Martin Wolf has written an article in the Financial Times in which he recommends that the government should become the buyer of last resort from companies whose turnovers have crashed as a result of coronavirus. The idea appears to be based on the work of Emmanuel Saez and Gabriel Zucman, both of Berkeley in the USA. Both are, of course, best known for their work on tax abuse and I would suggest that after this venture they should stick to that arena. Their two page paper on this issue, published on 15 March is here.
The suggestion made is that if a business is short of sales because of coronavirus then the government should make good the shortfall and provide the missing sales income. They say that this is appropriate because they describe the government as 'the customer of last resort'.
The suggestion is crass, in the extreme, and shows a typical economists' failure to understand the most basic facts of business operations. I can only presume the same is true of Martin Wolf, because as a matter of fact such a programme would massively, and wholly unjustifiably, benefit business and provide the most enormous boost to the owners of capital which could never be justified.
The very obvious reason for saying this is that if, as Saez and Zucman suggest, a government should buy the unsold tickets of an airline if they're are not flying at present, they will then in effect be paying for the airline to provide flights which will not be taking place. The airline will get the full revenue but not fly the plane, and so the government will pay for the fuel, and pay the airport, plus the landing taxes, and so on, all of which are the airline's marginal costs incurred for putting a plane in the air. And since these costs will not be incurred there is no way that the airline should be compensated for them: to do so would just simply and unjustifiably massively enrich the airline.
What is more, if the airline was compensated for these costs, and the airport also got full compensation, as did the aviation fuel supplier, everyone would be coining it in. And that would make no sense at all.
So the idea that the government is the customer of last resort is absurd. Compensate business for those costs it must incur to keep going and which cannot be avoided such as labour costs and other, rather limited, expenses but there is no reason at all why a normal rate of return on capital need be paid, or that avoidable marginal costs be paid, or that costs like bank loan and lease repayments and rents which could and should be subject to payment holidays, should also be covered.
I rather hope that this crisis gives rise to some good ideas and sound suggestions on how compensation be provided to keep business going, but this idea fails completely to fulfil that requirement. I hope it is dead and buried as soon as possible.
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Wouldn’t an undertaking that the government was customer of last resort lead to er.. rampant inflation?
Possibly
But more likely yo massive profiteering
This suggestion is grossly incompetent and I don’t care if the three supporting it know that I think so
Peter – i agree though at some point the helicopter money around the world will also be inflationary. Not in this context but further down the line. I broadly agree with MMT but fear its abuse as a concept in the hands of global leaders with a populist agenda..which in this age is pretty much everyone (maybe less so some asian economies). The risk of debasing of currency is real as is inflation and the fiscal taps being turned off in the future when a dependency has been created. Together with a steepening yield curve. It looks like a return to boom bust in the wrong hands – and how can you assume anything else with the state of global leaders and also their opposition. That all said, we shouldn’t worry too much about the future when the present represents such a threat.
Where is the steepening yield curve coming from?
Please talk sense
“Where is the steepening yield curve coming from?”
Helicopter money and its potential abuse..happening all ready in the US post Trumps recent rhetoric
Pigs might fly
Long dated US Inflation linked govt securities have fallen over 10% since Trump talked helicopter money.. so even if Pigs not airborne they are on the runway..
That’s wholly unrelated
That’s a dash fir cash for settlements
You are utterly out of your depth
My suggestion for handling the economic emergency
“Press the Pause Button”.
In brief,
People who can and have work to go to, go and do it, they get paid normally.
For the immediate future, EVERYONE ELSE lives in their current accommodation at no cost, and gets a basic ration of food and energy. No money changes hands whatsoever! No tax, no rent, no interest, no repayment, no cost of food or energy. The idea is to simply maintain the UK population as a coherence society.
Providers of food and energy are paid by the government at cost.
As things return to normal, people climb off of the safety net.
Asset holders keep their asset holding in limbo, until rents can be paid again
Yes there are lots of detail to be worked out
Key here is equity, whilst maintaining the asset-holding class.
Govt loans, grants etc to businesses based on political considerations, are in my view, a recipe for disaster.
I’m seeking to go in much the same direction
I’d suggest a pint except I am in quarantine…
Well said – I was mulling this over in my brain today – business needs support – but will it also be overpaying its CEO’s and awarding bonuses after the Government has helped them out?
Hmmm……………………….
Completely agree, Martin on this occasion is talking nonsense..
The only truly valuable by-product of this crisis is that more and more people will see that all economic policy decisions are discretionary political descisions made to favour the wealthy and the powerful and those in secure economics circumstances, with some attempt being made to extend the favour sufficiently down the income deciles to secure sufficient popular support. And when the limited largesse begins to run out voters are intimidated in to voting against their interests by the conjuring up of largely imaginary internal and external threats.
Enough people saw that very clearly during and after the last war and, in this country, gave Labour a whopping majority to govern in the public interest. And this was replicated throughout western Europe during the post-war reconstruction. For internal and external reasons, the consensus broke down in the ’70s. And since then we’ve seen economic policy dominated by the interests of the wealthy and the powerful, the asset rich and the economically secure. Everyone else is expected to shift for themselves.
This crisis is going to provide another, once-in-a-generation, eye-opening experience and governments will be forced to govern in the public interest and not in the interests of the wealthy and the powerful, the asset rich and the economically secure. And those who are apparently advocating the latter, such as Martin Wolf, will find very quickly they’re on the wrong-side of history.
[…] commercial wipe out is on the cards loans do not work. But nor, as I suggested yesterday, can the government simply replace the missing sales: that is equally reckless, and inappropriate. […]
Yeah, where corporates are concerned the states assistance should go to the worker and not the company.
With banks the assistance should got the mortgagors and borrowers generally not the banks, with property, the tenants not the landlords.
I won’t list the reasons. Anyone that doesn’t already know them should do.