For Business Nerds: What Should the Government Do?
I have a question.
What is the ethical obligation of governments to the businesses they have shut down?
Given the fact that it was the right thing to do in the face of the COVID-19 Pandemic, what kind of obligation is owed to the businesses (and their employees) in this situation?
I think asking the question is essential because this is unlike any challenge we’ve had in our lifetimes.
It is a hornet’s nest of politics, worldview, and economics. Still, if we — as small business owners and employees — don’t talk about this issue, the conversation will be pre-empted by policymakers and partisans who may not have any real-world experience of running small businesses.
Full disclosure: My wife and I own a small retail business in Santa Fe, NM. My wife is brilliant at running the business. I am more of the “trusted adviser.” The mall where our business is located was closed. Yet, because we have an external door and were deemed an essential business (dog food and supplies-we love dogs!), we remained open. We are operating, but we are down 50–70% in sales as of May and had to layoff one employee. We are lucky, but like the rest of small-business America, anxious about the future.
So let’s start with the question, does the government have an ethical obligation here? Since governments (State and Federal) shut down businesses, are they on the hook to help companies survive the pandemic-caused lockdowns, slowdowns, and recessions to come?
From a strictly Darwinian Capitalist point of view, you would say no. The strong, well-capitalized businesses will struggle through, and the ones on the margin will fail. The strictly capitalist opinion would be businesses fail, other businesses will spring up in their place, displaced employees will find new jobs. The government is neutral. Governments don’t pick winners and losers. The strong survive the weak fail.
Of course, this is an extreme point of view. Theorists be damned, governments have always put their hand on the scales of economies.
But the siren song of unfettered capitalism, of free markets, of the rags to riches American dream has been a part of our consciousness since the beginning of the Republic.
And then comes the Pandemic. The novel disease. We have no immunity, no vaccine, no treatment. It’s highly infectious, with an unknown mortality rate. And it descends upon a highly interconnected, interdependent and complex world economy.
In reaction, governments shut down businesses, required social distancing, and many mandated sheltering in place.
Commerce stopped by government order. Again, it was the right thing to do to slow the Pandemic, flatten the curve, and not overwhelm hospitals and ICUs.
Thousands of businesses closed. Unemployment might reach the Great Depression levels. An unintended but significant consequence for small companies is that the shut down has given the keys to the kingdom to Amazon, Walmart, Target, and the big box stores. (and in our world Petco). They are thriving and hiring while many small businesses are panicked about paying next month’s rent.
So, where do we go from here and what is the responsibility of governments?
First, let’s realize that we have never been here before. We are in the midst of a high stakes economic and social experiment, a global one. This will test our concepts of governance. I can’t think of precedents that are close enough to our current experience to be helpful. (with possibly the exception of FDR’s response to the Great Depression.)
Because I am a business nerd, I have to add one more ingredient to the pot of boiling water. Before all this started, pre-COVID,(remember?) I wrote a white paper for a large consulting client on the topic of disruption. It was about how our economy was being challenged by what my colleague and Harvard Professor, Amy Edmundson, calls the VUCA world; Volatility, Uncertainty, Complexity, and Ambiguity. This is the economic world that former Democratic Presidential Candidate Andrew Yang warned us about. (favorite lapel button: MATH)
Here is the problem. The Pandemic did not descend on a predictable economy. Rather it came upon a global economy that was in the midst of transformation, of being disrupted. Technology, automation, science, a shrinking globe are changing the way things are, well, were.
My concern is that governments believe that the task is to return economies to a pre-COVID “normal” when closer to the truth is we are moving into uncharted territory. It is caused by the Pandemic and accelerated by the fundamental transformation of the economy.
Examples: If you are a large manufacturer, doesn’t it make sense to go to more automation for the safety of the remaining workers (physical distancing) and so that you can continue to function during this and possibly new pandemics?
Or how about the film industry? Doesn’t it make sense, knowing that large gatherings might become something of the past (until there is a vaccine or maybe longer if consumer habits change) to change your business model to direct to homes rather than theaters? Are movie theaters going the way of silent films?
