Congress is working to craft an economic response to COVID-19 with admirable speed, open-mindedness, and focus on the specific goal of alleviating economic hardship. As the idea of sending immediate cash payments to households appears to be generating broad-based consensus, congressional attention is turning to the question of how best to assist businesses paralyzed for the sake of public health. The simplest and most effective solution to this problem is the creation of a Public-Health Takings Fund, to compensate businesses for the fixed costs they will incur while closed in the public interest.
Helping the hardest-hit businesses is difficult. On the one hand, we cannot send everyone the total revenue they might otherwise have earned during this period—it would be impossible to calculate, prohibitively expensive, and the end result would be a massive windfall for owners who get to cash checks without incurring the expenses of day-to-day operations. On the other hand, otherwise healthy businesses will go bankrupt in the face of long stretches with no revenue, even if they don’t have to pay their day-to-day expenses.
The key here is to recognize that businesses have two kinds of expenses: fixed and variable. Think about your local coffee shop. It has some fixed costs that it must pay regardless of whether anyone comes in, such as rent or a mortgage, and interest on the loan for that fancy espresso machine. Then it has variable costs that it pays based on customer demand, such as wages and the cost of ingredients. Each time you buy a cup of coffee, some of the price covers the variable costs of making that cup. What’s left over is called the “gross margin.” The coffee shop counts on generating enough gross margin from enough cups sold to cover those fixed costs.