In a perfect world, there would be a very profitable growing private sector business and a very efficient small government performing social support and security system for all, including unemployment and health benefits. And in a perfect world business and Government would divide responsibilities among themselves. Business manages the economy during peacetime and stability, while the government interferes during wars and natural or man-made disasters.
But, is there anyone ready when the world is not perfect? Most likely the answer is very few of us are. The Coronavirus Pandemic exposed us all. Individuals, families, small businesses, large businesses, military, federal and state governments were all not ready! Why? This is the subject of this writing.
The private sector is profitable because its efficiency depending primarily on running business by fully investing the available and borrowed funds, with minimum regards to the risk of low liquidity. Highly financed business assets put any enterprise on the edge of bankruptcy immediately after any crisis takes place. For that we don’t need to go too far back in history, we only need to remember the Great Financial Crisis of 2008 through 2012. Healthy cash-flows, with a good cushion of salable finished goods and a good percentage of available cash (minimum 6 months of operating expenses) is essential to any going concern enterprise, and that should be regulated for medium and large publicly owned business to start with. The problem is when any disturbance to business takes place, like a natural disaster such as an earthquake, storm, fire and tornadoes, companies rely on their insurances to recover. But when we get major natural or man-made disasters like the great recession in 2008 and the current “Coronavirus Pandemic” everything collapses, and that becomes an opportunity for Government to come to the rescue.
But if the States and Federal Governments were not properly prepared for such a grand event then we will endure the Perfect Collapse. In the case of Coronavirus our medical service relies on our medical insurances if we have it. Insurance providers rely on private medical institutions. All medical chain providers (in the United States) are profit-oriented enterprises. Part of being profitable means they have to carry only the minimum level of everything, from human resources to patient beds from equipment like ventilators to medical supplies like face masks and other PPE’s. This is OK during business as usual. They are ready, efficient and profitable, just like food and grocery supplies chains.
Now the extraordinary crisis surprised everyone! Not to worry because the Government will step in and manage the crisis. Unfortunately, the federal government and the states were not ready at all for such scope of a Pandemic. What make it worse are the globalization of the pandemic and its nature of transmitting the disease easily through the respiratory human system that requires the shutdown of all factories, and shipping and travel between all countries.
Why didn’t we see the pandemic coming? Actually, we did see it coming, but it was too late. Even then there was no political will, not only in the US, but throughout the world, to take drastic measures to stop it, because of the economic consequences. The technology and analytical advancement are so great that we may believe everything is predictable. Take the weather forecast for example and imagine how much the prediction of rains, winds, temperatures, tornadoes, tsunamis and volcanic eruptions have saved lives and property at land, sea and air.
If the success of the private sector is measured by its profitability under normal market conditions and its sustainability during a recession or crisis, the Government’s success can only be measured by its smooth handling of natural and man-made crises and disasters.
What is missing in this epidemic and in the 2008 recession three major weaknesses?
- Lack of sustainability in the corporate business, namely the liquidity of its assets.
- Lack of prediction and readiness to act at the Federal and State Government Levels.
- A major dependency on importing consumer and medical goods and supplies from cheap labor overseas countries.
The old saying of “too big to fail” must be replaced by “too big to be sustained.” Why? Because it’s noticeable that the large, publicly owned corporations are the first to collapse, first to file for bankruptcy or seek Government help. This is happening mainly because there are not enough emergency fund reserved. Perhaps Congress should adopt more financial regulation to force large and medium publicly owned companies to reserve enough liquid assets in the form of cash, salable finished goods and government secured bonds, just like medium and large financial institutions were put under the scrutiny of a “Stress Test”. Simple very well-known financial ratios like Working Capital Ratio (current assists/current liability= 2:1) and Quick Ratio also called “Acid-Test Ratio” (current assists without inventory/ current liability= 1:1). Some may argues that more regulations create less opportunity for businesses, I would argue reasonable safeguard regulations is a better protection for business, and this will reduce the chances of yet another taxpayer bailout again and again. Business must have the tolerance to accept shut down with zero revenue without lay out their valuable employees immediately and change their status to be unemployed to be burden on the taxpayers and unemployment insurance.
As for the Government’s performance, it can’t be measured only by balancing its fiscal budget, or winning a war somewhere, but must be accountable for its ability to predict, being ready, and by its aggressive, promptness to response before, during and after any natural and man-made disasters.
As of today, May 25, 2020, we have reached 1.7 million cases and about 100,000 deaths in the US only. A 5.5 Million Cases and about 350,000 deaths worldwide. This is a harsh sad painful indication of the failure of the Businesses and Governments combined.
Mohammad H Alnajafi
www.mhalnajafi.org
May 25,2020
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