The finance faculty from the MIT Sloan School of Management have today sent an open letter to Congress supporting a stimulus package that focuses on combating the coronoavirus pandemic directly, as well as helping economically vulnerable households and small businesses. The MIT professors also said that unrestricted cash injection into large corporations would be a “grave mistake”.
“Bailouts of large firms mainly benefit large investors who are not as economically vulnerable and should understand the risks of investing in stocks and other corporate securities in the first place,” the letter states. “The fact that the 2017 corporate tax cut has led to a dramatic increase in share buybacks suggests that any similar cash injection into large corporations would mostly benefit large investors. In addition, large firms are much stronger financially.
The Federal Reserve’s recent announcement to purchase corporate bonds provides yet another backstop for their financing, they note in the letter. “By opening the door to funding the losses of large private-sector enterprises, we risk creating a feeding frenzy where any failing business, if sufficiently large and politically well-connected enough, will be asking for a handout,” they say.
The professors point out that the lone group of stakeholders that will not “be at the trough” – and the ones who can put large amounts of capital to work immediately to save patients’ lives – is the scientists, clinicians, and healthcare professionals who are currently working round the clock to develop COVID-19 therapies and to deal with the growing number of patients flooding their clinics.
The MIT professors add that Congress has the authority to direct these funds to reducing the spread of the virus, increasing medical capacity to help sick people, and getting people safely back to work once it is possible.
They outlined a number of steps they believe should be taken, including but not limited to:
- Subsidising the testing and diagnosis of COVID-19, especially for those without medical insurance, and conducting randomised testing rather than focusing only on symptomatic patients;
- Setting up serological testing capacity to identify people who recovered from the virus and have developed immunity to allow them to go back to work more quickly;
- Immediately launching a national adaptive platform clinical trial – along the lines of I-SPY and GBM-AGILE – to allow doctors to treat patients with experimental therapies while simultaneously collecting data that can be used by the FDA to approve the most effective of these therapies quickly;
- Increasing economic incentives – including startup capital, advance market commitments, prizes, additional patent exclusivity, and loan guarantees – for the development of multiple anti-COVID-19 therapies, not just vaccines but drugs and devices that can help infected patients immediately;
- Providing continued funding – in exchange for equity, at fair market valuations – for biopharma companies developing critical technologies to treating COVID-19;
- Providing states and municipalities with the necessary funding to build temporary infrastructure for dealing with overcrowded hospitals, such as large medical tents with ICU beds, ventilators, etc;
- Distributing masks, hand sanitiser, and other preventative tools, which will help “flatten the curve” while also demonstrating to the public at large in a very concrete, even if small, way that help is on the way.
Equally important, say the professors, is that the stimulus package should address the negative economic consequences of COVID-19, in particular households and small businesses most affected by the pandemic. The funds could be used for:
- Paying unemployment benefits and/or allowing companies to [furlough] workers and paying employers to keep workers on the payroll;
- Providing a backstop for small business loans so that small borrowers can roll over loans coming due or extend repayment periods;
- Allowing workers in affected industries to delay rent, mortgage, and credit card payments for up to six months, with a backstop for banks against delays in these payments.
The professors believe that any funds lent to businesses should contain three features that protect taxpayer interests: only firms that are solvent without support should receive government funds; the terms offered and eligibility should be rule-based, not discretionary; the funds should be given as safe collateralised lending or as preferred stock at reasonable interest rates and require that the government receive a non-voting ownership share or warrants so that the taxpayer who provides assistance in this crisis can share in the profits in the recovery.
In sum, we believe a strong and effective stimulus package should focus on the combat of the pandemic itself, as well as its negative impact on the most vulnerable households, workers and small businesses. Large firms – or rather, their investors – can take care of themselves. It would be a terrible waste to spend so much money but not fund the things that are most likely to end the crisis.
The letter was signed by MIT finance professors Andrew Lo, Jonathan Parker, Antoinette Schoar, David Thesmar, Massachusetts Institute of Technology, and Haoxiang Zhu.