It has been more than three months since Congress passed the $2.2 trillion Coronavirus, Aid, Relief, and Economic Security Act. And while stimulus checks and extended unemployment benefits have helped keep many Americans afloat, the law has also drawn plenty of criticism for its generosity toward big business.
The CARES Act’s Paycheck Protection Program was intended to help small businesses by offering loans that would become grants if they were used to keep employees on their books. But some say PPP is too hard for some small businesses to access and distributes too much money to companies that don’t need it.
Scott Galloway’s online-learning business qualified for PPP, money that he and his investors did not require. “We’re a bunch of wealthy white guys — the last people who should be taking government money,” he says. According to Galloway, professor of marketing at the NYU Stern School of Business and co-host of New York’s Pivot podcast, the coronavirus bailout package is nothing more than an enormous transfer of wealth from young, poor, diverse Americans to old, rich, white Americans. Intelligencer spoke to Galloway about his stimulus objections, his apprehension over universal basic income, and how restructuring company board seats might reduce income inequality.
It has been three months since the coronavirus bailout package was passed. How is it different from other bailouts?
If you think about the bailouts of 2008, they were mostly premised on this boogeyman that if one piece of the economy failed, you could end up with this domino effect, this contagion, that might take down the entire thing. The rationale given to the European Central Bank to try to bail out Greece was that if Greece went down, all of Europe could have gone down. I call it the systemic-risk bailout. With the 9/11 bailouts, it’s this act of God that put an exogenous shot into certain industries that should be given a lifeline, because who could have ever imagined this?
The coronavirus bailout was a little bit of economic pain and a little bit of an exogenous shock. I wouldn’t argue there’s a ton of systemic risk, other than the risks from a lot of unemployment, the way your inability to pay your rent can lead to a downward spiral of the economy. I would argue that the systemic risk here is more of a moral hazard. I would argue that everything we ever do on this scale is a thinly veiled attempt to flatten the curve for rich people. There are a lot of stories about mom-and-pop small businesses that are inspiring, and some are true, and some of this PPP bailout money will get to those people and save their businesses.
But I think a lot, if not the majority, of this money will do nothing but buttress the wealth of the wealthiest cohort in America. Follow the money. Something like 80 percent of the capital went to 10 percent of the small businesses. What you’re going to find is that 80 percent went to a business that has six Toyota dealerships in North Texas and the guy who owns it owns a piece of the Houston Texans. You’re going to find that the bulk of the money was given to what I’ll call “bigger small businesses,” whose investors and owners, on average, are doing really well. Many of them are in the top 10 percent if not the top one percent.
There’s a principle in economic crises that governments should err on the side of giving too much money in a stimulus package. The Federal Reserve is buying up all sorts of debt right now. What’s wrong with taking the “all of the above” approach and giving money to small-business owners — whether wealthy or not — while also giving checks directly to people? (Is this not what the CARES Act basically did?)
That’s like saying, “Okay, well, let’s err on the side of too much, so let’s bail out billionaires, too.” Maybe I agree with the idea of erring on the side of too much, but shouldn’t we have erred on the side of too much to individuals? We are going to have to pay this money back. It’s sort of misleading to call them loans. They’re grants. I don’t think programs that are mass attempts to transfer money to wealthy people is the way to go. The administration has accomplished what they set out to accomplish. They’ve used this crisis as an excuse to transfer money to the wealthiest people in America, who are largely their donors and supporters. Sure, it was good to do something fast and violent to respond to this thing — in other words, it’s okay to spill a little if you’re moving fast, which they did — but the question is: Does that exonerate them from all oversight?
You know what ground zero for this will be? You’re going to find out that a lot of private-equity- and venture-capital-backed companies took this money, which is nothing but a transfer of wealth from future generations to some of the wealthiest people in the world. My business qualified for this. We could have received about a quarter of a million dollars. Technically speaking, because I own half the equity in my small business, that would have given me $125,000. If my net worth goes up $125,000, I buy more Amazon stock, which drives Amazon stock up higher. And who owns Amazon stock? Loosely speaking, the 10 percent. The highest-income households in America own probably 80 percent of all stocks. The wheel just keeps on spinning, if you will. The way you stimulate an economy is, you get money to the place that has the greatest multiplier effect. Give a lower- or middle-income person $125,000 and they spend it on goods and services that goes back into the real economy.
That’s why you’ve said this stimulus is steroids for Amazon and Walmart?
Remember that thing, “if movie titles were honest”? Well, if you call this stimulus what it really is, the first title is, “A Hate Crime Against Future Generations.” But the second honest title of this stimulus would be, “The Amazon and Walmart Shareholder Act.” Who are the biggest recipients of the trillions of dollars that end up back in the real economy? Walmart and Amazon, the two biggest retailers. You could say that’s good for all of retail. But wait, how do we make it really good for Amazon and Walmart? We’ll mandate the closure of 98 percent of their competition! Amazon and Walmart shareholders couldn’t have dreamt this up themselves. Walmart had its largest quarter or year-on-year quarterly gains in revenue that they’ve had in decades. So there are big winners here and big losers. But unfortunately, the losers don’t vote, and that’s why this happens. The losers are young people and people who aren’t born yet. The winners not only vote, they have thousands of lobbyists in D.C. It’s no accident that we can all feel good about this — there will be that cupcake owner who got stimulus money. But we’ll find that the majority of the funds, especially around the PPP specifically, will have gone to the shareholder class and benefited the shared private corporations.
