CoronaStatism (a budding branch of Coronanomics)

The Federal government is giving away money to bailing out America’s airlines. With Covid-19 ravaging airlines’ bottom lines, many believe this to be appropriate, an economically-wise decision.

It isn’t.

There are terribly consequential choices that governments have to make in order to ensure the well-being of their citizens. The U.S. government’s most recent approach has been to ignore the difficult balancing-of-interests that such an analysis would require. It instead simply throws money at problems by running the Dollar printing press in the mistaken belief that doing so is without consequences. Surprisingly to many, it often does so on a bipartisan basis. As TLR has repeatedly observed, joint Republican-Democratic deficits stretch beyond the horizon. In “They’re All Keynesians Now,” TLR described how both Democrats and Republicans are devotees of deficit spending. Democrats appear to believe in the no-limit, no-penalty money-printing that MMT promises, while Republicans simply ignore the issue – they simultaneously cut taxes and increase spending. Neither worries about is paying attention to America’s burgeoning debt or its enormous annual deficits. If either political party was interested in economic realities, it would be focusing on both. In the case of the airlines, they would weigh the financial costs vs. the financial benefits …, but that would require America’s elected officials to overlook airline companies’ campaign donations and employee-voters. They aren’t doing so. As an alternative, they could defer to the Rule of Law as codified in America’s unique and enlightened bankruptcy acts …, but that too would require government officials to overlook votes and political donations. They aren’t doing that either. Instead, government officials have chosen to ignore economic reality as well as America’s legal system in favor of vote-buying airline bailouts and, in so doing, they also have decided to consolidate industrial support and de facto control of airlines in government …, and consequently have materially enlarged the government’s role in the economy.

When Ronald Reagan declared that “Government is not the solution to our problem, government is the problem,” he was referring to the Federal government’s increasing role in Americans’ lives and its ever-increasing litany of decisions that would be better left to a free-market, capitalist economy. While many politicians continue to chant Reagan’s small government mantra, their actions reflect their adoption of Statism as a substitute (a subject most recently addressed in the July 5th TLR). This has become a habit and, although some have argued that doing so today is justified by the economic damage caused by Covid-19, that is merely an attempt to justify a political agenda. Airlines are substantial contributors to America’s political parties … to both parties and in roughly equal amounts … and they employ a large number of voters. Those two attributes make airlines popular to elected officials on a bipartisan basis. Other countries prefer to call support for political agendas “bribes.” In America, they’re called “lobbying expenses” and “political contributions” that encourage the Federal government to intervene in favor of well-financed individuals and industries. America’s airlines aptly fit that description.

Despite the political largesse, perhaps the airlines nevertheless are deserving of a bailout? Air travel during the Covid-19 pandemic is down more than 75% from 2019 levels with airlines operating at highly reduced volumes of between 20% and 40% of capacity. Reduced passenger loads, idled airplanes that require constant maintenance, and an industry supporting 450,000 domestic employees results in an airline industry that is bleeding cash. America’s airlines necessarily are planning to further reduce flight schedules and, importantly for Congress, make deep voter job cuts before Election Day. United has told its employees that it expects to furlough 36,000 jobs by the Fall and American Airlines warned that it intends to furlough 25,000 employees. With payroll grants under the CARES Act ending on September 30th, pink slips are likely to begin flowing in October. The International Air Transport Association, an industry trade group, has cautioned airlines that the pain is unlikely to be short-lived. It projects that the industry will not recover until 2024. That’s a long time, far too long for the government to be paying for the maintenance of idled airplanes and for today’s bloated airline payrolls.

For America’s airline industry, downturns are nothing new – airline bankruptcies unfortunately are as American as apple pie. They’re a cyclical phenomenon that airlines have frequently put to good use – periodic bankruptcy filings have defined the industry, and for good economic reasons. In 2005, for example, Congress directed the government’s General Accounting Office (GAO) to study and report on its causes. The GAO concluded that “[b]ankruptcy is endemic to the airline industry…. Structurally, the industry is characterized by high fixed costs, cyclical demand for its services, and intense competition. Consequently, since deregulation in 1978, there have been 162 airline bankruptcy filings …,” with more having been added over the subsequent 15 years. The GAO concluded that “[t]he historically high number of airline bankruptcies and liquidations is a reflection of the industry’s inherent instability.” There were 11 major passenger airlines in 1995, a number that increased to 23 in 2009 despite then-existing overcapacity. Even after the Great Recession’s weeding-out process, that number was 17 in 2018. The top 10 account for 90% of the market …, but that seeming concentration hasn’t affected continuing high fixed costs … or the boom-and-bust cyclical nature of the business. The airlines currently have enormous overcapacity that the the industry believes will last for years. The economic fallout from Covid-19 accordingly ought to be treated as another cyclical bankruptcy-triggering event.

