How bad will this recession be? Why is Congress bailing out big corporations that had record profits last year? What would happen if stock buybacks were permanently eliminated? This week, Nick and Goldy answer your questions about the economy in the time of COVID-19.

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Nick Hanauer:

The average citizen is going to get hammered unless we find ways to access the enormous amounts of wealth that we have in this country to address these problems.

David Goldstein:

What we need to do is dump cash into the bank accounts of the American people, and keep them going until we get through this pandemic, and then maybe we can pick up where we left off.

Nick Hanauer:

All of these issues compound in ways that you only learn about in a crisis, unless you’ve been paying close attention.

Speaker 3:

From the offices of Civic Ventures in downtown Seattle, this is Pitchfork Economics with Nick Hanauer, one American capitalist’s desperate attempt to save us from ourselves.

Nick Hanauer:

I’m Nick Hanauer, founder of Civic Ventures.

David Goldstein:

I’m David Goldstein, senior fellow at Civic Ventures. Hello podcast listeners, were back me on a proper mic, and Nick, you from your secure location.

Nick Hanauer:

Yes, indeed.

David Goldstein:

We’re here this episode to answer questions, your questions about the coronavirus pandemic, and its economic impact. So Annie, we’ve got a lot of questions from listeners, I understand?

Annie:

Yeah, we got a flood of questions. We got voicemails, we got emails, we got Instagram DMs. They’re coming from all sides.

Nick Hanauer:

Okay.

David Goldstein:

Okay.

Annie:

Okay. You ready to go?

Nick Hanauer:

Absolutely.

Annie:

All right, so the first one is from email. “I just wanted to get your thoughts on the upcoming economic crisis, and how bad it will be. Personally, I think it will be much worse than 2008. Given the title of your show, what do you think will happen? Will the government, and wealthy elite step in to help the rest of us, or will the pitchforks start coming out, because the current administration, and majority of wealthy people couldn’t care less what happens to us lesser folks? Anyway, love the podcast. Keep up the good work.”

Nick Hanauer:

Well, I mean, let’s just address directly, will the government and wealthy elite step in to help the rest of us. I mean, I think that even that framing is a neoliberal framing. No society should need permission from wealthy people to operate in a high functioning way. But for sure, if the government is run by people like Mitch McConnell, and Ted Cruz, and Rand Paul, you can guarantee that wealthy citizens will not bear their fair share of the burden. Those people see their role as defending economic elites. Goldie, correct me if I’m wrong, but is it not true that every single Republican member of Congress has signed the no new taxes pledge? Grover Norquist’s no new taxes pledge?

David Goldstein:

Absolutely. It may have changed in the last couple of years, but it’s been that way for well over a decade. More than that.

Nick Hanauer:

Yeah, right. So, in a society where 100% of the Republican members of Congress have signed a pledge saying they will never pass a tax increase, in a crisis?

David Goldstein:

They will never vote for a tax increase of any kind, at any time, for any reason.

Nick Hanauer:

That’s right. But will the revolution come? I don’t know. For sure, the average citizen is going to get hammered through this process, unless we find ways to access the enormous amounts of wealth that we have in this country to address these problems.

David Goldstein:

And the thing to keep in mind throughout all of this is the economic crisis isn’t necessary. It doesn’t have to happen.

Nick Hanauer:

No, right.

David Goldstein:

We can do things to basically put the economy on hold, provide supplemental income for people who have been laid off due to the stay at home orders, suspend rents, and mortgages, and evictions, and defaults, so that people don’t lose their homes. We can give everybody healthcare so that in our employer based healthcare system, where the minute you lose your job, you lose your healthcare, in the midst of a pandemic, that’s just crazy. We can address all these things. If we have the political will, we can do it. If we don’t and we say, “Oh well, markets.” And leave it up to individuals fend for themselves, it’s going to be a fucking shit show, Nick.

Nick Hanauer:

Yeah, yeah.

David Goldstein:

It’s going to be a shit show out there for a 60, 70, 80% of Americans.

Nick Hanauer:

Correct.

