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Harvard Business Prof. on coronavirus: we worry there will still be a lot of business failure

Harvard Business School Professor Robin Greenwood joins Yahoo Finance’s Seana Smith to discuss his policy proposal with an MIT Sloan professor to help the economy recover after the coronavirus pandemic.

Video Transcript

SEANA SMITH: Welcome back to Yahoo Finance. Now, the White House laying out a plan to reopen the economy in three phases. Now, this comes as businesses are struggling to survive the current pandemic. Our next guest says that it is crucial to help the economy return to normal when the time comes. But the question is, how exactly do we do it and how do we do it effectively?

So here with more on this, we have Harvard Business School Professor Robin Greenwood. And Professor Greenwood, thanks for joining us this afternoon. Let's start with the administration's proposal to reopen the economy. What did you think of what they're trying to do? And from a business perspective, do you think it makes sense?

ROBIN GREENWOOD: The administration is trying to do a lot of things. I think they're trying to preserve business continuity primarily. There's been a bunch of different proposals. I mean, I combine what the administration is doing with what the Fed is doing. And if you think about the overall government response plan-- in phase one, it's really to try to prevent business failure and try to make it so that if we reemerge in a month, in two months, something along those lines, that businesses will be able to snap back into production and so on.

The other thing I would add is that a lot of the economic response plan has been centered around helping those most vulnerable to the crisis, so employees getting checks and so on. And I think helping employees-- it won't just be good for them and on equity grounds. But it's also good for the economy, because they consume and they'll be able to go back to work as usual. And so I think that's been the focus of phase one of the plan. And our emphasis-- and I'll get to in a second-- has really been on phase two, because we worry that no matter what you do, no matter how good the plan is at this point, there's still going to be a lot of business failure.

SEANA SMITH: Yeah. So going off that, I know your plan focuses on phase two. But how do we address or how do we minimize the number of businesses that won't survive this? How do we make sure that more businesses are still alive on the other side of the outbreak?

ROBIN GREENWOOD: Well, there's been a lot of plans that have been circulating, particularly among the different universities, proposing various forms of what people might call income support for businesses, which is to say that essentially the government pays the bills of whether it be the airlines or small businesses. Those so far haven't really made their way into the administration's proposals, except in small form. There's been a lending program so far administered by the SBA, the Small Business Administration. But they've had trouble having rollout of those dollars. And frankly, for a lot of businesses, it's not going to be enough-- enough capital.

So there was a survey done just last week of small businesses, run by some of my colleagues. And they had responses from 5,000 businesses approximately around the country. And over 65% of those businesses have less than two months of cash on hand of expenses. And so, you know, the government can do something to help those businesses if the lockdown is a month, if the lockdown is two months. But once we're getting into a space of two, three, four, five months-- and you know, we all hope that it's not so long, but it could be-- then we're going to be really facing a big wave of business failure.

SEANA SMITH: Yeah. I know you mentioned the moratorium on debt payments. Just in terms of how far this will go, how big of the help this would be, for business owners-- I mean, how do you try to evaluate how best to do this and what the next steps would be then going forward?

ROBIN GREENWOOD: Yeah. So the basic idea behind our plan is that lots of cities, like Los Angeles, Seattle, have already encouraged moratoria on various debt and rent payments. And so frankly, people are not paying their rents as it is right now. And so our question was really, well, what happens when the dust settles? So go out three months, four months, five months, and say you have a landlord and a tenant and they haven't been paying rent for four months-- and they can't afford to go back into business and pay that back rent. Margins are tight.

Think of a business like a restaurant or a dry cleaner. They're simply going to go bankrupt if they do so. So how do they organize to move past this delinquency. And our proposal is essentially that they come to an agreement. And it's a common agreement across all businesses where they say, well, forget about that rent that you owed, and the government gives a credit to the landlord in this case. And that comes in the form of a tax rebate maybe six months later or a year later-- say 30% 40% of that initial amount owed. And it helps avoid a bunch of the haggling that is going to happen over the next four months and avoids what we expect to be a massive wave of bankruptcies coming across the United States.

SEANA SMITH: Well, Professor Greenwood, how would the government then benefit from your proposal? Because you're going to need to convince them that they will also get something out of this in order for it to be effective and for it make sense for them to do it as well.

ROBIN GREENWOOD: We expect the government to-- the governments a beneficiary from a growing economy. And the government, in the long-run, is not going to benefit from a wave of business failure. But you're right-- this is not going to be a program that by itself is revenue neutral. The program by itself is going to cost the government money, but we hope in service of an improved economy. I'd like to add that if you think about big businesses across the United States, we have a process for dealing with business failure that works incredibly well. It's called Chapter 11.

And you know, most of us have flown on an airline many times in our lives that was bankrupt and maybe we didn't even know it was bankrupt. But small businesses aren't like that and medium size businesses aren't like that. They don't operate well in bankruptcy. It's expensive. It requires a lot of lawyers. And so I think we have to make more effort as a society, as a government, to try to avoid that-- and if we do get there, to make sure that it operates as close as possible to the way that it does for big businesses.

SEANA SMITH: Yeah, certainly. And very interesting. And it does make sense when you lay it out like that. Harvard Business School Professor Robin Greenwood, thank you so much for joining us this afternoon.

ROBIN GREENWOOD: Thanks, Seana, for being here.