Say you’re speaker of the House and you come back after summer recess. Unemployment is still well above 10 percent and you’re dealing with a flood of new bankruptcies. What kind of stimulus bill would you put together?
Again, I think it’s bailing out people, not companies. To a certain extent, what a lot of this rescue package does favors the equity holders. In the case of the transportation industry, the airline industry, the primary compensation of management has been options on equity, and shareholders expect a greater return than debt because their equity is less secure. If United Airlines and Carnival Cruises went out of business, or “went bankrupt,” it’s not as if the planes would just sit in the desert or the cruise ships would sink to the bottom of the ocean. The equity would get wiped out, the debtors would seize control of the assets, and the companies would get out of their current obligations. Then they’d restructure the companies and come back. There would still be a United Airlines. There would still be Carnival Cruises. It’s just that the debt holders would own the assets and the equity would be wiped out. Stronger companies would reemerge. These companies should be allowed to go out of business.
What we’re doing is creating fat, happy, zombie small businesses that are not subject to what is the key component of staying in fighting shape: the marketplace. American companies used to be the wolves of the global economy, the most agile and fierce organisms in the business world, and we’ve turned them into these bitch poodles, waiting for the government to come home and feed them.
The real problem with every bailout, whether it was the first bailout of Chrysler in the ’80s or Lockheed in the ’70s, is that it can be directly correlated to another, bigger bailout of the same company or same industry years or decades later. Every bailout not only kicks the can down the road but makes the can bigger and more likely to break your toe the next time you encounter it. You could argue the bailout of the defense industry — of Lockheed — led to a general sense or lack of cost controls in the military industrial complex. The bailout of Chrysler meant that we didn’t move to smaller cars as soon as we needed to; the other two guys, Ford and GM, didn’t renegotiate their union contracts to get to a sustainable cost structure; and Chrysler ended up going out of business, again, while taking down General Motors. They all benefited from the sugar high.
The stimulus plan that makes the most sense is something like the ones in Europe and some countries in Latin America, where they consider people’s average earnings for the last three years. If you’re making over $100,000 a year and you haven’t figured out a way to survive six months, great, it sucks to be a grown-up. But say you’re in a household that makes less than $100,000 a year, which is more than half of all households. What Germany said, or some nations in Europe said, was, “We’re going to give you 60 to 80 percent of your average earnings.” That establishes a couple of things. One, there isn’t panic. People aren’t panicked about getting sick. They’re not panicked about feeding their family. And two, it’s better for the economy. It’s more stimulative for the economy because when a middle-class, lower-middle-class, or low-income person gets a stimulus check, they spend all of it. There’s a much bigger multiplier effect. In addition, consumers should decide which businesses survive, not the government.
How is this plan different from some sort of universal basic income?
I don’t want to say Andrew Yang has been validated, but a lot of people are now saying, “Okay, does UBI make more sense?” UBI, to a certain extent, is an attempt to just level-up people. I don’t think UBI is a good idea, and the difference between what I would propose and UBI is that mine would have an end date. But until the pandemic is over, and a certain amount of time after it, you take away the fear and you put the money into the real economy.
You can see that all of this stimulus happens and the online-trading accounts of Robinhood and E-Trade and Schwab and Public skyrocket. That’s no accident. The government has basically funded a run-up in the stock markets because a lot of people who got their stimulus checks weren’t spending it on food, they were spending it on buying Shopify stock or Netflix stock. If you owned $100 worth of Apple or Amazon or Facebook on January 1, it’s now worth $115. You can’t ignore the correlation between the stimulus and the run-up in the stock market. Was that the intention of this capital?
You said you don’t think UBI is a good idea. Why?
The cruel truth of capitalism — and one of the reasons it works — is that you can’t reward the winners without punishing the losers. Now, does that mean we should have a Blade Runner, Hunger Games-like society? No, and we’re barreling towards that. But I also don’t think we should move to a system where the winners don’t have dramatically more than the losers. Universal basic income is an interesting idea; I just think it should be more targeted.
What can the government do to prevent or prepare for these catastrophic recessionary events?
There are three very obvious fixes — some low-hanging fruit. But when I say low-hanging fruit, I mean fruit the size of watermelons. The first is Social Security. Many economists say that if not for Social Security, 38 percent of seniors would live in poverty. Thanks to Social Security, it’s only 11 percent. We spend a trillion dollars a year to take senior poverty from 38 to 11 percent. It’s considered an incredibly successful program. But there are much less expensive ways of taking senior poverty down by 27 percent. A third of children live in food-insecure households, but we don’t drop $300 worth of groceries off on the doorsteps of every house with children in it. What we’ve decided is that Social Security is a right and that it’s some sort of pension where people put in and get the same amount out. The people who are drawing Social Security right now are taking a multiple of the amount out that they put in, and it’s nothing but a transfer of wealth from a young, more racially diverse cohort to an older, more white cohort. Social Security is inequitable and needs to be age-adjusted. It’s gone from a program that takes seniors out of poverty to a program that upgrades Nana and Pop-Pop from Carnival to Crystal cruises for a trillion dollars a year.
