Respectfully Disagreeing with Arnold Kling About 'Overdraft Protection'

In 2009 Arnold Kling and Nick Schulz published From Poverty to Prosperity. There were numerous excellent insights in what remains a very important book, but arguably the most important one concerns the earnings implications for the immigrants who reach the United States. Kling and Schulz conveyed to readers that the productivity of those individuals immediately multiplies many times over once they set foot in the Land of Liberty.

Why is this? The answer is very simple: investment in U.S.-based businesses is gargantuan, and contrary to what the class-struggle crowd would like you to believe, the investment redounds to workers who have all manner of mechanical innovations attached to their work specialties such that the wealth produced by them per hour rises in vertiginous fashion.

Kling’s and Schulz’s essential insight, at least as read by yours truly, was that the disheveled, hungry, poor and tired individual yearning to live and work in the United States is nothing like the one who will eventually work stateside. So let them in. Kling’s view on human flows has long helped inform mine, which is why anything he proposes always rates contemplation in my eyes.

What’s been written so far is a good jumping off point to address Kling’s proposal that the federal government not send checks to individuals and businesses who’ve seen their existing and future economic prospects destroyed by the hysteria-driven lockdown of economic activity by politicians on the local, state and national level. Kling views the sending of checks as too slow, among other things. He instead argues in favor of the federal government directly depositing cash into the bank accounts of individuals and businesses.

Here’s how Institute for Policy Innovation president Tom Giovanetti approvingly described Kling’s plan in a recent Wall Street Journal opinion piece:

“Here’s the idea: Every bank account in the U.S., personal or business, would have added to it a line of credit, at low interest, backed by the federal government. The credit line would be the sum total of all deposits made to the account in January and February. This bases the credit line on account holders’ pre-Covid-19 revenue streams, not their bank balances or creditworthiness, allowing them to borrow as needed. It would work like government-backed overdraft protection.”

Let it be said up front that Kling’s proposal is much better, and quite a bit more thoughtful than the obnoxious extraction by politicians of a trillion+ from the U.S. economy, only for the feds to dole out the money to individuals and businesses without regard to their existing and future prospects. At the same time, Kling would probably agree that any proposal, no matter how thoughtful, kind of misses the point. Indeed, four weeks ago Kling didn't need to focus his highly innovative mind on ways for government to liquefy businesses. Largely free to produce, they didn't need it. In that case, it's difficult to cheer any proposal. Businesses and individuals don't need policy right now, they need back their freedom to produce. 

Still, the world is an imperfect place. Thanks to monumental error on the part of politicians whereby they pursued the non sequitur of forced poverty as a way to fight a virus, we're now forced to consider policy responses not to a health problem (as Dr. Bill Meisler put it to me in an e-mail, "I cannot think of a single instance in history where a overall healthy society has deliberately closed itself down almost completely in order to contain an epidemic or plague), but to staggering political ineptitude that future historians will marvel at. Kling is merely responding to this imperfect world. Here are my areas of respectful disagreement. 

For one, businesses die all the time in the U.S. and die most frequently in the most prosperous, dynamic regions of the U.S. Silicon Valley businesses are constantly going bankrupt, and if they weren’t, what thrives would be quite a bit less prosperous. That which resuscitates based on bank deposits needlessly blunts the economy-enhancing process whereby the bad and mediocre are starved of resources so that the good and great of the future can attain what they need to grow.

Kling might respond that all-too-many businesses are folding now not due to subpar performance, but thanks to government suffocation. Yes, and isn't that the point? Rather than institute an overdraft protection plan that empowers government even more, it seems the cheaper, more effective policy response is for politicians to remove the proverbial boot from the necks of businesses. 

All of which speaks to another problem with liquidity injections based on the past. So often businesses going under do so in a blaze of sales as they clear their inventories. It’s not unreasonable to suggest that some big bank deposits were made by businesses in January and February that were quite a bit less than healthy.

After which, are we going to be so quick to dismiss the arguably wrong, but conventional wisdom that reigned right up to when politicians tragically decided to impose command and control on the economy? Specifically, have we forgotten the popular view (however wrongheaded) that thanks to Amazon and other online powerhouses, traditional retail is dying? About this, the supposition is silly on its face as evidenced by Amazon’s rush into brick-and-mortar, but the fact remains that companies like Amazon are forcing a positive, Schumpeterian disruption on traditional retail that will logically redound to the consumer. Why then, empower the federal government to blunt this positive evolution with the money of others?

Which brings us to businesses that do the vast majority of their billing once spring hits, and perhaps more notably, when summer hits. This is important in consideration of all the businesses that had been counting on a robust graduation season, prom season, March Madness, Major League Baseball, and all sorts of other events that we associate with Spring. The Cherry Blossom Festival was set to pull in countless visitors to Washington, D.C. in March, while Austin’s South by Southwest was going to enhance the finances of businesses in Texas’s state capitol. No doubt many businesses lost money in January and February, or did very little billing altogether, with their best receipts ahead. But thanks to politicians foisting one-size-fits-all solutions on them, the months most crucial to them will be desperate. In that case, how do loans that reflect less flush stretches improve their outlook?

Looking ahead to the summer, the same applies. Some in the alarmist camp terrifyingly believe the very people who power all progress and health care advances, meaning we humans, exist as a death threat to each other well into the future; the future including summer. Such a view is tragically idiotic, but it raises the question of how businesses that achieve profitability in the summer months will be improved by bank deposits for months (January and February) in which they’re much less active.

All of which leads to Black Friday, which falls the day after Thanksgiving in November. It’s well known that businesses lose money fairly consistently until then, which brings up an obvious question about how much businesses (healthy and unhealthy) were depositing into bank accounts in January and February to begin with.

Plus, what about new businesses; as in ones that opened in January and February? Perhaps having not established a consistent clientele in the early months, they’ve suffered growing pains on top of shutdown. Maybe they’ve got brilliant long-term prospects, but the shutdown has obscured them altogether.

It’s all a reminder first of the basic truth that liquidity is so often not a consequence of the past. It’s instead a consequence of expectations about the future. For the federal government to liquefy businesses based on two months would be for the feds to prop up all too many that shouldn’t be, and at the same time depriving all too many of the capital necessary to continue to prosper.

Which means it’s mostly a reminder that governments cannot allocate capital. Period. They can’t even with Kling’s thoughtful plan, precisely because they can’t account for the myriad factors that market-disciplined investors account for when they decide whether or not to commit capital. Basically, the overdraft protection plan thoughtfully devised by Kling is a non sequitur not because Kling isn't wise, but because government once again can't allocate capital effectively. If the goal is a stronger economy, then the only answer is economic freedom. 

One senses Kling would ultimately agree. Indeed, a month ago no one was calling for overdraft protection or anything else like it. The U.S. economy was free then. Now it isn’t. Bring back freedom and you don’t need innovative plans from government that can’t possibly be innovative.