Crony capitalism works for the companies it benefits, but that doesn’t mean it’s good for the country.
Crony capitalism works for the companies it benefits, but that doesn’t mean it’s good for the country.
A merican Compass recently produced a piece, written by Gabriela Rodriguez, professing the greatness of European industrial policy. Rodriguez uses European governments’ support for Airbus as a case study. Airbus, you see, sold more planes in 2022 than Boeing, invests more in R&D, employs workers throughout Europe, and has lower production costs thanks to the strategic decisions made by a few European governments to turn things around.
Rodriguez’s piece is part of a series of American Compass articles that claims to highlight “lessons on public policy’s vital role in a productive market economy that supports families, workers, communities, and entire nations.” The experience of Airbus allegedly offers a significant contrast with that of Boeing and is offered as evidence that “shareholder primacy does not necessarily yield the most competitive or innovative firms.” Paragraphs like this one encapsulate the general thrust of the argument:
Airbus caught up and surpassed Boeing as the world’s leading aircraft manufacturer, gaining a reputation for cutting-edge innovation from fly-by-wire controls to composite materials. Boeing, for its part, descended into financialization and outsourcing, disgorging capital to shareholders while lagging in R&D investment, which led ultimately to embarrassing production delays and catastrophic crashes that grounded large portions of its fleet.
As American Compass frequently does, this piece overclaims and under-delivers. It’s written as a contrast between two ways of doing business: the mindless, unconstrained way of the free market, supposedly epitomized by Boeing, and the carefully arranged marriage between government and business, supposedly epitomized by Airbus. But this contrast is a cartoon, and to draw it, Rodriguez has to elide some important facts.
Boeing Isn’t an Artifact of Market Fundamentalism
First and foremost, the reality is that Boeing is now as much a creature of the state as Airbus. Here are just a few examples of the connection between Boeing and U.S. governments.
- According to Executive Gov, “in 2021, 49% of [Boeing’s] revenue” — $23 billion worth — “came from the federal government.”
- Boeing receives loads of tax breaks and infrastructure support from state and local governments.
- For decades, Boeing was the biggest beneficiary of the Export-Import Bank, so much so that much of Ex-Im’s Covid response was designed with Boeing specifically in mind.
- Boeing’s commercial sales are often brokered by the U.S. government. For example, Air India’s recent order of over 200 Boeing jets was announced by President Biden. President Trump announced Qatar’s purchase of five Boeing 777 freighters in 2019. President Obama was present when Vietjet Airlines signed a deal to purchase 100 Boeing 737 MAX airplanes, and he even once quipped that he deserves a gold watch for selling so many Boeing planes.
- Boeing moved its headquarters to the Washington, D.C., area when existing tax subsidies in Chicago ran out. Also no doubt contributing to this move was Boeing’s recognition that its future depends mightily on government appropriations and the favor of regulators.
- Boeing got Congress to change the law and reduce the safety standards applied to the as-yet-uncertified newer variants of the 737 MAX. The company’s cozy relationship with its regulators has also played a role in the 737 MAX’s catastrophic crashes.
A list of the many government subsidies enjoyed by Boeing demonstrates that the American Compass piece is really contrasting two different models of government intervention, rather than contrasting a model of government intervention with a model of free-market fundamentalism.
Moreover, nowhere does Rodriguez explain why governments should be involved in the making and marketing of commercial aircraft. She writes that “European politicians and bureaucrats correctly identified aerospace as a vital sector” and wanted their own commercial-aircraft manufacturer so they wouldn’t depend so heavily on the U.S. But on what grounds? Was national security threatened by the dominance in commercial planes of a company headquartered in an allied country? Or is the unique, capital-intensive nature of commercial-aircraft production (i.e., there will be only a small handful of worldwide producers, so it’s important to have one onshore) the reason for the move? I don’t necessarily buy either of these arguments, but if Rodriguez is to prove her case, she needs to show why governments should use taxpayer dollars to prop up aircraft manufacturers.
At What Costs?
Rodriguez does a poor job of assessing the actual costs involved in Europe’s boosting of Airbus and whether these are justified. Answering these questions properly is important if one is going to argue that subsidies and other special privileges bestowed on Airbus improved life for Europeans. But her piece makes no attempt to show that these subsidies and special privileges — over $200 billion in today’s dollars bestowed on Airbus over the last 40 years — have been beneficial to anyone other than Airbus and its executives, suppliers, and workers. Is the industrial policy that produced Airbus a net positive for the European economy or taxpayers in the countries that supported it?
