same, and many do. The ones that refused, should be left to dry and are entirely at fault.
If your profits are 5% then for a year-long "rainy day" you'd need to make profit for 20 years and keep it in the bank without ever returning it to investors. That's ludicrous.
Look up the "Accumulated Earnings Tax". The IRS essentially requires companies to return their profits to their shareholders each year and not save it, or else face a tax penalty.
In the case of something unforeseeable like a global pandemic, both corporations and individuals need to be helped out alike. Companies large or small shouldn't go bankrupt because of something so unforeseeable, and neither should individuals.
Aren't retirees told that the sensible thing to do is to have a lot of bonds and relatively few equities? Also why hold your savings concentrated in a single company, even if you worked for it years ago?
Yes to all the points below about bonds at stuff, but let's get to the deeper point.
When push comes to shove in a crazy post Covid-19 world, we can care for them without financial gimmicks.
You might have saved up abstract papers and computer database entries your entire career, but what you consume is physical goods made recent to your consuming them. We can ration out those goods to retirees (or bump up social security).
Grandma should have thought twice before investing in an evil corporation which took loans to evade taxes and screwed over other people's grandchildren.
All depends on your spending flexibility, time horizon, etc. If you can comfortably drop to half of your steady state spending for a couple of years, or if you do something like a CD ladder, it can make sense to have >50% of your retirement assets in stock.
Letting large businesses (airlines etc.) go bankrupt isn't just a disaster for the rich -- it's a disaster for retirees who hold a majority of savings in equities (index funds etc.), as they've been told is the responsible thing to do.
Don't throw the baby out with the bathwater -- or grandma out with the billionaires.
We want to reduce inequality? Great. But do it in a targeted way, through taxation that takes into account people's income and overall wealth. Not in a blunt-instrument way that harms middle-class savers along with hedge funds.
And not through letting a host of major corporations go bankrupt through zero fault of their management/board.
(Remember, it's not like an airline can buy insurance against a months-long pandemic, nor are public companies supposed to retain unnecessary cash in times of profit -- the IRS virtually requires them to distribute it to shareholders either through dividends or buybacks.)
EDIT (in response to comments): OK, I exaggerated a little -- retirees shouldn't be holding a majority of savings in stock. But since one common rule of thumb is to hold a percentage in equities that is 100 minus your age, a 70-year-old still has 30% in equities. And your 50-year-old saving up for retirement has half. The main point still stands: normal middle-class folks hold equities as a significant part of their savings. It's not just billionaires who own equities.