A Better Alternative to More Coronavirus Stimulus Spending and Loan Programs
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A Better Alternative to More Coronavirus Stimulus Spending and Loan Programs

Tax-exempt CoVictory Bonds and Loans could rally everyone —from mom and pop shops to big institutional investors— to privately finance a victory over the coronavirus recession.

As the nation grapples with the ongoing coronavirus pandemic, the U.S. Senate may soon consider another federal stimulus package.  Some politicians favor trillions in additional federal spending and lending, but before we further explode the debt and deficit, let’s pause and think about what would best help the American people. Smart, inclusive tax relief that maximizes private investment would work much better to help restore and maximize prosperity for all.

Not content with the bipartisan $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act) stimulus, which tripled the federal budget deficit, House Democrats, in May, passed their next phase of stimulus spending — the $3 trillion Health and Economic Recovery Omnibus Emergency Solutions Act (HEROES Act).

Not to be outdone, President Donald Trump recently stated, “I support actually larger numbers [stimulus spending] than the Democrats. But it’s got to be done properly.”

Meanwhile, Senate Majority Leader Mitch McConnell (R-KY), after previously expressing some doubt over the need for more stimulus, has confirmed his interest in another stimulus round, which he says should be smaller than the CARES Act and “designed to help us where we are a month from now, not where we were three months ago.”

While CARES Act spending and loans may have helped some survive the initial COVID19 lockdowns, the programs in the bill have been roundly criticized for wasting money on well-funded companies while excluding many small businesses in urgent need of liquidity. More to the point, however, neither the CARES Act nor the HEROES Act is event remotely designed to spur the economic recovery the country needs now.

The point of any economic recovery policy at this time should be to empower a return to inclusive, robust, private free enterprise, not to deepen dependence on distortionary government spending and lending, which inevitably crowds out private investors and picks undeserving winners. Lenders of last resort should not be made the lenders of first resort. Central banks and governments should not replace private debt markets. Congress should seek to encourage private, not government, lending and investment.

Private, tax-exempt debt could help accomplish exactly that.  Based on the current gap between similarly-rated taxable private bonds and tax-exempt government bonds, tax-exempt private bonds would drive down most firms’ borrowing costs by around 30 percent. Tax-exempt private loans could reduce the cost of debt by up to 21 percent (the corporate income tax rate burden that we’d lift).  Private, tax-exempt bonds and loans would offer a simple fiscal tool that firms, large and small, could use to drive down their costs of debt and to obtain affordable capital that could help them recover from the COVID-19 recession.

To address this we propose a temporary program that authorizes the issuance of private, tax-exempt CoVictory Bonds and Loans (CVBLs) for a two-year recovery period. This would be a far less expensive, more inclusive, and cost-effective stimulus package per dollar of new investment than the CARES Act. It would not be backed by, or spend, taxpayers’ money.

If the tax-exempt program allows up to five-year loan terms, then, by our calculations, $1 trillion of such debt would only reduce the government tax revenues by between $30 billion to $40 billion—without figuring in any added tax revenue from dynamic impacts.  It costs way less to stimulate private, rather than government, investment. And from the taxpayer’s perspective, simply forgiving the tax on interest costs is far less expensive or problematic than forgiving loan principal, as the CARES Act allows.

As World War II Victory Bonds did at that time, CoVictory Bonds and Loans could rally everyone —from mom and pop shops to big institutional investors— to help come together to privately finance a collaborative American victory over the COVID-19 recession.

What we’re proposing here, and calling CoVictory Bonds and Loans, needs to be carefully distinguished from ordinary tax-exempt state and local debt, which at the simplest level encourages bigger government versus more free enterprise. It also needs to be differentiated, most importantly, from CARES Act federal lending, much more of which is definitely under consideration by Washington policymakers.

Bagehot’s Dictum

The lending programs in the CARES Act may seem, at first, like a reasonable implementation of Bagehot’s Dictum, the strategy that lenders of last resort have used successfully to mitigate numerous crises for over 150 years.  Named for the great 19th-century economist Walter Bagehot, the dictum may be summed up as follows: to avert panic, central banks should lend early and freely (i.e. without limit), to solvent firms, against good collateral, and at ‘high rates.’… “to ‘this and that man,’” as Bagehot put it, “whenever the security is good.”

