I am against the bailout of the airline industry being proposed as coronavirus relief, especially as it is now structured. But problems — real or imagined — with the current form of the bailout are no reason for Democrats to try to extort demands that will leave the airlines worse off when this crisis ends. In fact, a bailout paired with passing the Democrats’ demands would be the worst of both worlds, as it would all but guarantee that airlines will repeatedly have to run to the government for help in the future.
The case against a government bailout of the airline industry is simple. The coronavirus crisis is indeed both a public-health and economic tragedy, but it doesn’t justify running to the government for help without first taking other available steps for possibly avoiding the need for such a bailout.
First, there is no systemic, economy-wide risk from airlines’ going into bankruptcy. Also, contrary to the industry’s self-serving warnings, the industry will not disappear without a bailout. Airlines still have access to capital markets and have many durable assets that they can sell off or use as collateral to get additional financing, even during this crisis, as evidenced by the substantial additional private capital that they secured during the past two weeks.
As many before me have argued, the industry should use its assets prior to filing for Chapter 11 bankruptcy protection. And if in the end companies must file for Chapter 11 protection, we know it won’t be the end of the industry, since this option has been used successfully many times before. In addition, if one of the worries is, as it should be, about airline workers, past bankruptcies tell us that the carriers would be able to continue paying them by raising credit to cover their payroll (as was the case even during the last financial crisis). The Federal Reserve’s actions are such that liquidity won’t be a problem for companies looking to raise money. Moreover, workers who lose their jobs due to this public-health crisis would have access to unemployment insurance, as did workers in the past. Congress can make sure the program is fit to act as needed for the time being. (For a good argument about why boosting unemployment insurance is the best way to go, see this piece by Andrew Biggs.)
Resorting to these options first and before a government-granted bailout won’t prevent airlines from flying safely, albeit for the time being on limited routes. Moreover, on the other side of bankruptcy, the airlines will still have planes, employees, and customers. Besides, a bailout without a resolution of the public-health crisis we have today will do nothing to get people flying again.
These are not painless options. But everyone is hurting during this crisis and priorities should be set.
Finally, bailouts set bad precedent. What Matt Mitchell and Tad DeHaven of the GMU Mercatus Center correctly wrote about the 2008 financial crisis applies here as well:
Moreover, we know from the history of bailouts that the true cost of a bailout is not the taxpayer expense (which is often recouped) but the expectation it sets for future bailouts, an expectation that invites future disaster.
That said, it is totally irresponsible for the Democrats to use this bailout as a way to push progressive demands. As the Wall Street Journal reports:
Sen. Elizabeth Warren would require, among other things, that to receive aid firms must institute a $15 minimum wage, set aside board seats for workers, and obtain shareholder approval for any political expenditures. Of all her proposals, perhaps the most damaging economically in the long run is her insistence that companies receiving aid be permanently barred from executing share buybacks, even after the aid is repaid.
Imposing minimum-wage mandates, restrictions on executive compensation, and other directives that restrain business decisions as conditions for the receipt of bailout funds will only increase the likelihood that airlines will encounter financial troubles in the future. Artificially raising wages will unnecessarily burden airlines’ labor expenses, and bias their mix of labor and capital equipment inefficiently toward too much capital equipment and too little labor. As for the demand for a ban on stock buybacks, the WSJ piece does a good job explaining why such a ban is so idiotic.
As a longtime opponent of the bipartisan push to restrict executive compensation, I also think the Democrats’ demand to make it a long-term condition for the bailout is counterproductive idea. It will diminish airlines’ ability to compete for top executive talent — an outcome that will make airlines less efficient and robust and, thus, less well-equipped to withstand future crises.
If members of Congress really possess uniquely good knowledge about how to structure airlines’ employment contracts and other operational details, these men and women would better serve the public by resigning from Congress and launching their own airlines. But of course the very fact that they are neither experienced nor specialized at running commercial airlines means that they have no good knowledge about the details of how these large and complex organizations are best structured and operated.
But then again, the idea of giving the federal government equity stakes in airline companies is no better.
The bottom line is this: Bailouts are not a good idea. No matter what one thinks of this crisis as changing the standard for bailing out companies, their long-term consequences won’t change. In addition, all the conditions set by the Democrats will only add to these bad long-term effects. In other words, you get the worst of both worlds.
(By the way, for all airline-related issues, including this bailout request and past bailout history, among other things, I recommend Gary Leff’s blog View From the Wing.)