WHY OLD DEBT PLAYBOOK MAY NOT BE GOOD ENOUGH

Equity should become a bigger part of rescue plan, writes Kevin Carmichael.

Dave Mckay, chief executive of Royal Bank of Canada, said last month that the federal government should raise the “forgivable” portion of its emergency small-business loan program to as much as 75 per cent from the current 25 per cent, or $10,000, whichever is greater.

Dan Kelly, president of the Canadian Federation of Independent Business, which represents some 110,000 such companies, loved the idea of “forgiving ” 50 to 75 per cent of the debt issued through Canada Emergency Business Account, a $25-billion pot of money that backs zero-interest loans up to as much as $40,000.

In effect, Mckay and Kelly were calling for a $30,000 grant, which is an entirely valid proposal, but one the country’s conservative business and political cultures would quite likely reflexively reject.

Canada is strange that way. We’re a capitalist society that distrusts capitalists, and maybe for good reason, since so many of them deny that their industries sit on a foundation of public investment, subsidies worth about $30 billion per year and government-sanctioned oligopolies.

Those contradictions may now be getting in the way of thinking creatively about how best to escape the recession with pace.

Everyone says the COVID -19 crisis is unique, but the only thing revolutionary about the rescue plan so far is the scale of the spending commitments.

Otherwise, it’s the same playbook that governments and companies have been using to fix problems forever: debt.

Ask a mandarin, or former mandarin, about what stops the government from taking equity stakes in the businesses that it’s bailing out, and you’ll likely hear some variation of “governments can’t pick winners,” even though the economy is sloshing with subsidies. Ask an executive or a business lobbyist the same question, and you’re apt to be told that bureaucrats and politicians don’t belong in the C-suite, which would be fine, if there weren’t so many examples of companies stiffing taxpayers on no-strings-attached loans.

We have no problem throwing money at individuals.

Finance Minister Bill Morneau on Friday said the government would now subsidize wages until the end of August, extending the Canada Emergency Wage Subsidy program by 12 weeks. The Canada Emergency Response Benefit sends $2,000 a month to workers cut loose because of the lockdowns as well as freelancers without contracts.

These are good programs.

The Bank of Canada divided mortgage holders and renters into three equal income groups and estimated what each paid monthly for shelter, food and internet. The middle group of mortgage holders needs about $2,600 per month to cover living expenses, while the middle group of renters requires about $2,000, suggesting most individuals are being kept afloat by the emergency programs.

Prime Minister Justin Trudeau’s government has also been generous to companies, especially smaller ones, except it’s at the cost of adding to their eventual post-crisis burdens.

The aid on offer is mostly in the form of loans, which is better than nothing, but it could impede the recovery when the COVID-19 lockdowns end. Money that could be used for hiring and investment will be diverted to debt repayment, which was already a headwind given that non-financial corporate debt had surged to 315 per cent of income, well above the historical average, according to the Bank of Canada. That doesn’t mean Morneau should be writing blank cheques. But if the goal is recovery, the government should probably be making more use of grants, at least for smaller firms, since there is an elevated risk that already heavily indebted companies will become zombie firms or default on their loans.

“The idea of grants starts to become more interesting under the circumstances,” Eric Morse, an entrepreneurship professor at the University of Western Ontario’s Ivey Business School, said in an interview. “It would make a big difference in how we come out of this downturn. You’d be helping the economy recover more quickly.”

Equity should also become a bigger part of the rescue, if only because taxpayers would have a chance to benefit from the upside of government investments in distressed assets. Take Air Canada, as a hypothetical example, since there is broad agreement that the airline industry will need more help than it has received to date. The company’s shares have lost 70 per cent of their value since the start of year. Airline stocks may never return to pre-crisis levels, but some recovery seems plausible.

If the government decides an airline bailout is needed, why wouldn’t you do it as an investor?

The Logic this week reported that the federal government is interested in giving itself the option of taking equity stakes in companies that draw on its big-business loan program.

Given the debt the federal government is piling up to save the economy, it’s the wrong time to get hung up on taboos about public ownership of private companies. The government could easily create an investment fund and appoint experts to run it.