The case of the bailout of a restaurant

Adam Ozimek is a leading labor market economist, but also co-owner of an excellent bar / restaurant / arcade / bowling alley in Lancaster, Pa. Called Decades – which like so many bars and restaurants, has been hit hard by the coronavirus and the economic crisis.

He posted on Sep 17 that even though “incomes have increased a little” from their Covid low point, they are still less than a third of normal levels “despite take-out and a new large outdoor space”.

One problem is that to comply with state security mandates, only half of the lanes can be opened at any given time. Another is that the large corporate events industry is gone, which is a big part of their normal mix. Decade owners were worried about the pandemic as early as January, so they spent all of their 2019 profits on debt reduction. That, along with the help earlier this year from the Paycheck Protection Program, has kept them afloat so far. But unless the income goes up a lot and soon they are going to have big problems.

And they are not alone. Seven bars / restaurants in my DC neighborhood owned by the Hilton brothers, longtime mainstays of local nightlife, are closing indefinitely. The neighborhood falafel venue, which previously depended on a constant stream of drunken patrons late at night for its income, has also closed. Several scheduled restaurant openings do not appear to be taking place or are delayed.

Nationwide, 60% of Covid-related business closures are now permanent, according to Yelp. And the impact is being felt throughout the industry – from big cities like DC to smaller ones like Lancaster, from independent restaurants to large publicly traded companies like the one that owns IHOP and Applebee’s or the one that owns Chili’s and Olive Garden.

Simply put, “reopening the economy” is not enough to save the US service industry.

But keeping them open is a huge risk to public health. As Anthony Fauci told Chris Hayes on September 17th, “Bars are a very important place for the spread of infection. There is no doubt about it. Transmission from bars and restaurants was a major factor in the rise in Covid-19 cases in the United States last summer, and it appears to be behind the increase in cases occurring in Europe in this moment. As the weather cools and al fresco dining becomes impossible in large parts of America, the problems will only get worse – enough customers will behave cautiously to doom restaurants to failure, but just enough can behave irresponsibly to spread the virus.

The federal government needs to be much freer with the bailout money and, in return, demand more restrictions on the operation of bars and restaurants. Right now, the bailout phobia is hurting both the economy and public health – with no real benefit other than the superficial improvement in labor market statistics.

Prolonged pandemic will give us a smaller and worse restaurant industry

A restaurant has variable costs. If you sell less wine, you don’t need to buy that much wine. If you sell less food, you don’t need to buy that many raw materials. And if your restaurant is never really full, you don’t need to pay so many cooks and servers.

But it also has fixed costs. If you borrowed money to start your restaurant or buy your building, you have to pay interest on those loans. And if you rent out your space, as is more common, you have to pay your landlord. Since these rents have been set in the past in a competitive market based on the assumption that restaurants would be crowded at peak times, it just doesn’t work to downsize businesses. You make more open income than closed income, and more with looser restrictions than with hard restrictions. But basically, as long as members of the most vulnerable population subgroups stay at home, and at least some young and healthy people are more crowd-averse than usual, restaurants will have a big problem.

Indeed, since restaurants are still in operation, this is largely because tenants have not paid their rent in full or because landlords have negotiated rent reductions. After all, there’s no point in evicting a restaurant when the demand for new restaurant leases is minimal.

Still, owners have their own bills to pay, usually in the form of mortgages, and there are delivery-centric pizza chains and other businesses looking to expand. And ultimately, if enough restaurants fail, the rest can survive by raising prices.

This emerging world of higher unemployment, higher prices and reduced choice is not what everyone wants. But all of the current US decision-makers to support the sector encourage behavior that poses a risk to public health.

You cannot eat food with a mask on

At the start of the pandemic, public health authorities actively discouraged the use of masks by the public and strongly encouraged hand washing and surface cleaning. We subsequently learned the good news that surface transmission seems rare in practice. As Emanuel Goldman writes in the August issue of The Lancet, messages suggesting a high risk of surface transmission “were assumed from studies which bear little resemblance to real-life scenarios”. In practice, the risks, although not non-existent, are relatively low: surface transmission “is not considered the primary means of spreading the virus”, according to current guidelines from the Centers for Disease Control and Prevention (CDC) .

