It seems like yesterday that we were in the midst of a partial government shutdown and a good many of us were turning to food banks to keep food on our tables. People couldn’t afford to buy medicine or pay for child care, their mortgages, or buy fuel to get to work. They were struggling to cope.
Experts were reminding us then of the need to save for a rainy day.
It’s hard to believe, but the struggle so many of us were having just a year ago is the one we’re experiencing now. The only difference was the storyline centered around struggling families.
Now I can’t help feeling a bit of déjà vu.
Now we find ourselves in the midst of the COVID-19 pandemic. Not only are families struggling to make ends meet, so are local and state governments, and small, and to my surprise, big businesses.
Just last week, J. Crew filed for bankruptcy. Neiman Marcus followed a few days later. Both had too much debt and too little cash, which have been made significantly worse due to COVID-19.
More could come.
The question that has been looming in my mind is why. If we’re supposed to put aside enough to cover six months of expenses, shouldn’t big business do the same?
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Didn’t we learn anything from last year’s partial government shutdown or the Great Recession a decade or so ago?
It doesn’t look like it, according to Erik Gordon, a business professor at the University of Michigan.
To be fair, Gordon said, we’d have to separate small businesses from larger companies like Delta Air Lines, Home Depot and UPS.
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“I have more sympathy for small businesses that make less money to put aside for rainy days than the big companies have.”
A new poll from MetLife and the U.S. Chamber of Commerce reveals that 1 in 4 small businesses or 24% say they are two months or less from closing permanently amid the economic downturn caused by the coronavirus pandemic. One in 10 or 11% say they are less than one month away from permanently going out of business.
What’s more surprising is when big companies are less prepared for emergencies.
In decent times, rather than keeping a cash cushion in the bank for times like these, Gordon said, CEOs of big companies distribute that cash to their shareholders in the form of dividends or buy back their stocks to make themselves more valuable, which keeps the price of the stock up.
“When the stock price stays up, they get to keep their jobs,” Gordon said. “If the company keeps money sitting around for a rainy day, it’s not doing anything to make the CEO look good.”
If a company runs into a cash pinch in normal times, Gordon said they can take out a bank loan and it’s not a big deal. When something goes wrong like COVID-19 or they’re faced with a financial crisis, that changes everything. They have to get in line for a loan like everybody else.
The bottom line, according to Gordon, is companies didn’t learn their lesson. They have short memories.
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“It’s amazing these people get paid as much money as they do,” he said. “This shouldn’t be happening. What’s even sadder is because the government is bailing them out, they won’t have much incentive to save cash for the next rainy day.”
So, what’s the lesson here?
Spending all your cash can put you out of business when tough times arrive, but having a cash cushion is what keeps you solvent, Gordon said.
Even so, he said, cash is especially important when you try to get through a sudden event like a pandemic or a terrorist strike.
“Recessions come on slowly, so you have time to adjust. Sudden events give you no time to adjust, so you need that cash on hand.”
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A lot of these businesses, of course, are blaming their shrinking bottom line on the pandemic. The truth is some of them were heading into bankruptcy anyway. COVID-19 just put them on the path a little bit sooner.
J. Crew, for instance, had been in trouble for years, Gordon said. All COVID-19 did was send it into bankruptcy earlier than expected.
But for the little restaurant in Virginia-Highland, the pandemic changed everything for them. They deserve some help. Companies that were failing prior to the pandemic do not. Giving them money is like pouring it down the drain.
“A lot of big shots in business and politics are using the virus as an excuse for their own failures,” Gordon said. “You and I couldn’t get away with that stuff.”
Of course, not everyone sees it that way.
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Giacomo Santangelo, a professor of economics at Fordham University, told me the redistribution of income as dividends or buying back stock does more than just “make the CEO look good.” It allows firms to stay in business and continue hiring, which allows workers to support their families.
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“By failing to financially assist or in the vernacular that’s being thrown around so much today ‘bail out’ larger companies, the government would be ensuring the unemployment of even more people,” Santangelo said.
In his assessment, in fact, there was no lesson to gain from last year that would’ve prepared firms for the coronavirus.
“By that same logic, are households to blame for the difficulty they find themselves in?” he asks. “I don’t think so. That is a rather cold assessment of the situation.”
If we were six months or a year into lockdown, I might agree. But for two months?
If we’re expected to be financially responsible, to save for a rainy day, to not look to the government for help, the same should be expected of big business.
Instead, we hear stories of them using their banking connections to jump in front of small businesses and take billions of dollars in loans while small businesses are stuck in red tape, getting nothing.
Gordon likened it to a middle-class family needing $5,000 to get by but getting nothing but red tape from the government while the multimillionaire who needs $500,000 immediately gets it handed to them.
“Given what CEOs saw during the (Great Recession), it’s hard to understand how they could be caught so short of cash this time around,” Gordon said. “Will they ever learn?”
Will any of us?
Find Gracie on Facebook (www.facebook.com/graciestaplesajc/) and Twitter (@GStaples_AJC) or email her at gstaples@ajc.com.