Ashton:

My name is Ashton. I’m calling from Fort Worth, Texas. My question is, what do you all think the aftermath of the virus is going to be economically, specifically corporate responsibility towards broader communities, and maybe increased protections for small businesses, since those are the people most effected by this whole social distancing shutdown that we have going on? And maybe if there will be a balance shift towards serving corporate interests now, to serving small businesses, and individual interests more? Thanks guys. Love the show. Have a great day. Bye.

David Goldstein:

So are things going to change better in the aftermath of the virus? I sure as hell hope so Ashton, but I’m not hopeful. How about you Nick?

Nick Hanauer:

Yeah. Again, I was baffled by how passive people were in the face of these super unfair arrangements before the virus. So, it’s really hard for me to judge where people are going to come out after it, and it really will be interesting to see where people land after this crisis. Do they continue to buy this neoliberal lie, that when the rich get richer, everyone is better off, and that we’re all better off on our own, and that government is the enemy, not an instrument of us all, to solve the collective action problems that we all face?

Nick Hanauer:

Are people going to continue to subscribe to this idea that government should be small enough so that we can drown it in a bathtub? Are people going to continue to vote people into office who signed pledges saying, “I will never pass a tax.” I have no idea. It just baffles me that people did it in the first place.

David Goldstein:

So, this is the thing, Ashton, don’t expect corporations to decide to be more responsible all by themselves.

Nick Hanauer:

Correct.

David Goldstein:

It’s going to take pressure from consumers, from workers. It’s going to take organizing. I mean, you see some hopeful signs already. Kroger, the second largest supermarket company announced, at least temporarily, it was a $2 or $3 increase per hour in hazard pay over the course of the pandemic. You had a company like, I think they’re called Darden, which controls a restaurant group that owns places like Olive Garden, that after just being hammered, publicly announced that all of their employees would now get paid sick leave. And the hope is, that as we claw back at these gains, and over the course of the pandemic, that once workers have these things, they won’t be taken away again. But they’re not going to happen simply because it’s the right thing to do, and employers feel bad for their workers. It’s only going to happen if people demand it, and fight for it.

Nick Hanauer:

Yeah. So it will be interesting to see, and what’s really striking, again, nothing like a deadly pandemic to make all this stuff vivid. So all of my friends on Wall Street are hiding in their homes in the Hamptons, but the people, our government thinks should not earn any more than $7.25 an hour are on the front lines dealing with this crisis every day at work. It’s just astonishing that the people who basically create no value in our society, but who earn just jillions per year, hide, while the folks who work at grocery stores still have to go to work, to make sure that people continue to get food. And these are the people that Mitch McConnell thinks should not earn any more than $7.25 an hour. It’s just unbelievable.

David Goldstein:

With a tip penalty. Right?

Nick Hanauer:

Yeah.

David Goldstein:

Because you want to take that, you want to take the first five bucks of tips out, and give it to your employer. Speaking of which, public service announcement right here folks. If you’re somebody who’s just lucky like Nick in general, or lucky like me to be able to work from home, and still collect my full paycheck, if you’re doing okay through this, and like me, you are ordering groceries, or if you are ordering takeout food, and you’re having stuff delivered, tip these folks, God dammit, and not the usual 20%, tip them 25, 30, 40%. These people are putting their lives on the line to bring you food, and you can afford it right now, because you’re actually not spending money going out to restaurants, and going to bars, and going on vacation and so forth. So those of us who are fortunate to have an income, and keep it throughout this, and are relying on these low wage workers to keep us alive. My God, show your appreciation and throw them a tip, because they don’t just deserve it. They need it. And if you are still shopping, absolutely be sure to shop from small local businesses, businesses you love, that you want to survive this disaster, because if you don’t, they’re all going to go away, and we’re just going to have Walmarts, and Amazon, and Olive Gardens from here on out.

Billy:

Hey Nick, this is Billy from Orlando. My question is, I’m going to do some rambling a little bit, but I’m interested, we’re going to know how much this is going to cost us to react to this kind of a situation. I’m curious to see what it would really cost for us to ramp, up and protect us before it happens. To have a system in place that can at least minimize our expense responding like this. We’re just so much smarter than this. That’s one. And then two, I’d be interested to know, relative to the cost of the tax breaks that the rich got a few years ago, how much that would be compared to what we can build to protect us in the future? Good luck. Stay safe. Thank you, take care.

