Guest Editorial: A Deathblow to Private Property Rights
By Barry Farah, April 30, 2020
As we hobble toward restarting our crippled economy, it would be helpful if government took an honest look at the damage done to the spirit of the entrepreneur.
The entrepreneur may buy a franchise, an existing small business, or build one from scratch. It is usually done with a well-thought-out business plan cataloguing the strengths and weaknesses of the business and the team, along with financial projections, evaluation of operations, marketing and technology and a review of opportunities and threats. An entrepreneur approaches his investors and potential lenders with some ability to rank and assess the risks. The investors and lenders are generally sophisticated and analytical, and the entrepreneur attempts to convince them that the venture is worth the risk.
That is until now. Now we must factor in a new risk; a new threat. This new threat is worse than an isolated natural disaster or clever competitors. It strikes a blow at the spirit of enterprise. Now, given their response to COVID-19, the government has acted like it believes it owns the revenue drivers of the business. As such, investors and lenders will include a strategy to maneuver around “fighting a virus.”
Most governors have claimed they had no choice but to take the advice of the CDC. Ceding this authority resulted in the shuttering of businesses, thereby defying the private property rights that are foundational to the American idea. And along with that, the initiative and ingenuity of entrepreneurs has been sucker-punched, dealing a blow to the heart and soul of the nation’s job creators.
And, with many governors claiming they can turn things off again in an instant, the entrepreneur is forced to wonder if she will ever have free and clear title to her earned free cash flow. Free cash flow is the money left over after paying the bills and funding capital expenditures. It is the driver of true business value. The 17% of businesses (measured by employees) tagged by government bureaucrats as “essential services” are able to legally continue generating revenues and earning free cash flow. The remaining 83% must view the right to their earned free cash flow as temporary and fragile. So, free cash flow is effectively controlled by the government and the business owner “leases” it?
With this shift, investors will likely require an even shorter-term outlook and lenders will restrict expansion. This approach results in a leaner business with fewer employees, and an investor strategy to distribute cash as soon as you get it versus using it to build for the future.
This havoc was due to the blunt force of a suppression strategy. If a private property honoring strategy were implemented, most companies would have voluntarily followed reasonable guidelines for health and safety as we know from states like South Dakota. Businesses would still have been hurt, but many that have failed could have survived. If it is fine to go into a Lowe’s and stand 6 feet apart, why isn’t it OK to enter a Dave & Buster’s 6 feet apart? Or for salon stylists to wear masks and gloves at work? Business owners would have gleaned insight from their insurance company and their legal counsel and their competitors to make the best decisions possible, but we would not have needed to bail them out. Their incentive to create an environment that safely draws in the customer would have ruled the day.
The outcome of a more nuanced approach might have resulted in more people getting sick, but then more would have recovered, as the data now reveals.
We would have been well on our way to herd immunity with the Imperial College’s originally suggested more modest mitigation plan. But we locked down to reduce death.
Did we reduce death? Though some studies argue for less, there is historical data demonstrating that a 1% increase in unemployment is a direct cause of 10,000 to 37,000 deaths. The unemployment rate was 3.5% in February. It is now over 15% and according to the St Louis Fed it could hit 32% this quarter. If it hovers around 15.5% and we use the lower bound of historical data, that is 120,000 deaths.
Regardless, mental health problems, drug and alcohol addiction, cardiology issues, child abuse, spouse abuse and suicides are up. We traded our freedom and these casualties for a fight against a novel virus that we knew little about and overshot with draconian actions based on unreliable models.
I am hoping our economy will come roaring back, but it will be difficult since the entrepreneur doesn’t know what to expect. In the past, even with the hurdle of regulations, the entrepreneur could rely on private property rights. Now, unless we pivot dramatically in support of those rights, the entrepreneur must incorporate in his business projections that his private property rights are conditional.
Business is risky enough when the government stays out of your way. Now, knowing the government can effectively take everything away from you next time there is a new virus, would you invest your life savings to start a restaurant, event planning or fun center?
The best remedy would be government self-restraint and a little remorse.
Barry Farah successfully launched 12 businesses in six sectors and has written three books. Farah ran for governor of Colorado in 2018.