Is Andrew Ross Sorkin's Solution Worse Than the Crisis?
Every so often it’s worth restating the simple truth that just about every business ever founded in Silicon Valley has gone bankrupt. By all accounts from venture capitalists who allocate capital to Valley technology concepts, over 90% fail.
This factoid rates prominent mention ahead of analyzing New York Times columnist Andrew Ross Sorkin’s proposed solution for a U.S. economy in the midst of sick-inducing decline. Sorkin famously wrote Too Big To Fail about 2008, the book was a great read that yours truly pulls facts and quotes from to this day, and because of Sorkin’s prominence as a commentator, his viewpoints are worth discussion.
Sorkin bills his solution as so obvious and timely that it could avert a “depression,” but to read it is to see that the Times columnist mistakes what drives economic progress, and what doesn’t. His solution is that:
“The government could offer every American business, large and small, and every self-employed – and gig – worker a no-interest ‘bridge loan’ guaranteed for the duration of the crisis to be paid back over a five year period.” He adds that the “only condition of the loan to businesses would be that companies continue to employ at least 90 percent of their work force at the same wage that they did before the crisis.”
To see why such a solution would lead to quite a bit worse than the present crisis, readers need only imagine if back in 2001 politicians applied the Sorkin solution to the technology sector as internet companies and share prices collapsed everywhere. If so, eToys, Webvan, and theglobe.com (to name a few) would have gotten new, highly lucrative leases on life. Though it came later, Friendster might still be consuming precious capital of the human and financial kind, and then imagine the myriad search companies that aimed to be Google before Google became Google. Figure that the latter was founded in 1998. How unfortunate if, in the clutter of 2001, hundreds and perhaps thousands of Google-style businesses had been propped up care of the federal government. Imagine the massively shrunken dynamism in the Valley if the bad and unequal were routinely saved.
Looking at this in bigger picture fashion, Fairfield, CT-based GE was the world’s most valuable company when the 21st century began. Tyco was seen as the next GE, Lucent was cutting edge communications, AOL and Yahoo were the thoroughly dominant players in the Internet space, and by all-too-many accounts Enron was the best managed company in the world. At the same time the aforementioned were at the top of the corporate heap, Microsoft was on the verge of 15 years of flat share-price returns after the horrid treatment of it by the DOJ, Apple was limping out of near-bankruptcy thanks to an investment from Bill Gates, Amazon peddled books, CDs and DVDs so unprofitably that it was referred to as Amazon.org, Google was unknown, and Facebook didn’t exist on account of founder Mark Zuckerberg still being in high school Today the five previously mentioned are the most valuable companies in the world, while GE is less than a fifth of its old value, AOL is a monument to a distant Internet past, Enron is…
Seemingly missed by Sorkin is that economies gain strength from periods of weakness precisely because the bad are starved of precious capital so that the good can get more of it. Imagine if this natural, economy-enhancing process were blunted by the federal government? Think of all the great businesses, along with all the great concepts that would never be able to attain funding thanks to the federal government siphoning enormous amounts of wealth out of the economy, only to give it back to individuals and businesses without regard to the worth of their work or business model.
What reads as economic suffocation gets worse when the price tag of Sorkin's plan is considered. He acknowledges his vision will cost “a lot,” but in blithely suggesting “as much as $10 trillion,” Sorkin vastly understates how economically expensive his vision for revival is. One guesses his understatement is rooted in a misunderstanding that trips up all-too-many economists and pundits: they assume money is a separate entity to real resources. More realistically, money is the natural consequence of resources. Money is just a measure that only exists and is only useful insofar as real resources of the product, service and labor variety are being created and exchanged. In short, Sorkin is calling for a plan that would empower the federal government to play the biggest lender in the world by many miles; its lending dictating the direction of up to $10 trillion worth of products, services, and labor. Imagine then, the horrid economic impact this would bring about as federal officials operating sans market discipline basically commandeer resources amounting to something more than half of the U.S. economy’s size. The harm to future economic growth while incalculable, would surely be enormous.
To which Sorkin might respond that this is a health crisis of major scope that neither businesses nor individuals could have prepared for. Given how what’s lethal reached us out of the deepest of left fields, government must step in, and in place of shell-shocked private investors.
Of course the problem with such a view is that by the estimates of Dr. David Katz, a physician who opined on the Coronavirus in the New York Times, the economic health threats of Coronavirus are wildly overstated. Per Katz, “The data from South Korea, where tracking the coronavirus has been by far the best to date, indicate that as much as 99 percent of active cases in the general population are “mild” and do not require specific medical treatment.” About Katz’s stats, this commentator will leave it up to the best medical and scientific minds to debate them. At the same time, it’s worth pointing out that South Korea is a highly economically developed country, and one of the countries hit hardest and earliest by the virus.
If Katz is correct then it seems the virus hits most in mild fashion; it’s most substantial lethality centered on the elderly. If so, it doesn’t dismiss the health concerns of the elderly one iota to restate a point that Katz and others (including yours truly) have made repeatedly: the response to the virus has been much more troublesome than the virus itself. To fight the spread of something that will impact most in mild fashion, major parts of the U.S. economy have been shut down altogether.
In short, the rather costless economic answer that Sorkin oddly glossed over is for politicians on the local, state, and national level to end their shutdown of the U.S. economy. If so, there will be no need for federal loans. About this, Sorkin surely knows that a month ago capital for businesses was plentiful amid soaring equity markets. If politicians just take their booted feet off of the most dynamic economy in the world, Sorkin can rest assured that equities will rally along with private investor willingness to commit capital to businesses able to breathe again.
So while scientists and doctors can continue to focus on the health implications of the Coronavirus, it’s no major insight to say that the economic aspects of it have been largely politician driven through their imposition of command-and-control. In that case, adding Sorkin’s call for the nationalization of capital allocation on top of command-and-control would turn what’s an awful situation into one that’s desperate.