Nick Hanauer:

So, Billy from Orlando asks the broad question, how much it would’ve cost to prepare for a pandemic like this? And Goldie, you and I have been saying, “A pathogen is one thing. A pandemic is another.” Right?

David Goldstein:

Right.

Nick Hanauer:

You don’t have to… Pathogens will come and go. Pandemics are a consequence of bad leadership, bad preparation, and a wishful thinking.

David Goldstein:

Right. Right. And that’s why the United States had a pandemic prevention and preparedness team until Trump fired them.

Nick Hanauer:

Yeah, exactly. Because it was a “waste of money.”

David Goldstein:

Right, right. I think Nick, you would agree that this is like the classic case of being a billion wise, and a trillion foolish.

Nick Hanauer:

Yeah, exactly. And it certainly… I mean of course, you and I are no experts on what it would have cost precisely to have been prepared, but it certainly could not have cost the country any more than a few tens of billions of dollars to have masks, and ventilators, and some sort of national testing regime, and a fully functioning FEMA, and so on and so forth, to deal with this eventuality. And that may sound like a lot of money, but not compared to the $1.3 trillion tax cut we mostly gave rich people two years ago.

David Goldstein:

Right.

Nick Hanauer:

Right? It’s almost nothing to be prepared for something like this, relative to the rest.

David Goldstein:

Yeah, it’s Jeff Bezos’ couch change.

Nick Hanauer:

Exactly. And is it unforgivable that we are not prepared? Absolutely. But that’s what you get when you elect people who believe that government isn’t the solution, government is the problem.

David Goldstein:

And as for the larger economic issue of how to prepare Americans in terms of providing paid sick leave, paid family medical leave, adequate income, access to health insurance, et cetera, I don’t think those things cost anything. To be honest, I think that if Americans were prepared with a social safety net, and adequate labor standards, that’s a plus economically. Everybody does better. That’s not expensive. It doesn’t cost anything in the long run, because it pays for itself.

Nick Hanauer:

Yeah, but rich people wouldn’t be as rich. Okay. Next question.

Trevor:

Hey Nick, this is Trevor [Eeks 00:13:31]. I’m calling from [inaudible 00:13:32] Peru, where the entire country is currently on quarantine lockdown. I think the most interesting thing right now that could be asked is why is it that it seems in the United States, the poor, the working class, and just most people with a job in many sectors who are now out of work, are still being expected to pay rent, and utilities, and taxes when other countries like France are removing those burdens.

Trevor:

It seems to me that the United States, or that we as a country, cannot expect the poor and the people who are most vulnerable, who no longer have jobs or sources of income to continue to not get paid, but to allow rich people, and banks, and big companies to continue to get paid while this crisis continues. So I’d be really happy to hear your thoughts about this. Thanks for everything you do. Love the show. Take care.

David Goldstein:

I think the answer, Nick, is because our nation is sociopathic.

Nick Hanauer:

Well, I think our nation is neoliberal.

David Goldstein:

Okay. Our leaders are sociopaths.

Nick Hanauer:

Our leaders are neoliberal. That’s a question for Mitch McConnell, and the Republicans in the Senate. Why have we privileged bailing out big companies, over making sure that working, and middle class families are going to be okay? Well, that’s trickle down economics. When the rich get richer, that’s good for everybody. When the poor get richer, well that’s very, very expensive. And, our great challenge is to turn all this stuff from being upside down right side up.

Nick Hanauer:

I’m not saying that we shouldn’t try to defend industries that are vulnerable, but… I do believe that that is necessary, but there are smart ways to do it, and stupid ways to do it. And one of the reasons that we’re having to bail out all of these industries, of course, is that the industries themselves have been made fragile by decades of shareholder value maximization, neo-liberalism, right? That those companies didn’t think about building resilience. They didn’t think about using their excess cash flows to keep on the balance sheet, should something bad happen. Instead they distributed them to their shareholders in the form of dividends, or stock buybacks, or giant bonuses for executives. And as a consequence, those, those companies in those industries are unbelievably fragile right now.

David Goldstein:

Right.

Nick Hanauer:

So again, in our country, we privatized the gains, right? The shareholders got the benefit of all those dividends, and stock buybacks. But now we’re socializing the costs. So the American taxpayer will now bail out these companies. And which-

David Goldstein:

Well, we’re socializing the cost of bailing out corporate America.