Go down the list, health care, travel, hospitality, will all be transformed often in ways we won’t recognize. Mass transit: how is that going to work exactly? And airlines? How about restaurants? It makes perfect sense from an epidemiological point of view to limit seating in a restaurant to 25% capacity. But when you are working with tight margins, it could end up in a slow march to going out of business, depending on how long this goes on. And remember, we don’t set the timetable, the virus does.
I want to take it from a national level down to a micro-level, to where small businesses live.
Our store is an example. We manage it from our kitchen table. We have two to five employees, depending on the season. We watch pennies. When our state shut down, we re-negotiated our rent. We suspended paying our mortgage and a car payment, and, as I mentioned, we regretfully laid off a twenty-year veteran employee. We watched other small businesses in our area close permanently. We applied for the Paycheck Protection Plan, which we got, but it turned out to be a bait and switch, the guidance for how you convert the loan to a grant kept changing. We will likely pay most of it back. We watch our daily sales numbers like hawks. We have a daily break-even number that we’ve memorized. We, like most small retail businesses, are looking at months, if not longer, of depressed sales — most likely until there is a vaccine.
We, like most small businesses, are not sitting on cash. Last month’s revenues pay this month’s bills.
I worry that policymakers, as we all tend to do, look to the past to come up with solutions for the Pandemic. But we need to heed the words of Marshall McLuhan: “You can’t drive into the future looking in the rearview mirror.” Yesterday’s solutions to economic downturns will not work today.
My example is loans. Loans — debt — when sales are declining, and cash flow in a drought are anathema to small businesses. We, for example, can’t afford any more debt on razor-thin margins. But loaning money, even with great interest rates and deferred payments, is the go-to of governments.
It seems ethically wrong to stop our businesses from operating, drive our income into the basement, force us to layoff workers, and then give us loans that we have to add to our balance sheets.
It’s a Hobson’s choice. Borrowing more and more money to stay afloat, wait out the virus, is no choice at all. It will put us, and lots of other businesses, out of business.
By the way, we are talking about many businesses. According to a survey by Main Street America (as quoted by CNBC), 7.5 million small businesses could close permanently over the next five months.
Of course, there are more optimistic viewpoints. A sharp bounce off the bottom, a “V” shaped recovery, and everything will go back to pre-COVID normal in the fourth-quarter of 2020. But I ask you, is that a reliable bet that you would take? We are a consumer-driven economy. We’ve pounded into people that the new normal will be six-feet of distancing. It means face masks, limiting the number of individuals in stores, restaurants, and manufacturing facilities. Finally, it means revisiting sheltering in place if there are new flare-ups of infections. Are these policies going to change in the next 6–8 months? Probably not much. And, what if we don’t have an effective vaccine for a year? The point is this is a marathon, not a sprint.
I hope I am wrong, but I feel as if we are in a slow-moving train-wreck that needs big, bold, and creative solutions to be forestalled.
I lean towards massive government (federal) investments in the short term, and a well thought out structural support going forward. Remember, out of the Depression came Social Security, Unemployment Insurance, and the WPA.
Yes, it is expensive.
For perspective on cost, according to Barrons, Denmark, England, and Germany are each investing approximately 15% of their gross national output in pandemic economic recovery. (The USA is investing about half that, 8%. Hopefully, that will go up if another stimulus bill gets passed) England, for example, is paying up to 80% of employees’ wages until the crisis is over.
Big. Bold. Creative.
I have three requests to end this.
First, if you are a business owner or an employee in an industry, take a moment and put on your forecasting hat. What do you think your summer will be like? Or, your Christmas season?
If you’re like us, all we can say is that we don’t know. It is uncertain. We’ve reliably grown our business (even during the 2008 recession) by a few percentage points each year. But now that is up in smoke.
Next, how do you think your consumers, your customers, behavior, and buying patterns are going to change?
Again, the most reasonable answer is that we don’t know.
This is our new reality. Trying to predict the future at the level of a small business (or I guess the macro-economy) right now is like trying to drive a car while looking down at the white stripe on the road. We can’t see the big trends or how the road up ahead bends.
Given all this, one final question. What do you think is the ethical responsibility of governments right now?
I fear that if we don’t answer that question and speak truth to power, we will die, and the cause of death will be neglect.
Have a voice. Call your Governor. Call your congressperson. Let’s shake things up.
ps: Let me know what you think the government response should be! Email me at Hersch.email@example.com