Unfortunately, the practices that Derek Thompson calls the “theater of hygiene,” where business owners or government officials go to great lengths to clean and sanitize various surfaces, have become quite entrenched.

The hygiene theater is attractive in part because it is theatrical – you can see someone who rubs. But it is also attractive because it can, in principle, be done anywhere. The fact that this isn’t really necessary in most cases is probably good news, but it has helped reinforce a false sense of security about how transmission actually occurs.

At the end of March, evidence was mounting that the practice of wearing masks in Asia had been correct from the start, and on April 3, the CDC began recommending the use of masks. The evidence in favor of masks has only grown stronger since then, as as evidence of surface transmission wanes, evidence of “airborne” or aerosol transmission has strengthened.

The prior thought on person-to-person transmission was that we only had to worry about the relatively large droplets falling quickly to the ground, hence the emphasis on a distance of 6 feet. These droplets are a problem, but doctors and scientists are increasingly concerned about the smaller particles that travel further. There is a lot of disagreement over exactly how to characterize this (see my colleague Vox Brian Resnick’s explanation for more details), but the bottom line is, as Zeynep Tufekci writes, “we should be focusing so much on ventilation than on distancing, masks, and hand washing, which all experts agree are important. “

This brings us back to bars and restaurants. If you eat outside, you are in a well ventilated space. And according to public health guidelines, as long as surfaces are reasonably clean and you’re not too close to anyone outside your home, you should be safe enough.

But if you are indoors without a mask, eating and chatting, no amount of disinfectant wipes will make things completely safe unless the restaurant has high quality ventilation. And while developing clear standards for ventilation, testing, and paying for upgrades is a possible solution, these efforts need to be focused on critical facilities such as nursing homes and care providers. health, and not on pleasant establishments such as restaurants.

The whole “airborne” debate can get very complicated and technical, but the basic problem is simple: indoor meals are very dangerous. And the alfresco dining room that has been used as a substitute is running out of steam as the weather cools down in much of the country. For health reasons, we need fewer customers in these businesses. For economic reasons, we need it to survive. The fix is ​​a huge bailout.

Cheap loans could save struggling businesses

Ozimek, the restaurateur / economist, developed a very sensible proposition months ago with John Lettieri of the Economic Innovation Group:

  • Any qualifying business could get a loan worth less than $ 5 million or 200% of 2019 expenses. The loan would be repaid over a 20-year period with a zero percent interest rate and a grace period. three months without any payment.
  • The loans would be made and held by private banks, so restaurants could use their existing banking relationships, and the federal government would guarantee the loans and pay the banks a small fee for their problems.
  • The funds must be widely available for legitimate business uses, including refinancing old loans, paying rent, paying staff, investing in equipment, or whatever.

Businesses could use the loan to replace old debt with cheaper new debt, cover rent, have cash to invest in picnic tables or umbrellas, for example, to facilitate eating out. , then continue to sell food with income covering variable costs. It wouldn’t save every restaurant or restaurant job, but it would save a lot and make it more economically tolerable to save a lot of lives.

To get the money, restaurants would have to close their dining rooms to customers and subsist on delivery, take-out and alfresco dining, unless the community prevalence of Covid-19 is at a designated low level. . There could also be a provision to establish ventilation and air purification protocols that are considered sufficient, of course with loan money available to make upgrades.

Shutting down more stuff would be a huge disappointment, and obviously no one in politics really wants to do it. But America’s restaurant industry is not going to survive the winter in healthy conditions no matter what restrictions we place on it. The industry needs a bailout, and fast. Once we have come to terms with this reality, doing the right thing for public health becomes obvious. Every week of delay costs lives while doing little to save businesses.

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