Stop creating incentives for American businesses to take on debt.

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Homer Simpson once proposed a toast “with alcohol, cause and solution to all the problems of life”. For global companies that have drunk a lot, his line captures an unpleasant irony. The pandemic poses particularly significant economic risks for companies with heavily indebted balance sheets, a group that now includes much of the corporate world. However, the only viable short-term solution is to borrow more, to survive until the end of the crisis. As a result, companies will hit the next crisis with even more precarious debt piles. The cycle must be broken.

In the United States, non-financial corporate debt was around $ 10 billion at the start of the crisis. With 47% of gross domestic product, it has never been higher. Under normal conditions, this would not be a problem, because record interest rates made debt easier. Business leaders, by mobilizing, only followed the incentives presented to them. Debt is cheap and tax deductible, so using more of it increases income.

But in the event of a crisis, whatever its price, the debt becomes radioactive. As income drops, interest payments are important. Debt maturities become deadly threats. The risk of contagious defects increases and the system creaks.

 

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