But the U.S. government doesn’t want any of the nation’s major airlines (United, American, Delta, Southwest, JetBlue, Spirit, Alaska, Frontier, Hawaiian, SkyWest, or Allegient) to declare bankruptcy and jettison workers before a national election. Although the government was faced with an analogous problem during the Great Recession, it is now not applying the lessons it should have learned. Instead, it is applying the same Statist bailout policy,

In 2008, the Big Three automakers, along with their suppliers and distributors, employed ~1.6 million Americans. A total of perhaps 2 million people relied on the auto companies for health care and 775,000 retirees collected pensions …, far greater numbers that those in today’s airline industry. In bailing out GM and Chrysler (Ford declined bailout money), the government invested $130 billion in a multi-part restructuring plan that, after a partial recovery, cost American taxpayers $80 billion. That bailout was hotly debated and was not a bipartisan effort. It was denounced by fiscal conservatives, libertarians and a number of economists as a liberal, Obama-era, anti-capitalist travesty. The airline industry bailout is not facing the same criticisms …, or even the same critics.

Moody’s chief economist, Mark Zandi, who was then and still is a proponent of the 2008-09 bailout, concluded that “it was a slam-dunk success.” In his view, it stabilized auto industry employment and enabled an economic rebound, with each of the Big Three emerging as a profitable business (though with fewer employees being paid lower wages). He conceded, however, that it was bad government policy: “You don’t want to bail out people who make mistakes, and clearly the automakers had their fair share of mistakes. But … there was no choice. This was people’s jobs on the line, our economy on the line.”

Auto manufacturers’ pleas for financial aid appealed to politicians in 2008-09 because of the size and importance of the domestic auto industry, the political clout of the auto companies, and the number of employees and retirees supported by the auto industry. Much like the Wall Street behemoths who also were bailed out during the Great Recession, the auto companies were deemed “too big to fail.” (Airline companies do not have the same economic or business profile as the Big Three or Wall Street.) Cato Institute’s Daniel Ikenson condemned such “too big to fail” bailouts as sending the wrong message to America’s businesses. “[W]e were bailing out a couple of companies that had made bad decisions [and] shielding them from the effects of their decisions.” Despite the auto industry bailout, auto-manufacturing employment fell by more than one-third, a loss of 334,000 jobs. Membership in the United Autoworkers fell by 150,000. The Midwest’s blue-collar middle class saw declining wages and incomes. The collateral effect was to spread economic pain over years, delaying and, arguably, stunting the recovery. America’s industrial heartland festered as a result, with unanticipated political and economic consequences.

There are any number of facts that differentiate the 2008-09 auto industry – and its bailout – from the 2020 airline industry. Even if bailouts ought to be part of a pluralistic, capitalist society – even if America ought to become even more Statist/State-run –, bailing out an industry with “inherent instability” that periodically undergoes “endemic bankruptcies” is poor policy … to say the least. Although jobs might be temporarily sustained, the industry is in need of significant reorganization and repair. That’s precisely the purpose of America’s bankruptcy laws …, and a normal function of capitalism’s “invisible hand.”

The CARES Act already has allocated $50 billion of cash and loans to passenger airlines’ payrolls, and an additional $10 billion to industry participants. In return, the government will receive ~1% of airline companies’ stock over five years. That ~$60 billion has not stabilized airlines’ balance sheets. To no ones’ surprise, the airlines already have returned to Congress … seeking a further ~$32 billion. Such an amount would tide them over only until March 31st. More government funding presumably would be necessary then. In bailing out the airline industry, the government is conceding that money buys more than mere influence. It multiplies in its return, undermining both political and economic incentives. It erodes the foundations of democracy and, at the same time, erodes capitalism by eliminating the consequences of competition. By their bipartisan support of an economic bailout of America’s airlines, both Political Parties are affirming adopting economic Statism, subsuming private industry to State interests and adopting the policy that the State has a necessary and legitimate role in directing the economy, either directly through state ownership or indirectly through economic interventionism and regulation – centralized planning by another name. Both are thereby experimenting with risking the success of America’s economic and political systems.

Finally (from a good friend)
lonely realist

© Copyright 2020 by William Natbony. All rights reserved.

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