Government bailouts and the opportunity to rebuild better

13 July 2020

The COVID-19 virus hit the world economy swiftly, taking a devastating toll on businesses of all sizes, from small restaurants and family-owned retail shops to multinational corporations. Governments have stepped in to provide more than US$9 trillion in various forms of stimulus to mitigate the long-term fallout.

In the short term, these loans and cash infusions have propped up the economy and provided assistance for business recovery, but the virus has proven relentless and the road to full recovery looks long. The vast majority of countries remain on the brink of recession, which means that more government stimulus is likely to come.

The “Great Reset”

As leaders debate what type of aid to provide businesses, and how much, there is the possibility for governments to use their leverage in rescuing distressed corporations as an opportunity to create a better future — not just back to normal, but a new normal where we emphasise social and environmental responsibility over corporate profits.

The virus essentially hit pause in our lives, and the World Economic Forum has called for a “Great Reset” as we prepare to push play again. We need to reflect on the lessons of the 2008 economic crash, where stimulus packages led to the largest increase in carbon emissions in 50 years, followed by a decade of sluggish recovery that only exacerbated some of our biggest global challenges, so we can use this crisis to create meaningful change.

By attaching the appropriate strings and conditions to bailouts, governments can encourage responsible business practices to address climate change, income inequality, and job insecurity, while protecting against future shocks by creating a more resilient economy.

Rebuilding greener

Just weeks before news of a novel coronavirus started trickling out of China, world leaders were meeting in Madrid for a United Nations climate summit. On the agenda were severe warnings from leading scientists that we are much closer to a global “point of no return” than previously thought. Instability in Antarctic and Greenland ice sheets, sea level rise, and global temperature increases are exacerbating severe weather events and forcing the mass migration of millions living in vulnerable coastal regions. Warmer ocean temperatures may forever alter Australia’s Great Barrier Reef, leading to a profound change in marine biodiversity. Deforestation is devastating the world’s largest rainforest.

In the wake of COVID-19 as governments weigh the requests for assistance from large corporations, some are attaching conditions and requirements to the financial aid — a sort of “green tax” — to address these looming climate crises.

Australian lawmakers, for example, required that a portion of state aid for Australian Airlines be used to hit specific targets for reducing carbon emissions. The final deal includes requirements to reduce total emissions by 30 percent by 2030 and eliminate short-haul flights where a train route is available, among others. France followed suit with its own conditions for an Air France bailout.

Other opportunities include:

  • Providing more subsidies to diversify energy options, adding more renewable energy to reduce reliance on coal and other fossil fuels
  • Strengthening initiatives surrounding sustainability in food production, and requiring farmers to invest portions of bailout money to reduce pollution
  • Requiring disclosure and more stringent reporting about firms’ financial risks and exposure related to climate change or other dual economic-climate threats
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Income inequality and job insecurity

Furthermore, COVID-19 has uncovered social inequality across a great number of countries. While pre-pandemic the global economy looked good on paper, the record-breaking global stock markets belied a system where real wealth for most people was stagnate or declining.

Hoping to avoid a repeat of the short-sighted business practices, financial risk exposure, and profiteering that corporations engaged in following the 2008 bailout after the Great Recession, governments should be taking a long-term view by requiring aid to be used for initiatives that prioritise worker well-being over profits. For example, Denmark, Poland, and France all denied bailouts to any company with headquarters in a “tax haven” country, reasoning that companies purposely avoiding taxes should not be able to request handouts from those same tax coffers.

Governments have also attempted to leverage financial aid to stem the tide of employee layoffs. In the US, large companies that took stimulus money must keep at least 90 percent of employees on its payroll through September 30 (some have already announced plans to start laying off employees in October, calling into question how effective the incentive will be). The Netherlands has promised to cover 75 to 90 percent of employees’ salaries for companies that avoid layoffs.

Governments should also use their leverage to limit payouts to companies with large stockpiles of cash, or those loaded with excessive debt from paying out huge dividends to shareholders. Setting limits on share buybacks or dividend payouts makes sense when taxpayer money is used to prop up corporations.

In addition to these short-term measures, now is also a time to consider massive investment in long-term strategies to improve wages and increase wealth for the “squeezed middle” and the poor, such as:

  • Tax credits or incentives for first-time homebuyers, since homes are the largest asset for most middle-class families. Just last week the UK announced a stamp duty holiday, making it more attractive to buy a house in England and Northern Ireland.
  • Investments to make university education more affordable for more people without crippling debt upon graduation. The increased interest in online schooling can play a big role in making education more accessible to everyone.
  • Investment in public infrastructure to guarantee low- and middle-income families access to things like high-speed internet and affordable transportation.

A fork in the road

Right now we are sitting at a significant fork in the road. On one side is the choice to continue down the same road we have been on for decades, a return to “normal” where corporate profits take priority while middle and low income families are further marginalised, and environmental destruction is ignored. On the other side is the choice to force industries and corporations to address climate change in real and meaningful ways, and to strengthen wages for workers who make up the middle and lower income classes to the benefit of the entire global economy. Governments hold the power to require these changes, and COVID-19 poses a unique opportunity to exercise that power.

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