Government Largess Can't Keep Economic Blood From Spilling - Particularly With Petty Fascist Autocrats in Charge

The stock market, after dropping 35% from its all time high on February 19^th sits today up about 30% from its March 23 low.  Overall the S&P 500 is down a mere 14% from its apex.  Everything being equal, things must be pretty good…

Not so much.  Although the world is slowly thawing from its government imposed freeze, the truth is far less sanguine than the stock market might suggest, i.e. that this Coronavirus scare was just a minor speedbump on our economic march to prosperity and beyond…

The reality is far darker, and the only reason that’s not readily apparent is that the federal government and the fed have poured $10 trillion or so into our economy via direct payments, loans, bonds and guarantees and governments around the world have taken similar steps. 

The fact that 30 million Americans today find themselves out of work will not be quickly fixed.  Jobs are not the kinds of things you can simply switch on and off… at least not in a capitalist economy. Businesses create jobs by trying to meet market demands in hope of earning a profit.  The Coronavirus shutdown has obliterated that entire dynamic.   

Restaurants are possibly the best resource to look to in order to get a picture of what the future holds.  Why?  Because restaurants are among the most entrepreneurial aspects of the American economy and they employ fully 10% of American workers.  There are about 1,000,000 restaurants in the United States and 13,000 more open each year, while a similar number close annually.  Of those million restaurants, 70% are single unit operations, 90% employ fewer than 50 employees and 6 in 10 adults have worked in a restaurant.

So what do restaurants tell us about the future?  It doesn’t look good…

Imagine you own a restaurant.  Not a fast food chain restaurant where 70% or more of the business was drive thru even before Coronavirus hit, but a restaurant where patrons come in, look at a menu, give their orders to a waiter and then eat on the premises. 

You’ve been largely idled for much of the last two months.  You might have been able to retool a bit in order to serve some take out or delivery orders, but odds are you simply closed.

Over the years you’ve adjusted your floorplan, you’ve tweaked your menu and you’ve trained your employees to upsell everything from wine and add ons to desert and cappuccino.  All for a business that probably gives you a 3-5% net profit or twice that if you’re lucky. 

Now you’ve been closed for two months and you’re wondering where you go from here.  Even if you laid off your staff so they could collect unemployment, you were probably still paying (or trying to…) your rent, pest control, outstanding invoices and making payments on the debts you incurred to open the restaurant in the first place. If you didn’t make the payments, they didn’t just disappear; they accumulated and will be waiting to be paid once you open back up. 

Now you find yourself in a quandary.  The governor has said that you can reopen, but in doing so you must take into account social distancing, i.e. your restaurant can only operate with 25% or 50% of the customer capacity.  That means that other than less labor and food, your restaurant has to operate with outlays almost exactly where they were before the virus, but do so with only half or less of the customers and revenue, plus now there are added costs of masks, extensive cleaning operations and perhaps even disposable silverware!  For most restaurants, that’s a money losing proposition.  Even if to-go business were to pick up, there’s little chance that the additional revenue would make up for that lost business.

More important than the revenue, is the margin.  Dine in restaurants make big profits on alcohol, sodas, coffee and desserts, all things that take out customers are less likely to buy than dine in customers.

Adding to all of that, your employees, who are collecting state unemployment plus $600 a week from the federal government, are now earning twice what they earn while working for you, and may well do so for months to come.  Given the economics, many will decline the opportunity to return and lose half the income they’re currently making, which generates pressure on you to offer higher wages.  So now your formerly relatively robust 5% profit margin restaurant business has transformed into a money losing albatross. 

How can one stay in business with numbers like that?  You can’t of course… And that’s the math quandary facing businesses across the country, and of course it’s not just restaurants.  It’s hair stylists and barber shops.  It’s nail salons and massage parlors.  It’s karate classes and dance instructors.  It’s accountants and business consultants.  Its gyms and movie theaters and many other businesses.   And don’t be surprised if schools, churches, hospitals, and government agencies don’t pile on.  Sure, those aren’t businesses, but they are all buy substantial goods and services from businesses…

All of this is particularly important for small businesses because unlike big businesses who often can tap into debt or equity markets, small businesses often face high hurdles when it comes to financing.  And, small businesses (as defined by the SBA as those with under 500 employees) are the lifeblood of the American economy.  They make up 99% of all businesses, employ half the workforce, and generate 70% of all new jobs.  And they are the ones most likely to have been sidelined by this lockdown and will have the most difficult time emerging. 

