Shining a Spotlight on the Stealth Airline Bailouts
2023-01-01 · Guest: Veronique de Rugy (Mercatus Center Senior Research Fellow) · 52:44
Bailouts and Cronyism in the Airline Industry
Host Bob Zadek and guest Veronique de Rugy discuss the massive, bipartisan airline bailouts embedded in COVID-19 relief legislation. They analyze the financial discrepancy between the stated goal of preserving jobs and the actual billions distributed, suggesting the funds primarily benefited shareholders rather than employees.
Topics: Airline bailouts, COVID-19 relief legislation, corporate cronyism, moral hazard, shareholder protection, Mercatus Center Speakers: Bob Zadek (Host), Veronique de Rugy (Guest)
Introduction and the Stealth Bailout [00:08]
Bob Zadek: Welcome to the Bob Zadek Show, your home for insight and in-depth analysis. Listen live right here, or join us at BobZadek.com. That’s Z-A-D-E-K, BobZadek.com. The Bob Zadek Show: Ideas, not attitude; information, not talking points.
Hello, friends. I’m Bob Zadek, host of the country’s longest-running libertarian broadcast, nationally streamed at 8 a.m. Pacific time Sundays on the 860 AM app. My Bob Zadek Show podcast archive holds 15 years of major issue discussion and is the ideal resource to remind us of the past errors, especially since many are still with us. I promise you in-depth content on social, political, and economic issues that really matter, always with the ideal guest—accessible and entertaining.
Today’s returning guest, Veronique de Rugy, exceeds those standards. Veronique is the George Gibbs Chair in Political Economy and a senior research fellow at the Mercatus Center at George Mason University and is a nationally syndicated columnist. She has frequently testified before Congress, and the sparks have flown—and we all know there’s a lot of that.
Today, Veronique and I will discuss the underreported, indeed almost stealth, but massive bailout of the airline industry, which was part of the inaptly named COVID relief legislation. Veronique will explain in detail the Faustian bargain which the airline industry has made with Washington, whereby the airlines sold to Congress—and not for an insubstantial amount of money—voting control of their boards of directors. And you thought it was immoral, or if not illegal, to buy the right to vote.
Veronique, welcome to the show this morning.
Veronique de Rugy: Thank you for having me.
Bob Zadek: Now, Veronique, the bailout, as I said in my introduction, has been underreported. I dare say if you were to do a search, “bailout of the airline industry,” you would not immediately find all of the legislation that was embedded in and an important part of the various Biden administration, Democrats-only-voting-for-it, COVID relief legislation. So I don’t—I don’t recall ever hearing about the airline bailout. So give us, first of all, tell us the headline of how the COVID relief legislation amounted to a bailout of the airline industry and the magnitude, and then we will drill down and take it apart and see if it made any sense.
Veronique de Rugy: Yeah. So the only thing I will correct from what you’ve said is that actually it was quite bipartisan, unfortunately. When it comes to the airline, Republicans are as terrible as—and when it comes to bailing out and cronyism, Republicans are as terrible as the Democrats.
And they were done, you know, they were done in the name mostly like the Payroll Protection Program, if you remember for companies, in the name of actually trying to give an incentive for airlines to not furlough or fire their workers. And so we—we got this—we got this massive bailouts, and then it was going to be for six months, right? It was—it was an enormous amount of money for six months, and then if I remember correctly, they were—so there were two other ones, another 25 billion and another one who was 15 billion, I think.
And each time they were done again in the name of companies saying, “Well, you know,” airlines saying, “Well, you know, um, the money you gave us was all great, but it’s been six months now, and the economy hasn’t recovered, hasn’t reopened, people are still not flying as they used to, and we think we’re going to be bailing out. We’re gonna be, we’re going to be furloughing, or we’re gonna be getting rid of um of people.”
Another argument that was used, and I suspect we’re gonna cover this later on, is the argument for keeping all these workers employed, right? During—even though no one was flying, or very few people were flying, was this notion that when the economy would recover, then the airlines would be ready to go. There’d be no—there’d be no gap between not flying and flying full-time, and—and that would help the economy recover.
So that’s pretty much the lay of the land. And I think altogether, um, it was—it was—I mean, it was close to 70,000, 70 billion dollars going to airlines. By the way, it is a tradition now almost that at every emergency, every crisis, the airlines are almost the first one with their hands out asking for a bailout.