The second fix is one of the most expensive tax deductions: capital gains interest deduction or capital gains tax. You only pay 22.8 percent on capital gains — you pay more on current income. We have decided that the money that money makes is more noble and more worthy than the money that sweat makes. That is, again, nothing but a transfer of wealth from a young, multiracial cohort to an older, white cohort. It is ridiculous to think that we need to inspire more investment capital. Whether you look at interest rates, whether you look at the amount of money that is available for alternative investments, whether you look at the size of the private-equity business or the alternative investments, we are awash in investment capital.
The third fix is the other most expensive tax deduction: the mortgage tax deduction. This notion that a house is the American Dream is a tagline brought to you by the National Association of Realtors. Ask anyone who bought a house in 2007 how their dreams turned out. Robert Shiller, the Yale economist and Nobel Prize winner, has done a lot of analysis showing that if you account for maintenance, a house isn’t any better an investment than any other investment class. But who owns homes? Older, largely white people. Who rents? Younger, more multiracial people.
Everything we do — every large investment, every really staggeringly expensive program in America — is nothing but a transfer of wealth. The latest obscenity is that we have finally decided to brazenly admit that the tax rate that the top 0.1 percent pays is lower than the rest. It’s like we have finally given up on this lie that we have a progressive tax structure. Money, at its root, is a transfer of time and work from one cohort to the other. And with these bailouts, we have said, we’re going to give as much time off and reduce the workload on older white people at the expense of future generations, the younger, more multiracial people. Younger people sense it. We are putting in place the groundwork for massive civil unrest. To a certain extent, the civil unrest we’re experiencing today is a part of that. The spark was this horrific act and a younger generation saying, justifiably, we’ve had it. Right? But the sheer size of the protests, to a certain extent, is a combination of factors, including the bailout.
Big companies give these huge stock packages to the top executives. Could we pass some sort of legislation that requires a stock package for employees?
There’s a few things you could do. Germany mandates that a certain percentage of the board has to be represented by employees. Germany is highly unionized. So what does this mean? With corporations, it all starts with the board. The board gets to decide who the CEO is and the compensation structure for the CEO. And then that individual decides the compensation structure and the strategy and the wages for the rest of the company. So when half the people on your board of directors are workers, you find that there are lower profits that go to shareholders and more employees earn higher wages.
In America, we’ve just made a conscious choice to favor shareholders over employees. There’s some merit to that. Stocks were flat for decades, up until about the late ’70s, early ’80s. And then the shareholder class rose up and said, “We’ve had enough of this.” And activist investing started replacing the CEOs or putting in place CEOs who were very shareholder-driven. So we’re now in a situation where you have CEOs making tens of millions of dollars while the bulk of their workforce makes $10 or $15 an hour. Where it really kind of went parabolic was when [Uber’s] Dara Khosrowshahi, when the stock price got to a certain point, was promised $120 million. And there are all sorts of studies coming in showing that a large contingent of Uber’s seven-million-strong employee base — and maybe if they’re not classified as employees, they call them partners, they really are their workers — were making less than minimum wage. When the employee base is taking all of the profits, that doesn’t work either, because then people don’t want to invest in companies and you can’t innovate, you don’t have investment capital. You need a balance. The question is, have we swung this way too far to the other end?
What you could do, because you asked what you could do: You could mandate that a certain percentage of board seats are represented by employees. You could mandate a federal minimum wage that catches us up to where we used to be, say, in the ’80s, because inflation has outpaced minimum wage. Compensation drives behavior. For CEOs, every decision is about getting the stock price higher in the next two to five years, because most CEOs don’t last longer than five or six years. You could do clawbacks. In other words, you could put those gains in an escrow. I mean, there’s a lot you could do. You could have higher tax rates for companies or the executives if they make, say, more than 200 times what the average employee makes. Perhaps they would be motivated or more generous to raise the wages of the employee base. Because where we’ve ended up, we’ve adopted lock, stock, and barrel the Milton Friedman school, where a company’s sole mission is to reward its shareholders. At most companies — I know this firsthand — the board’s approach to compensation of its employees is based on supply and demand. If we can get people to work in our retail outlets for $10 an hour with no health care, fine, that’s just how it is, and if we need to pay CEOs tens of millions of dollars to get the best, that’s how it is.
The question is that supply-and-demand rubric around labor has resulted in a third of U.S. children living in households that are food-insecure despite the fact that on every level, the GDP in the U.S. has outperformed everyone in the world, except for China. We’ve had remarkable, unprecedented prosperity in this country over the last 40 years. The question is, have we had any progress?
This interview has been edited for length and clarity.