Europe’s stagnant economic growth, high unemployment rates, and high debt over the last few decades are not evidence in support of that theory. Also, European countries have seen their manufacturing sectors shrink as a share of total employment since the 1970s just like developed countries on other continents.
To make a case for industrial policy, one must be able to show that it has benefited not only the companies receiving government favors, but, more importantly, also the economies and taxpayers of the countries that paid for these favors. This is essential because labor and other resources directed by subsidies into Airbus must come from somewhere. Absent subsidies, these workers and resources would produce other goods and services, so the value of those other goods and services must be weighed against the value of the additional Airbus aircraft whose production has been made possible by subsidies and other privileges. Industrial-policy supporters hardly ever mention these foregone goods and services, much less show that their value could be less than the value of the additional aircraft. Rodriguez just assumes that what we get is the best that can be gotten, and that it was thus worth the expense.
All that Rodriguez’s piece does is prove that some government interventions aren’t failures when only measured in terms of output and worker employment in favored industries. But no one denies that a company can be built, survive, and grab a large share of the market if it’s fed a steady diet of billions of taxpayer funds in the form of subsidies and other special favors. For instance, for decades Airbus didn’t have to start repaying its government loans until it made a profit, and if it never made a profit then it never had to repay a dime. Under these conditions, that it stayed afloat in a duopolistic market is no great achievement.
That said, not even subsidies and special favors can guarantee commercial immortality. (See Scott Lincicome on South Korea.) Nor are subsidies sufficient to ensure that subsidized outputs are viable — Airbus has had a few models, such as the A340 and A380, that were commercial disappointments despite massive subsidies. Also, China’s COMAC and Russia’s United Aircraft Corporation have each been trying with subsidies to build commercial aircraft, and have each produced lackluster results. For instance, COMAC designed and constructed the C919, a narrow-body airliner that was supposed to compete with the Boeing 737 MAX and Airbus A320neo — but the planes have faced some technical problems, and very few of them have been sold.
In addition, Russia and China reached an agreement in 2016 to build a large passenger aircraft, the CR929. The plan was “for the fuselage to be designed in Russia. A Rolls-Royce engine would be used initially but would very likely be replaced by a Russian one. The wings and avionics would be produced in Russia. China’s role would include producing the fuselage and tailplane as well as conducting the final assembly in Shanghai.” But seven years after the project started, the effort has, like the C919, struggled with technical and other problems and seems increasingly likely to never pan out.
Is Airbus Truly Better than Boeing?
While it is true that with the A320 series, Airbus developed a very good narrow-body commercial aircraft — and also true that Airbus’s innovations in narrow-body planes generally are superior to those of Boeing — when it comes to building wide-body planes, Boeing regularly outperforms Airbus.
The most ambitious Airbus wide-body effort — the heavily subsidized Airbus 380 — was a financial disaster. Development alone of the enormous A380 cost roughly $25 billion, yet it’s not clear that Airbus recouped anything more than the marginal cost of building each of the planes that it did sell before production had to be permanently shut down in 2021. This shutdown was necessary in part because the A380 was a design marvel but a poor market fit: It failed to match the needs of airlines. Indeed, the A380 couldn’t compete with the Boeing 787, as evidenced by its weak sales.
The American Compass piece compares Boeing’s and Airbus’s commercial-aircraft deliveries only for a single year, 2022. First, while Rodriguez claims that Boeing delivered 410 planes in 2022, the Seattle Times piece she cites for this claim, echoing Boeing’s year-end report, actually says the number was 480, so she has undercounted in Airbus’s favor by 70 planes. Second, this is several years after Boeing’s 737 MAX was grounded due to a pair of fatal crashes that caused Boeing to halt production and deliveries — a fact that explains much of the current overall gap in deliveries between the two companies.
And in fact, considering the troubles faced by Boeing, Airbus has failed to capitalize on its advantage, with orders down significantly since 2014 in part due to production problems, supply-chain issues, and corruption. The chart above nicely highlights how, until Boeing got hit with its current problems, order numbers for the two airlines had been fairly similar since the early 1990s. In other words, it is a serious overstatement to claim that Airbus has been doing better than Boeing from an overall, long-term-sales perspective. It also remains to be seen if Airbus’s current sales performance and market-share dominance will continue after Boeing recovers.
