Covid 19 — Rethinking Capitalism, Government’s Role and our Values in Times of Crisis

Government as only line of defense vs. protector of last resort

The Government finally approved a Coronavirus rescue package worth $2T.

In a country where 50–75% of workers live paycheck-to-paycheck, a major disruption in the economy lasting longer than a few weeks, can have devastating consequences on millions of families. So, any help that the Government can provide to those most economically vulnerable is justified.

The problem is that this is happening in the context of $23T of US National Debt (> 100% of GDP) and increasing yearly at the clip of approximately $1T. In comparison the total assets in all US banks are worth approximately $18.5T.

In fact, current debt projections show that our national debt is expected to double (as % of GDP) by 2050, driven by underfunded mandatory spending programs (and underlying demographic changes). Many of these programs, including Social Security and Medicare, are expected to become insolvent by 2035 and 2026 respectively.

None of these projections account for future large economic bailouts due to major shocks to the system (viruses, wars, mega-recessions) or structural economic changes such as unemployment risks as a result of automation and AI replacing Human labor and eroding Income taxes.

Yet with families living month-to-month and a hyper-competitive market system that favors efficiency and ‘no fat’, we are finding ourselves in a position where our overburdened Government is becoming, more often than not, our only line of defense.

The dangers of over-reliance on the Federal Government

Consequences of too much debt are severe: if (more likely, when) the Government starts struggling with repaying its debt (or the interest on the debt), given other obligations, we will face one or more of the following negative outcomes:

• High interest rates will bring the economy to a halt
• Strong devaluation/inflation will melt people savings due to government ‘printing a lot of money’
• Defaulting on debt will devastate retirements accounts and Social Security. As a reminder currently a third of all US government debt is held by US investors (including our pension funds), 30% foreign investors (China, Japan, etc.) and the rest is owned by the government (including Social Security and other government employees and military deposits transferred into ‘safe’ interest-bearing government loans that the government can spend)

Risks to the free Economic model are real: the market and overall economy are becoming more dependent on Government actions (interest rate changes, injection of liquidity, wars) than fundamental market dynamics. The risks of such a model include:

• Bailout-induced apparent market benefits come at a price (long term unfunded public debt) that can wipe out such improvements down the road (see point on debt above)
• The decoupling of market performance from business results will create wrong incentives in where to invest and how to manage one’s business

Risks to our democracy and Governance are consequential:

• Incentive for rulers to intervene in the economy through policies that will dramatically sway the economy /markets in a direction that is favorable to them (financially or politically) and not necessarily the greater public — liquidating one’s portfolio of stocks based on advanced knowledge of impeding US health crisis is not ok! Nor is propping up the economy ahead of an election or starting a military conflict for economic reasons!
• Lobbying and the challenges of campaign finance are not new. However, they will only increase as the government interventions in the economy increase

Given the above, what should we do to strengthen our ability to respond to potentially re-occurring black swans?

Setting additional lines of defense: re-thinking Capitalism

One course of action is to reduce our reliance on the government by re-thinking capitalism to truly reflect our values. For instance,

Reflect the cost of negative externalities and inherent risks as well as intangible social benefits. For instance,

• If your company produces cheap products while destroying the environment, the costs to the environment should be accounted for in your profitability or your stock price
• If your 401K is propped-up due to a large stimulus bailout, the market should also reflect the increased risks of long-term government default (or inflation)
• If stay-at-home moms are raising a productive generation with solid morals, why should this benefit not be captured in our GDP the same way it is for working parents?
• Carbon credits are a good example of accounting for /quantifying externalities
• Quantum computing has the potential to understand linkages and inter-dependencies between many factors that today appear unrelated
• Finally, tariffs destined at setting a level playing field that upholds our values with our trade partners should be put in place

Provide incentives for companies and individuals to build ‘good fat’ in anticipation of ‘lean years’ and Black Swans e.g.,

• De-leverage and increase equity whenever possible
• Take for instance the airline industry, which has benefitted greatly in the past 10 years because of ticket prices not declining as fast as the price of oil. Instead of investing in a rainy-day fund, the industry has engaged in major stock repurchase plans, leaving airlines vulnerable today and seeking a bailout
• Perhaps, Introduce anti-fragility metrics in company valuations (not only equity and leverage, or resilience to market or currency changes, but also to employee health, locations. Add here the number of ongoing ‘experiments or MVPs’ in place to constantly gauge the ‘depth’ of the future ahead)

Re-think Insurance and Banking to account for a broad set of systemic risks and the New Normal

• The current breadth of insurance products is too narrow to deal with the variety of risks that we are facing (unemployment, economic crisis, health crisis) and probably inadequately priced to deal with black swans
• Insurance companies rely on re-insurers to insure themselves against low frequency / hi-severity risks. However, re-insurers are not prepared to deal with risks affecting the entire planet at once, or those reflecting a ‘New Normal’ (aging population, disrupted environment, perhaps even re-occurring deadly viruses, or Human job erosion due to AI)
• Perhaps there is a lesson to be taken from life insurers here; the fatal event is bound to happen. It is a question of time. Therefore, all premiums accumulated over time need to prepare for it. The difference? It is hard to model the likelihood of when a loss will occur and the risk of many insured suffering the loss at the same time is high
• One can therefore imagine a model, when at the time of birth we each have a Life Emergency Insurance or Individual Bailout Fund assigned to us (could be a combination of a bank loan and insurance policy) that we will be contributing to throughout our life and can use under strict conditions when Black Swans strike, with the possibility to transmit any remaining balance as inheritance to a beneficiary of our choice at the time of our passing

Getting rid of the Sword of Damocles hanging over our Future: de-leveraging the Government

We need to give our government room for action that it currently does not have — we can’t keep ‘kicking the can down the road’, as this can has turned into a fast-growing snowball tumbling down a cliff towards our village at the bottom of the valley.

We should be asking ourselves some key questions that test our core value and priorities:

Can we maintain the same spending levels and find new ways to increase revenues e.g.,

• Raise taxes (income, payroll, corporate, sales/consumption) significantly?
• Or try to rapidly grow the economy while maintaining same tax rates to cover the deficit? We would have to grow taxable Revenue by 30% to cover the $1T expense gap

What about reducing our discretionary spending? For instance, is the level of our military spending justified? today it amounts to $700B or 50% of all discretionary spending, compared to Education $100B, Healthcare $160B, Environment/Science $80B. Additionally, our wars abroad are costing us Trillions of dollars (not to mention the loss of life and limb of our soldiers and countless innocent civilians in impacted areas). Should we not instead reduce defense spending (focusing on defense vs offense) and reallocate to other social services?

Are we prepared to see Social Security and Medicare benefits significantly reduced, applied later in life, or to a smaller fraction of contributors (perhaps skipping upper middle class and the wealthy)?

Whatever choices we make should be aligned with our values as a Nation

There is one option that is clearly not viable: Maintain the status quo and watch the national deficit grow, secretly hoping that the boat will stay afloat!

Special thanks to @Elena Farah for contribution to Research and Editing