Despite this similarity, critics say CARES Act loan programs wasted money, unfairly favoring big businesses, giving them bigger loans faster, despite less need.  This bias can be explained by the fact that CARES Act lending departs from Bagehot’s Dictum in important particulars:

  • Rates on these loans have not been high. While low rates make sense to accelerate recovery, Bagehot warned that for early crisis stabilization, low rates would attract borrowers who don’t really need the money and divert funds away from firms in real need.
  • These low rates are fixed. In other words, this is price-controlled debt.  Since they allow no way for banks to price risk, we can observe the consequence that banks have no incentive to lend to smaller or riskier firms (the kinds that really need help) and instead have perverse incentives to loan as fast as possible to the biggest borrowers allowed by each program before funds are used up, to maximize generous loan origination fee revenue.
  • Paycheck Protection Program (PPP) loans require no collateral, are 100 percent Small Business Administration (SBA) guaranteed, and forgivable if restricted to payroll support (with principal covered by the SBA). This violates Bagehot’s solvency requirement, with the consequence that some funds will be wasted on insolvent firms that don’t survive, no matter how much they borrow, because their business models are broken.
  • Restrictions limit who can benefit from these loans, excluding many firms in great need. For instance, utility-scale energy investors form new partnerships, raising new capital for every energy infrastructure project.  But these dynamic job generators cannot participate in the Federal Reserve’s Main Street Lending Program because these loans require a 2019 income statement, which new projects lack.  So much for lending freely to “this man and that man.” Obviously, efforts aimed at spurring economic recovery need to encourage new projects, not exclude them.

Tax-exempt private debt helps solve these bureaucratically created distortions.  Tax-exempt private debt is simply ordinary debt without taxes.  Ordinary private debt is non-distortionary.  Since investment taxes are generally considered distortionary, tax-exempt private debt should be even less distortionary than ordinary debt with taxes.

While CVBLs offer cheaper capital without taxes on interest, it’s still a market rate. There’s no price control.  Everyone can participate, in many different ways and it even boosts equity investment.  Banks could price-in risk and therefore have an incentive to lend, not just to their biggest pre-existing customers, but also to smaller firms and riskier projects where that makes sense. Riskier borrowers would pay higher rates but would receive the greatest benefit in terms of the biggest interest reduction verses the taxable rate.

For example, our above-mentioned new energy developer that formerly borrowed at a rate between 5 percent to 10 percent, depending on project details, could now borrow at between 3.5 percent to 8 percent —while still providing the lender with the exact same after-tax net income opportunity. She can also potentially afford bigger projects or might be able to accelerate her deal flow to build more projects while the tax-free rates last because lower costs mean potentially bigger profits. Or perhaps, she would just use these loans to keep her company solvent through difficult times. Either way, all firms would now have access to cheaper funding that could be used to improve their sustainability and/or profitability.

In fact, CoVictory Bonds and Loans would have the potential for producing double-barreled impacts for all such privately-financed infrastructure projects, maximizing both new debt and equity investment together.  As a leveraged tax cut, CVBLs not only drive down the cost of capital but also leverage up return on equity.  That makes the equity more valuable, incentivizing more taxable equity investment alongside the tax-free debt, and makes CVBLs a cost-effective incentive for privately-built infrastructure.

Our calculations show that on a 50/50 capital stack, the government could take in roughly 350 percent more tax revenue on the new high-return equity investment than it would give up on the low-return tax-exempt debt.

Rules for CVBLs could also be much simpler than those that govern CARES Act loans. Price-controlled, forgivable government loans need lots of rules because they cost a lot, and short-circuit normal bank incentives to be cautious in lending money.   By contrast, tax-exempt debt is just ordinary debt without a tax, and so does not need more regulation than ordinary debt.  Banks and the capital markets would impose their own restrictions, to ensure that each loan is secure and makes sense.  Tax exemption will not change that fundamental caution.

CoVictory Bonds and Loans offer a highly cost-effective, easy-to-use COVID-19 recovery mechanism.  They deliver an inclusive, level playing field investment accelerant that works evenly, economy-wide, for every sector.  They streamline and remove the drag of tax barriers, which would slow any economic recovery.  They could stimulate employment and strengthen recovering firms. They could help unwind and reduce default risk on CARES Act loans and, by saving money versus more government lending and spending, could also help decrease federal tax expenses and deficits during the coronavirus crisis.

Congress should note, however, that CoVictory Bonds and Loans would work most effectively and inclusively if legislators also focus on free-market streamlining, economy-wide—that is, removing distortionary taxes, trade, and anticompetitive barriers that block ordinary people from realizing their own dreams, solving their own problems, and, ultimately, the problems of the world.


Rod Richardson is co-founder of the Clean Capitalist Leadership Council and president of the Grace Richardson Fund, which pioneers new free market solutions to critical issues in gridlock.

Wayne Winegarden is the senior fellow in business and economics at the Pacific Research Institute and the director of PRI’s Center for Medical Economics and Innovation.