This chart also doesn’t tell the whole story about how Airbus sold some of its planes. For instance, Rodriguez claims that Airbus’s success is revealed by its ability to sell planes outside of its captive European market. She doesn’t mention just how Airbus got some non-European countries to buy its planes. The company got hit with a $3.9 billion fine in 2020 for using hundreds of intermediaries to bribe public officials in numerous countries — including Japan, Russia, China, Libya, and Nepal — to buy its planes and satellites. Airbus also faced an American inquiry over possible violations of export controls. The corruption at Airbus is unfortunately a phenomenon seen all too often within companies that benefit from industrial policy, subsidies, and such.
While the American Compass piece lists all the subsidies, loans, and other handouts that Airbus got from European governments — as if all of this dispensing of other people’s money is unambiguously a good thing — it underplays some downstream effects of that largesse. For instance, the WTO allowed the U.S. government to hit the governments of Germany, France, the United Kingdom, and Spain with $7.5 billion in tariffs as a response to their massive Airbus-subsidy schemes. The EU responded by imposing retaliatory tariffs, starting a dispute that would go on for 17 years.
And even beyond the tariff war, the decades-long Boeing–Airbus industrial policy/subsidy fight has cost both the EU and U.S. economies time, tax dollars, government resources, economic uncertainty, and diplomacy. Are we really to believe that this is a commendable way to conduct business and foster innovation? American Compass thinks so. I don’t.
In the end, as my colleague Gary Leff says about Airbus, “It’s a prestige program, with manufacturing inefficiently and politically parceled out around Europe — not the kind of company [about which] we say, ‘Gosh, give me more of those please.’”
Boeing’s Problems May Have Less to Do with Market Fundamentalism than with Government Support
I’m not going to pretend that there isn’t a lot wrong at Boeing; there is. It has become a cronyist company detached from its great engineering legacy, and cronyism comes with a heavy cost. Boeing tried to shave costs on the 737 MAX and initially succeeded in doing so due to its cozy relationship with regulators. But in the end it wound up paying more because of the MAX’s grounding and the subsequent required changes to the aircraft (not to mention tort liability for the crashes). Boeing has also seemed to be asleep at the wheel: It abandoned the “middle market” and didn’t develop a replacement for the 757, which it no longer produces, while Airbus is having success selling the A321XLR in that market segment (though it hasn’t yet certified and delivered this plane). Yet it is also the case that U.S. protectionist policies have hurt Boeing to the benefit of Airbus. As trade tensions were heating up between the U.S. and China, three Chinese airlines switched from buying Boeing planes to buying Airbus planes.
Conclusion
There are a few claims made by the American Compass piece that are correct, but these aren’t controversial. First, Airbus is an artifact of the state. It was created by a consortium of governments, and it was supported financially by European taxpayers, including through the sweetheart deal whereby it didn’t have to repay its loans unless its planes made a profit in global markets. Second, it is also true that Airbus is one of the two dominant aircraft manufacturers today, hence showing that an enormous amount of subsidies and other financial support doesn’t always lead to failure. These are not new findings, especially considering that the sale of commercial aircraft (whether by Airbus or Boeing) is a geopolitical game in which purchase decisions are often made for noneconomic reasons.
But in the end, I am left wondering, as you should be, what exactly is supposed to be American Compass’s broadly applicable lesson here? Is it that hyper-regulated industries in which large purchases are made by state corporations, politics play an outsized role in orders, and subsidized producers compete for government-orchestrated orders can “work” despite offering a poor return to taxpayers? Or is it that government interventions in some companies make countries and their economies better off? American Compass certainly hasn’t proven the latter, and it hasn’t shown that the former is a strategy worth pursuing for our national defense or our position in the word. Because even if you buy the assertion that Airbus is as successful as American Compass claims it to be, all that says for sure is that it’s successful for its shareholders and workers, not for the people of Europe.
More important, it’s a huge mistake to simply assume, as American Compass too often does, that one country’s discrete industrial-policy “success” can be easily replicated by the U.S., even in the same industry. Countries have wildly different economies, politics, preexisting policies, cultures, and so forth. Even if you grant that Europe’s decades-long Airbus project “worked,” there’s simply no reason to assume the same could “work” here.