While government loans and guarantees are helpful, they can’t replace customers who are not there.  They can’t replace demand that has evaporated.  They can’t keep a business in business… and they can’t do any of that for any sustained period of time.  If printing money was the solution to this problem the Weimar Republic and Zimbabwe would be poster children for growth and prosperity.

Hence the divergence of the markets and main street.  Government largesse may work in the short run to keep the markets calm and the breadlines from forming, but it’s no recipe for prosperity or even economic growth.  Indeed, big businesses aren’t doing that badly under the current plan because they have legions of lobbyists who can ensure that they successfully navigate the restrictions and find the nuggets in the fine print of outlays, and Wall Street can see that.  But on Main Street, Adam Smith is coming, and he’s bringing Hell with him…

At the end of the day, all businesses depend on customers.  Customers spend money they’ve saved, earned or borrowed.  The first will eventually run out, the second can’t happen without a job and the third will soon be limited to those with pristine credit scores.  The Coronavirus lockdowns and government restrictions haven’t just killed the world's most prosperous economy since World War II, they have kneecapped the basic premise of free markets, that customers are free to buy what they want and sellers are free to sell their goods and services however they see fit.  True, we were hardly a free market before all of this, but now with government edicts about when you can open, what you can sell and how many customers you can have, we’re far closer to Karl Marx than Mr. Smith. 

There will be economic blood in the streets as America realizes that prosperity and economic growth can’t be dictated by government and that in most cases government action is a hindrance to both.  Prosperity requires entrepreneurs who are willing to risk their sweat and treasure to build something in pursuit of profit.  Economic growth requires markets that match consumer demands with businesses who can meet them.  Lockdowns and government edicts hinder both and the longer they go on and the more restrictive they are the more carnage there will be.  Business failures.  Bankruptcies.  Loan, mortgage and credit card defaults.  Tens of millions of Americans who can't find work.  And those are just the things you’ll see.  Imagine the new companies that won’t ever get out of the starting blocks.  The jobs that won’t be created.  The demand that’s simply not there…

Wall Street might imagine this Coronavirus disaster (the lockdowns, not the virus) is just a bump in the road, but it’s not.  It’s a cliff that we’ve been pushed off of, or more accurately, jumped off without much of a fight.  And it looks like the bottom below is littered with jagged rocks and glass.  Sadly we're not Road Runner in a cartoon where we can simply turn around in midair and run back onto solid ground.  It appears that we've become Wiley E. Coyote.  History will not look back favorably on the petty fascist autocrats and their delicate snowflake supporters who used a marginally dangerous virus in their march to undermine capitalism and decimate freedom and prosperity.  

America crossing the Rubicon: The Boston Marathon terrorists succeed far beyond their wildest dreams...

As is often the case with terrorist events, the Boston Marathon bombings had an impact far beyond the bodies of the people harmed by the delivery vehicle itself. Of course that is the very nature of terrorism, where the goal is to use the media to leverage shockingly violent attacks – but usually limited in scope – into events that shock and scare a far larger population than they could every impact directly. Whether the motivation comes from inside the head of a single person or the machinations of a disparate international movement, the goal is always the same: drive a change in behavior that they could not otherwise accomplish through peaceful, lawful means.

One of the challenges faced by President Bush after September 11th was in suggesting how Americans should react. He was pilloried by many people for suggesting that Americans “Get down to Disney World in Florida…” and that we should “Take your families and enjoy life, the way we want it to be enjoyed.” That may have sounded frivolous, but the reality is, he was right in suggesting that Americans not let the cowardly terrorists cow them into hiding in their homes. Their goal was to negatively impact the United States and the American way of life. President Bush suggested Americans not allow the terrorists to make such an impact.

That doesn’t mean that there should not have been a reaction to the attacks. On the contrary. Security lapses, which would be comical if they were not so deadly, had to be addressed. From plane boarding to procedures governing the communication between government agencies, many things had to be changed and improved. While the TSA may be an utterly dysfunctional agency with inept procedures where inefficiency seems to reign supreme, it’s at least an attempt to address the procedures that allowed September 11 to occur. Other changes were put in place as well, from the creation of the Department of Homeland Security to the greater sharing of information among government agencies, both between different agencies of the federal government as well as between local, state and federal agencies.  Again, no perfect solutions – not the least of which is the excessive militarization of local police forces – but at least they attempt to address obvious problems.

