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In case of economic emergency: break glass

Here's how we can put an end to bad bailouts.

Ben Bernanke, then chairman of the Federal Reserve, and Henry Paulson, then Secretary of the Treasury, talked during a hearing on Capitol Hill in 2008 — around the time of the first of the two massive economic bailouts that Washington has undertaken in the past 12 years.
Ben Bernanke, then chairman of the Federal Reserve, and Henry Paulson, then Secretary of the Treasury, talked during a hearing on Capitol Hill in 2008 — around the time of the first of the two massive economic bailouts that Washington has undertaken in the past 12 years.Doug Mills/The New York Times

Twice in a dozen years, Congress has undertaken enormous bailouts to rescue companies and individuals in the economy. In 2008, the federal government drafted legislation on the fly that bailed out the big financial institutions, but left many homeowners drowning with underwater mortgages. Amid popular outcry, Congress then promised to end bailouts forever with the passage of the Dodd-Frank Wall Street Reform Act in 2010.

Less than a decade later, Congress has authorized an even more enormous bailout. This time, the legislative process has been even more complicated. Congress once again scrambled, drafting legislation to address both the public health and economic emergencies stemming from COVID-19. So far it has rushed through five separate relief bills in a matter of months because each successive bill was insufficient to address not only the public health crisis but also the economic crisis. Congress will now likely take up a sixth bill in late July, in part to deal with the imminent expiration of expanded unemployment insurance benefits.

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Once again, the rescue legislation has been a bonanza for lobbyists, financial institutions, and big businesses, which have been able to get access to financing relatively swiftly and with few conditions. Once again, the public is left wondering where all the money went. And once again, workers and Main Street businesses have been relegated to second-class status. Small businesses have struggled to get limited rescue funds under the Paycheck Protection Act. Even with trillions of dollars going out the door, 40 million Americans remain out of work. The public health crisis continues, as testing remains woefully limited and incidence of the virus is growing in many parts of the country. Communities of color have been hit especially hard, setting back efforts to expand equality and opportunity.

This ad hoc approach to responding to economic crises is inefficient at best and malpractice at worst. Emergency response and disaster management professionals do not “wing it” every time there is a forest fire or a hurricane. They prepare in advance, developing policies and procedures so they can react swiftly and effectively. When Congress starts thinking about a response only after an economic crisis starts, it’s no surprise that the response isn’t very effective.

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Policymakers should take a page from the disaster response playbook. Economic crises are emergencies, and just like with a fire or a hurricane, many aspects of a response can be anticipated — unemployment, income shocks, and liquidity constraints. What we need, therefore, is a standing set of procedures and policies — an emergency economic resilience and stabilization law that can be activated when a crisis hits.

The benefits of this approach are significant. Congress could respond to economic emergencies more quickly because it wouldn’t need to reinvent the wheel every time there is a crisis. Executive branch agencies would also be able to anticipate the administrative capacities needed to implement the program. And individuals and businesses would have a good sense of what happens during a crisis, reducing fear and uncertainty.

Because the standing law would address the major foreseeable problems, Congress could focus its attention on the unique causes of the specific downturn. In the case of COVID-19, for example, Congress would have been able to spend much of the spring focused on the public health aspect of the crisis, such as facilitating production of tests and establishing a contact tracing system.

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A standing program would also reshape the political dynamics around rescue legislation. In the fog of an economic crisis, lobbyists see a bonanza: a chance to stuff goodies for their clients into must-pass legislation. Members of Congress who simply want good governance can end up using their limited political capital fighting off such bad policies or ensuring that uncontroversial provisions make it into the final bill rather than advancing the best policies.

While Congress would be free to change the economic resilience program even in the midst of a crisis, the fact that a program already exists would require members to explain any divergences. There would likely be fewer concerns about lobbying, favoritism, and corruption because the rules would be written without anyone knowing which particular companies need help—or which lobbied hardest. So what might such a program look like? We think it should have four parts.

First, it would end no-strings-attached bailouts by providing a restructuring process for large or publicly traded companies. The companies would have the option to get funding from the US government, but their shareholders would be wiped out. Their debt would be converted into equity — meaning the company would now be owned by its lenders and by the federal government, which would get a preferred equity stake. Alternatively, companies would still have the option to pursue a traditional restructuring in bankruptcy, but without federal aid.

Second, there would be a program for smaller businesses to cover payroll and operating expenses to prevent mass layoffs and closures on Main Street. The small business program would be akin to what Congress attempted with the Paycheck Protection Program, but with direct payroll subsidies for employers to maintain payroll and cover operating expenses, rather than operating through banks as third-party intermediaries.

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Third, there would be reforms to the financial system infrastructure so that every person or business could get an account to which emergency government payments could immediately be credited. That would make it possible for people and businesses to get direct payments, like checks, much more quickly than they have in this crisis.

Finally, the program would include “automatic stabilizers,” a wonky term for policies that are automatically triggered based on data, rather than relying on repeated and recurrent congressional action. In the event of an economic crisis like the crash in 2008 or COVID-19 this past spring, funding for state and local governments, for example, would automatically kick in and would continue until the economy has bounced back.

A standing economic resilience program like this one is possible for a simple reason. We can predict many of the policy responses that are needed in a crisis. While every crisis undoubtedly has its own unique trigger and features, the next time won’t be very different. Rather than live through another round of ad hoc bailouts for the wealthy and powerful and suffering for everyone else, Congress should get prepared, so our country’s response to the next crisis can be quicker, fairer, and more effective.

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Adam Levitin is a law professor at Georgetown University. Lindsay Owens is a fellow in the Great Democracy Initiative at the Roosevelt Institute. Ganesh Sitaraman is a law professor at Vanderbilt University.