Beware the “Distortional Impact” of Bailouts

In 2001, the federal government bailed out the airline industry with a $15 billion package. But by 2004, the program’s deficiencies were glaring. The airlines were already in trouble before 9/11, and the bailout propped up the ailing ones at the expense of the healthy ones, as the New York Times reported in a 2004 postmortem. “The bailout program may actually have made matters worse, some experts say, by forestalling a badly needed shakeout in the industry, keeping the weakest carriers alive at the expense of the others and perpetuating a glut of flights and seats,” the Times wrote. CBS News later reported that some of the bailout money went to already bankrupt companies, package delivery fleets and Grand Canyon tour helicopters. Today, and presumably for the coming months, the government is discouraging discretionary travel to beat the virus, which means we won’t need as many airline seats in the short term. The rational thing for the government to do would be to let the weaker airlines go out of business as the stronger but still viable carriers continue flying under Chapter 11 bankruptcy—as they have done in previous airline downturns. A new airline bailout would only repeat 2001’s mistake of preserving the weaker airlines at the expense of the better-run ones.

Resist Giving Bailouts to the Well-Connected

The biggest Washington bailouts have traditionally gone to the largest, most politically connected industries: The railroads, the automakers, aviation, the banks. The Tuesday Washington Post explains how the cruise lines, less crucial to the economy than the railroads, automakers and banks, might soon navigate their way to the federal trough. President Donald Trump counts Carnival Corp. Chairman Micky Arison as a friend. His firm was also an advertiser on Trump’s Apprentice show. The Norwegian Cruise Line has also made friends with the Trumps. It made a $100,000 donation to his foundation in 2005 after Melania Trump christened one of its ships. (She was named the ship’s “godmother.”) Brian Ballard and Pam Bondi, two Trump loyalists, were registered lobbyists for Carnival North American last year. Meanwhile, the federal government’s Centers for Disease Control and Prevention is advising travelers against taking a cruise. What sort of sense does it make for one branch of the government to discourage cruise travel and another to encourage continued voyages with subsidies? This would be as crazy as the government subsidizing tobacco farmers at the same time it spends millions on discouraging smoking—something that it does. So I guess there’s a precedent, but it’s an insane one.

Just Say No to the Entertainment Sector

The fattest target among the bailout pleaders is the casino industry. Trump, by the way, was once a casino owner and counts among his biggest campaign donors the casino megaowner Sheldon Adelson. On Monday, the gambling lobby told the Washington Post that the $260 billion industry was at a “near standstill” and begging for funds to continue. While sympathies should go out to every showgirl, valet, bartender, maid and craps dealer on the Las Vegas strip, it’s unconscionable to use federal money to prop up an industry that serves gamblers! Gambling, like attending a movie or baseball game, is entertainment, and hardly essential to our way of life the way electricity, roadways, food and shelter are. If we’re performing economic triage, there can’t be a worse candidate for a bailout and a better candidate for Chapter 11 reorganization than the casinos. We’ve never bailed out failing entertainment companies before, and this is no time to start. Besides, if we’re going to bail out the casinos, why not bail out MLB, the NBA, the NHL, the Masters golf tournament, the Kentucky Derby and the other sports businesses that have paused their operations (but not yet asked for bailouts)? What’s next? Bailouts for shuttered nightclubs and concert halls? The Regal, Landmark and Alamo movie theaters that just closed? Where does it end?

Sunset Provisions

While no request for a bailout or other relief should be categorically rejected, neither should any program of temporary relief become permanent or inviolate. Every bailout and accommodation should come with some sort of sunset provision so that businesses don’t become wards of the state or dependent on government largesse. “Nothing is so permanent as a temporary government program,” economist Milton Friedman once wrote. If we make mistakes with our bailouts, we should leave ourselves in a position to correct them quickly.

Perhaps there are instances and industries that deserve government handouts. Writing in the Wednesday Washington Post, business columnist Steven Pearlstein makes a guarded case for issuing federally guaranteed loans to select stressed companies that come with stringent conditions: no cash gifts like the airlines and cruise lines appear to want, and terms that should be no better “than if they were seeking capital from Warren Buffett and Berkshire Hathaway.”

In the very short term, we should be gung-ho for subsidizing the making of ventilators, masks and essential medical supplies. There’s also much to commend Mitt Romney and Andrew Yang’s proposal to give every American $1,000 to tide them over until the complexity of the coronavirus crisis is fully understood. But we should approach bailouts and other emergency actions with trepidation and guided by the understanding that anything we bail out now is likely to leave us with one less dollar to bail out something else later. Let’s not spend all our seed corn in one planting.

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