Calculating the Cost per Job [05:30]
Bob Zadek: Now, what an interesting statistic—you probably have it at your fingertips. If not, we can pass over it. If we start with the premise this was done so that there is continuity of employment—of course, they could have laid off the workers and then pulled them back, but the workers would have found other jobs, do different careers, and building an airline from scratch from a labor standpoint would be a challenge. So there is something to be said for continuity.
But—and the context I want to put this in—there is—one can calculate how many jobs were preserved and how much did it cost. And then with the complex device of long division, we can then calculate how much we spent per job to save the jobs. Do you happen to have that relationship handled?
Veronique de Rugy: So it’s a little bit complicated only because there were three different bailouts, and each time the numbers were different, right? And also the companies, the airlines are not super transparent about what they ended up doing.
But what I can tell you, for instance, the second bailout, the—the for instance, the—the companies were saying, I think altogether, “If we—you don’t give us a bailout, we’re going to be—we’re going to be furloughing,” I think it was like 30,000 people or something like this. And um, and what now, if you look at the average um salary, uh, I mean, actually, if you just assume like let’s say a hundred uh thousand dollars a year, which I think is a little high, right? It’s a little high for an average, but you know, senior pilots make a lot of money, and then there’s just a lot of people who don’t make a ton of money. But to be conservative, let’s say a hundred uh thousand dollars a year.
This was a bailout for um, this was a bailout for um uh six months. So fifty thousand dollars per per employee to prevent furloughing them, and you multiply by 30,000, and then immediately you can see that 25 billion dollars is at least 10 times more than what the airlines needed.
And I don’t have the numbers exactly, but I—um, in the study that my colleague Gary Leff and I wrote, the second one—we did a series of three. The first time we explained why airlines shouldn’t be bailed out. Um, second, or at the very least, certainly not bailed out from the get-go, and then we kind of explained why the second bailout was just complete nonsense. And in part we were making the argument and we had the correct numbers. I mean, I had all these numbers about—I haven’t looked at it in a while. Um, but I—but I remember clearly that basically if you did this calculation, the bailout that would have been needed to actually keep these people employed would have been something like $2.5 billion, and they ended up getting $25,000. So $25 billion, $25 billion, as opposed to $2.5 billion.
So that means that basically they were getting a lot of money in order for the companies to continue paying employees that they had no intention of furloughing. Hence, this is why we always say, you know, bailouts are mostly a uh bailout of shareholders; it has nothing to do with employees.
Bob Zadek: Now, uh it’s interesting that you mentioned bailout of shareholders, because that was exactly where I was about to go, as I was going to ask you the question where the answer I think would be a bit obvious to our listeners, but I’d like to hear it from your—from your point of view as an economist.
Now, so you’re quite right. The money is a wealth transfer from the government—from all of us—to the shareholders. Now, when shareholders invest in an airline, presumably, at least the theory is you—you invest in a company because you know there are risks and there are rewards, and you have made or somebody has made for you a calculation that buying stock in Delta Airlines, the benefits outweigh the detriments, the risks, and to some degree, either specifically or generally, one of the risks is something could happen existential that will affect the airline’s performance. It’s built into the equation, more or less.
So those of us who would like to think we have faith in the allocation of capital through the capital markets, we say, “Why are we bailing out shareholders since all that’s happened is a risk that whether they knew it or not, they were assuming it happened, and so there’s a bailout?”
Now speak a little bit more about that, about what that does, that kind of a bailout. And of course, very suspect you’re going to mention moral hazard along the way. But if I—I’ll start with a question for which you will give, I think the audience will profoundly benefit.
Would you like the summary of the next segment of the episode?
The Policy Failure of Airline Bailouts [12:37]
Bob Zadek: What’s wrong as a matter of policy, putting aside the fact the math doesn’t work, as a matter of policy, our government trying to protect the airlines from this existential threat that nobody caused? Isn’t there a public benefit that kind of—air quotes—justifies the expenditure?
