Setting the rules of the game

In mid-March, Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act, and two weeks later, on April 3, the Steven Mnuchin-led U.S. Department of Treasury finalized its plan to provide emergency loans to small businesses.

This extraordinary action signaled a dramatic break from contemporary politics. The presumed correlation between capitalism and democracy was neither fast enough nor effective enough to offset the effects of an economy ground to a near-complete halt under the heel of the COVID-19 pandemic.

For those who have long held fast to Mr. Jefferson’s admonition that the best government is the one “which governs least,” perhaps this signaled heresy.

Banks scrambled to set up application portals. Small-business owners, most working remotely, struggled to access and provide documentation for CARES Act loans. While $2.2 trillion seemed like “real money” when the legislation passed, it became quickly apparent that it wouldn’t be nearly enough. The Small Business Administration’s $349 billion relief fund ran out in just 13 days. Would additional federal funding be forthcoming? How many small businesses would go under before loans could be processed? Unemployment claims poured in at an unprecedented rate.

Without claiming any authority on Thomas Jefferson’s voluminous writings, it is clear that there is a role to be played by government during the current crisis.

Since my long-ago days in business school, I’ve been a fan of Milton Friedman’s 1970 essay, “The Social Responsibility of Business is to Increase its Profits,” which first appeared in The New York Times Magazine.

But what about the social responsibility of government? Those arguing against all government intervention seem to presume that government has no responsibility that cannot be better and more wisely executed by the business community.

This fox-in-the-henhouse mindset clearly comes up short in our present circumstances. Take vaccine development, for example. The pharmaceutical industry generally has no profit motive to fund research, development and stockpiling of a vaccine for a virus before it’s a problem. And once a virus is eradicated or no longer a threat, the market largely disappears. Government is the only logical customer to fund private development of disaster-related products such as these.

Health care provides other examples. Hospitals are required by law to serve all who show up at their doors, regardless of their ability to pay. The profit motive in this economic equation isn’t just ineffective, it’s entirely absent.

And what about banks? Under normal circumstances, banks make only collateralized loans, essentially lending money only to those who see paying interest as a lower cost alternative to selling other assets.

Unfortunately, as quarantine conditions have demonstrated, legions of small-business owners lack the necessary collateral for working capital loans. If the federal government didn’t step in to back these loans, entire sectors of the economy would collapse, imposing even higher costs on government for unemployment compensation and other social programs.

The current health crisis indeed challenges the notion that smart politics should always seek to minimize government. In fact, an active government plays a necessary and legitimate role in business and society.

Turning again to Friedman, we would all do well to pay heed to the full context of his thesis.

“There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

Setting the rules of that game is a role for which government must necessarily be empowered in order for capitalism and our democracy to succeed.

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