Nick Hanauer:

Yeah.

David Goldstein:

We’re not bailing out America, And I think the American people, and I think this is a huge mistake, because, in an economy where consumer spending accounts for 70% of GDP, when you push millions of households into bankruptcy and default, well, that’s going to trickle up to the rest of the economy. At this point, neither of us are hopeful, but we really just… What we need to do is dump cash into the bank accounts of the American people, and keep them going until we get through this pandemic. And then maybe we can pick up where we left off.

Nick Hanauer:

Yeah.

David Goldstein:

But if we allow the debts to accumulate, and the late fees, and the penalties to be added on, it’s just going to be a disaster.

Nick Hanauer:

Right?

Leslie:

Hello, Pitchfork Economics. This is Leslie in Detroit. My question is, what is the reason for stock buybacks? Why do stock buybacks exist? What purpose do they serve? This legislation to limit, to stop buybacks for one year, what purpose does that serve? What bad thing would happen if stock buybacks were eliminated permanently? If they were permanently outlawed? Thank you.

Nick Hanauer:

Okay, so Leslie raises the question of what are stock buybacks, and what are they for, and what would happen if they went away. One of our favorite, we’ve come back to this so many times, Goldie. And stock buybacks are simply a way for corporations to use their profits in a tax efficient way, to reward their existing shareholders, and executives, who get compensated in stock.

Nick Hanauer:

And it works like this: You make a bunch of money, and instead of paying your workers more, or investing in more production, or sticking the money in the bank, you buy your own stock. And when you buy your own stock, you reduce the number of shares, which means that the existing shareholders all earn a bigger portion of the company, because you’ve retired the shares, and you simultaneously push the price of the stock up, benefiting existing shareholders.

David Goldstein:

Right, right. As we’ve pointed out on many occasions, there’s two ways to boost earnings per share. One is to increase your earnings, which is difficult and risky. And the other is to reduce the number of shares, which is a sure fire. It works every time.

Nick Hanauer:

Exactly.

David Goldstein:

And so, they choose the easy way out, which is to reduce the number of shares.

Nick Hanauer:

Rather than making better products.

David Goldstein:

Right.

Nick Hanauer:

And selling them to more people. And there’s another secret to this, which is that because the executives of most companies get most of their compensation in stock, what they’re doing is they’re issuing stock, to give that stock to those executives. So they’re diluting their existing shareholders when they do that. But if you do stock buybacks, you wash out that dilution.

David Goldstein:

Right.

Nick Hanauer:

So it’s this very handy way of making the effect of giving stock options, but en masse to executives, it’s a way of masking that effect.

David Goldstein:

Right. The giant, CEO pay, Nick, has been made possible by stock buybacks because this pay is largely in stock.

Nick Hanauer:

Correct.

David Goldstein:

And if you continued to pay them 400 times the average worker, and you paid them in stock, eventually you’d be diluting the shares of all the other shareholders. [inaudible 00:20:16] You have to buy it back.

Nick Hanauer:

Which they hate.

David Goldstein:

Right.

Nick Hanauer:

So anyway, so why do we hate stock buybacks so much? Mostly because it’s such an obvious way of understanding the fundamental neoliberal lie, that the more profits companies make, the better it is for everyone. That profits, high profits are the source of the vitality of the economy, and the source of investment in the broader economy, which benefits everyone. Stock buybacks are how you know that mostly all companies do with their profits, is enrich shareholders and senior executives.

David Goldstein:

Right.

Nick Hanauer:

It’s just a very egregious way of doing that. And why do we care? Because today, when all of these companies, again, we’ve used the airline industry, because they’re a poster child for all this.

David Goldstein:

Boeing is the best is the best example right now.

Nick Hanauer:

Yeah.

David Goldstein:

Because Boeing, with its 737 Max grounded over the past year, was borrowing money to buyback stock and pay dividends. And now it’s getting what? A $17 billion bailout from taxpayers?

Nick Hanauer:

And of course, they could have not been doing buybacks. The airline industry, over the last 10 years, has used 96% of their cash flows on stock buybacks. Now, if they had kept that money, and stuck it on their balance sheets, in this crisis, they would have resilience. They would be able to much better withstand this downturn. And instead, they enriched themselves, the executives enriched themselves, and their shareholders. And now the American taxpayer is left holding the bag for that.