Veronique de Rugy: Yes. I mean, the answer is no. Um, but let me—let me take that question. Um, let me—like, let me answer your question and why I think it’s—it’s no. First, it is not the role of the government at a principal level to actually go and bail out um private companies, big or small. In the case of airlines, right? I mean, they had a lot of um options that were available to them. In case they hadn’t been bailed out before, they would have to actually close the airline altogether, right? They were able to—they would, and in fact they did—but they would have been able to tap into their enormous assets, to tap into the capital markets. By the way, the capital market was functioning quite well because of the intervention of the Fed. Um, they could have actually filed for bankruptcy, and they can still fly during bankruptcy. Um, I mean, airlines have done it many times and got out on the other side um uh stronger. Um, they—um, they could have uh tapped into their enormous mileage programs, which basically allowed them—would have allowed them to again tap into an enormous amount of capital. So there were a lot of things that could have been done by the airlines, and in fact, should have been done by the airlines, who by the way, had had the 10 years before the pandemic, their best profit ever, right? And so they were flush. They were—they were flush, and the capital market was uh again, thanks to the Fed, was like—was ready to lend. They were able to tap—to tap into those capital assets, use their own assets, um, declare bankruptcy. There’s just a lot of things they could have done.
Now, the other thing is this notion that somehow any airlines who cannot sustain an emergency like this one would come to disappear, mean some sort of catastrophe for the US that justifies the government stepping in. And by the way, I checked the number, and it—it’s—it was $54 billion over the course of three uh bailouts. It was supposed to be 75, but in the end it—it was $54 billion dollars. That justified that enormous amount of money for really actually really big and—and—and rich companies is nonsense. When a company has to close down, it doesn’t mean that there won’t be any planes to fly in the US. This company is going to be bought by another company. Their assets are still going to be there, and bought by other one—will a new company will emerge and all will be fine. The disappearance of a weak airline doesn’t mean that—certainly does not mean that Americans won’t be able to fly, there will be no more, you know, American Airlines. It’s nonsense.
Now I think there’s a much more credible case, at least for some level of bailout originally, simply because the government shut down the economy. And as a—but still in this case, considering how many air—how many different steps were available to airlines, and—and uh before they—they had to really sustain any sorts of real damage, I—I still think that even that um that—um, that argument is weak. Um, and then that would say that again arguments for bailouts are always done in the name of workers. “Oh, we need to do it to preserve workers,” but all that it’s doing really in the end, because it is—um, it is stepping in. The government is stepping in in place of their shareholders who, as you’ve said, right, took a risk calculating risk and investing in the airlines, and for the most part, they’re actually doing pretty well uh with their investments, and it’s their job when things, you know, when you invest somewhere, it’s not just in a—in an asset. It’s not just for when times are good, it’s also when times are bad. That’s—that’s—uh, that’s the assessment of the risk, right? Um, because the government steps in and basically takes the burden away from shareholders. Effectively, what you’re really doing is—is you’re—uh, you’re—you’re bailing out the shareholders from their basic responsibility. And by the way, it is worth saying that they’re also bailing out—the government is also bailing out creditors, right? And everyone compromises in light of the emergency about how much they’re going to get—one from what they’re due, and the other one from um in order to save a company they have shares in.
Bob Zadek: Now, uh, you said bankruptcy. Uh, probably some, perhaps not a whole lot, but some to some of our listeners, bankruptcy sounds scary. There’s an air of finality to it; it sounds like something will go away. And you were quite clear in your statement of a few minutes ago that the bankruptcy of an airline itself doesn’t mean the airline goes away. Well, that would be extreme and profoundly unlikely. Remember, General Motors went bankrupt. There wasn’t an interruption of even five minutes of anybody being able to buy or do business with General Motors. No one even knew about it in their daily life, and that was—wow—General Motors. So all that a bankruptcy is, is kind of invisible to the public. The public would not have a flight canceled. Some uneconomic flights may be canceled. That’s a good thing. But the audience should not be intimidated or frightened by the threat—threat being the wrong word—of a bankruptcy. It’s an adjustment, and Veronique, as you have pointed out, creditors who extended unsecured credit to the airlines, they made a credit judgment that the sale was worth the risk. Well, they bet wrong, and they will get less, maybe a lot less than what they are owed. But their customer will survive, and the customer will place more orders. So bankruptcy is just a jiggling around of losses.
Veronique de Rugy: Yeah, especially—especially in this case. And there are two types of bankruptcy—bankruptcies. There’s the one that are like the final terminated, like a Chapter 7, liquidation—
Bob Zadek: Yeah, Chapter 7.