There also remains much to do to improve security, particularly as it relates to borders, visa control and ports, but the reality is, and the Boston Marathon bombings demonstrated this clearly: there is simply no way to be 100% secure from terrorism. In a real life game of cat and mouse, each time government ups the ante on one aspect of security, the terrorists try and find another softer target and when something occurs the process starts all over again.

While a dozen years on the United States as a whole seems to have gone on relatively unscathed from September 11 – not to discount the life altering sacrifices made by the brave military and intelligence personnel – with Boston America may have crossed the Rubicon, and indeed, just as in Rome, the citizens of the Republic should be concerned.

On Friday April 19th America awoke to the warnings that the city of Boston was in virtual lockdown. Government organizations of every kind, from elementary schools to universities to every form of public transportation were closed. In Boston and its western suburbs citizens were “advised” to “shelter in place”. The 10th largest metropolitan area in the United States, the home of 4 million Americans was brought to a standstill by two misfits - one of whom was already dead - who had killed 4 people. In addition, remember, although these two men were indeed dangerous, this was almost a week after the bombings, the remaining suspect was on the run and there was little belief that he was in any position to inflict mass casualties on the citizenry of the Boston metro area.

So what we had were local and federal authorities searching for one man, and they essentially imposed martial law on an entire American city in order to find him. Indeed, men, women and children in Watertown were forced out of their homes at the point of a gun, simply because of where they lived. Millions of Americans were literally prisoners in their own homes in the pursuit of one man – albeit a dangerous one – but one man nonetheless, and one who was by all accounts on the run and likely wounded.

In this case the “shelter in place” orders lasted only one night because Dzhokhar Tsarnaev was found hiding in a boat. (The order was lifted an hour before he was found.) But what if he had not been found on Friday and the search stretched into Saturday and Sunday and the Governor decided not to lift the order? Would people have been forced to stay home for two or three days? What if Tsarnaev had instead hidden and died in a storm drain and was never found. How long would the lockdown have remained in place?

Today a Mirandized Dzhokhar Tsarnaev can sit back and see that with two pressure cookers, he and his brother were able to effect an impact far beyond anything they might have imagined in their wildest dreams. Which brings us back full circle to the goal of terrorism in the first place: Have an outsized impact by the strategic use of violence. What kind of a message does it send to Al Quaeda affiliates around the world or terrorist wannabes across the country? Had the brothers Tsarnaev had similarly inclined friends in Washington, New York and LA would 10% of the American population have been locked in their homes, bringing the financial and government sections of the United States to their knees? What if there was one bomb followed by coordinated bomb threats in 50 cities across the country. How many of those cities would have ended up in lockdown? 2? 10? 25? How many is OK? How long might those situations last?

A few notes to remember: The Tsarnaev brothers were first identified because of images captured by the Lord & Taylor department store security cameras – not by a government asset. Although authorities quickly distributed their photographs, it took the duo carjacking someone and robbing a convenience store before they popped up on the radar. Dzhokhar Tsarnaev was found by a civilian who noticed a loose tarp and blood on his boat rather than by any government agents or assets. The point is, the Boston Marathon terrorists were found because of good old fashioned detective work and the empowerment of the citizenry, not because of the imposition of a city wide lockdown and SWAT teams pulling families out of their homes at the point of a gun.

Unfortunately, humans being what they are, terrorism will likely not be going away anytime soon. Relatively free nations like the United States will always make appealing targets for cowards who cannot win their battles in the realm of ideas. The Boston Marathon terrorist attack was indeed a tragedy, and for thousands of people their lives will feel the shockwaves for years to come. It should not however be the catalyst that sets Americans cowering in corners and letting themselves be locked inside their homes. It’s bad enough that the round the clock hysteria & error filled media coverage communicates to the terrorists a fiction that they have destroyed the American way of life and have the American people shaking in their boots. We should not allow “shelter in place” and military styled assaults on innocent civilians to become the standard by which we deal with such events, lest America become a police state and that fiction becomes our reality.