Nick Hanauer:

What drives me crazy is, those companies cannot go back to their shareholders, and call all that money back. If you can send it out, why can’t you claim it all back? That should be the first way that these companies withstand these downturns. And to be clear, stock buybacks used to be illegal, until 1982 stock buybacks were regarded by the SEC as stock manipulation, which is what they are.

David Goldstein:

Intentionally manipulating the price of the stock by reducing the number of shares.

Nick Hanauer:

Exactly. Exactly. And then, in the neoliberal era, Ronald Reagan changed that rule in the SEC, and the rest is history. And in the last few years, stock buybacks have ranged, from between $600 and $800 billion per year. And you could just think, all of that money could have been used to pay for infrastructure, or healthcare, or education or whatever it is. All it was, was just money that was shoveled into the bank accounts of really, a very small minority of Americans. The richest Americans, and it’s just an egregiously awful artifact of a neoliberal economy.

David Goldstein:

So shorter Nick, Leslie, the purpose of stock buybacks is to make the rich richer, while screwing everybody else. And that’s why we hate them.

Nick Hanauer:

There you go.

Annie:

Okay, so we have a question from email. Why are the big corporations asking for financial help when they had record profits in the past year?

David Goldstein:

And just as importantly, Nick, why are we giving it to them?

Nick Hanauer:

Yeah, so the thing that’s shocking about this of course, is that the big corporations didn’t have record profits last year. They’ve had record profits for a bunch of years. Corporations have done extraordinarily well over the last 10 years. The percent of GDP that is corporate profits has largely doubled, from approximately 6% in the 50s and 60s, to almost 11 or 12% today. And, the question we should all have is, given how profitable these folks have been over the last years, why do they need any help at all? And of course the answer is that they didn’t keep the money on their balance sheets, to save for a rainy day, like conservative, sensible people might.

Nick Hanauer:

They shoveled it into the pockets of themselves, and their shareholders. And so now, most of them are very, very fragile, don’t have a lot of running room. And so, it’s up to us to bail them out. And I argued strenuously before this latest bill that just passed Congress, that any help that went to corporations should be in the form of an investment, with preferential shares. That we shouldn’t loan companies money to bail them out. We should buy stock in their company, if they need it, and that stock should be owned on behalf of the American people.

David Goldstein:

Right.

Nick Hanauer:

Unfortunately, nobody listened.

David Goldstein:

Yeah. Do we need to save Boeing and the airlines? Obviously, you need to save one of the two large aircraft manufacturers in the world, and yes, we need an airline industry when this is over, and people start flying again. But my God, make the shareholders take a haircut.

Nick Hanauer:

Yeah, right. Absolutely.

David Goldstein:

I don’t mind bailing out Boeing, and the airlines, for the sake of their employees, and the consumers who use their products, but don’t bail out the shareholders. Not the shareholders. The shareholders gambled. They made a bet. Wall Street is a giant casino.

Nick Hanauer:

Yeah.

David Goldstein:

It’s not investing when you buy shares, you’re betting that it goes up.

Nick Hanauer:

Yeah, correct.

David Goldstein:

It’s like, “Oh man. I put all my money on black, and the roulette wheel came up red. I need a bailout.”

Nick Hanauer:

Yeah, absolutely.

David Goldstein:

It’s infuriating.

Nick Hanauer:

Yeah, it is, indeed. But there we are.

David Goldstein:

Capitalism.

Nick Hanauer:

Neo-liberalism. Well, thanks everybody for listening. Next week we’re going to be talking to Heidi Shierholz. She’s an economist for EPI about the federal stimulus. What’s in it, and how it’s supposed to work, and the pluses and minuses. It should be really interesting.

Speaker 4:

Pitchfork Economics is produced by Civic Ventures. If you liked the show, make sure to subscribe, rate, and review us wherever you get your podcasts. Find us on Twitter, and Facebook at Civic Action, and Nick Hanauer. Follow our writing on Medium at Civic Skunk Works, and peek behind the podcast scenes on Instagram, at Pitchfork Economics. As always, from our team at Civic Ventures, thanks for listening. See you next week.