Veronique de Rugy: And then the Chapter 11 is one where basically a company declares bankruptcy, and the point of declaring bankruptcy is to be able to restructure the company that at this point is not—if—effective, is—has problem, uh, is not making profits for whatever reason, and to restructure it so it comes out of this fire uh stronger, right? That’s—that’s the whole point of—of the bankruptcy. And uh some bankruptcies are um—the—you go through bankruptcy because you’ve um—you—you know, you’ve made some bad business decisions. Sometimes you have to go through bankruptcy because there’s a pandemic, a one-in-a-hundred-years pandemic, and—and uh uh no one is flying. And uh even though, by the way, it was one of the most uh frustrating thing about—about uh the “no one is flying” thing is that actually the safest place to be indoors was actually in a plane um because it had the—the best air purifying um—you know, I mean, I flew actually—I flew a—I flew a fair amount during the pandemic and—and I was kind of really impressed about how, you know, how safe it—it felt. So yeah, I mean, it’s just people are really worried—I worried—but the—the those assets—like when you go through—so that even if you were to go through um through a bankruptcy that would—and you would for the purpose of actually closing down the airlines—so this happens a lot. There are a lot of airlines in the US. Who remembers Pan Am? Who remembers—I mean, Frontier, Eastern—Eastern—I mean, there’s just a lot of companies—TWA—
Bob Zadek: And National.
Veronique de Rugy: Exactly. It does not mean that then that those assets still exist—are going to be picked up by existing company—companies or new companies. And uh it doesn’t mean—usually you’re totally right um uh consumers will see nothing. Uh, and it certainly doesn’t mean that all of a sudden the US doesn’t have an airline. And—and it’s certainly, by the way, even assuming that there are disruptions to consumers, ultimately it beats uh sending taxpayers’ money uh to this airline in order to preserve it in spite of the fact that obviously it’s not working out. Preserving airlines for the sake of preserving airlines is uh is actually a money-losing uh uh endeavor.
Bob Zadek: And when—when airline, as you have pointed out, when the airline goes into bankruptcy, even if a bunch of them go into bankruptcy, the big losers ought to be management. They were the ones who didn’t properly plan, and the ones who ought to lose their job, and sometimes do, are existing management. So the bailout done under the name of protecting workers—the workers are the least at risk because somebody will buy those assets. They are capital intensive. Somebody’s gonna buy the planes and the gates and the repair facilities and the hangars. Somebody is gonna buy them as a going concern, and they’re gonna keep the workers because without the workers, there’s no company. So the bailout protecting the workers—that gives political cover. They’re not protecting the workers; they’re protecting management.
Moral Hazard and Socializing Costs [24:37]
Veronique de Rugy: Yes, and in fact, you know, also, we haven’t talked about moral hazards, which you mentioned earlier on, but that’s another thing that what ends up doing—what happens when airlines are bailed out over and over and over again without ever having to try to, um, to navigate through an emergency on their own. It means that the managers and the presidents of these airlines actually will run the airlines during good times as if they will be bailed out the next time around.
I blogged about it at some point at National Review, um, of the head of Delta who was telling investors—there was an investors’ meeting—and he was telling investors, he said, “Here’s what we’ve learned during this pandemic.” And effectively, what we’ve learned during the pandemic is that airlines are worth investing in because government will always bail us out. It means you never need to put money aside.
Bob Zadek: Yeah, you just don’t need to have a plan, right?
Veronique de Rugy: And so what it means is effectively you are privatizing all the benefits of, uh, and the gains from running a business like an airline, but you are socializing the cost, since the airlines will not be the one having to shoulder whatever happens in the bankruptcy and whatever cost emerges from an emergency because taxpayers will pick up that tap. And, and that is just not just unfair, but it creates real distortions in behaviors that are just incredibly unhealthy.
The Faustian Bargain and Regulatory Strings [26:15]
Bob Zadek: I introduced—when I introduced the topic, uh, this morning, uh, I mentioned what I described as the Faustian bargain that the airlines made with government and how they sold. I—the statement I made was they in effect gave the government a seat on the board of directors. So the government always, if they put money in, they get to call the shots. It’s true in healthcare, since the government provides—in effect provides—health care.
Okay, now tell us what the airlines from a management standpoint gave up, what they gave up or what they lost as they sold out to the government. Give us some of the headlines of how the—how the government now took control over management decisions on the airlines.
Veronique de Rugy: So for some of the bailouts, if I remember correctly, some of the shares of the airlines were turned over to Treasury, to Treasury. Um, but, uh, Senator Warren, um, wanted way more. She wanted basically much bigger control of government over the airlines. She wanted to make sure that airlines were going to cap executive pay, that there’d be no stock buyback. They were just a whole list, progressive list of things that she wanted.
And I was—I’m against the bailouts, but I’m also against government taking over and telling companies how to run their business, if only because this is a very dangerous spiral where you end up like with the—the worst of both worlds, where you end up with, um, with not just the company being bailed out, but also the government, like, calling the shots at a very fundamental level. And so it was just—it was just super unhealthy, um, as always. But they—she didn’t get—she didn’t get what she wanted.
Bob Zadek: Now, just to expand upon that, I—I believe the bailout did contain some restrictions on buybacks, as you had mentioned. And I want the—all buybacks are sort of jargon, just so our listeners understand what that’s all about. A buyback is a very simple step. A corporation makes a decision for business reasons that this is a good time for it to use some of its money to go into the stock market and buy its own shares and put it in treasury. It does so to prop up the share price, it does so so that existing shareholders get a higher dividend, it’s easier to sell stock in the future. But it’s a business judgment that the directors make. But it’s part of managing a company.
And to the progressives, that’s nothing other than, in their narrow tunnel vision, a transfer of wealth to people who don’t need the money. What they would prefer is that that money, if the company has money—which is part of the belief is that companies are always sitting on an enormous amount of money that they won’t share with workers, right?
Veronique de Rugy: And, uh, what they would want with that money is that the—that the company pay workers more, give more benefits, and all of that. So it’s always, it’s always, um, they always see stock buyback as something that is taken away from workers. Of course, I mean, workers’ wages, uh, and—and total compensation is set mostly by productivity, but Democrats just don’t want to hear this, right? They think that if there’s money left, independently of the productivity of workers, um, they should be getting more. And so everything, everything else that this money is used for, uh, no matter what the reason, they see it as going away, uh, as—as basically some unfairness to workers who they assume all the time are unfairly treated.
Bob Zadek: Uh, Veronique, uh, authored with Gary Leff, a name Veronique mentioned earlier, um, a series of three installments of a thorough policy brief. It was written for Mercatus Center, where Veronique teaches, part of GMU, George Mason University. Entitled—it’s very current. It was written in September. The last installment was in September. It was entitled “The 2020 Bailouts Left Airlines, the Economy, and the Federal Budget in Worse Shape.”
Though, if you are interested in this topic and what we are talking about, I commend that quite readable, uh, three-installment paper. It will tell you so much, not only about the airline industry, but beyond that, the relationship between private business, government, and bailouts. And Veronique’s conclusions apply equally well to the bank bailout. Indeed, it’s a mirror image. Everything we’re talking about could have been discussed with the bailout of the banks in 2007, 2008. It was the same bargain. The banks gave up control, uh, of a lot of their business. They gave up—Dodd-Frank, big banks like it, small banks don’t—in exchange for, in effect, a guarantee that they will never fail.
Price Signals and Resource Allocation [31:00]
Bob Zadek: And now the same bargain is made by the airlines. And Veronique, you used the phrase “socializing losses.” I want to build upon that a little bit because how profoundly an anti-market, anti-free market, that concept of socializing losses is. It’s a phrase you and I use all the time, but help the audience understand a bit what that simple phrase of socializing losses means to all of us who would prefer there to be a freer market.
Veronique de Rugy: Right. It’s—what do you want me to start with? Because we can take—
Bob Zadek: Well, just explain the concept, what that means to socialize losses, and the big picture effect, negative—the negative effect upon investing, allocation of risk in the capital markets and the like.
Veronique de Rugy: And in order to guide them, right, they—in order to do this, they basically have to produce something that consumers want, right? That’s that’s the goal. That’s the basic thing. And, um, and guiding a lot of their decisions is basically the ability to actually kind of look at prices, the prices that emerge in the market. These prices are just a remarkable, um, uh, reflection of, of like, like millions of pieces of information about scarcity, about demand, about—about supply, of all sorts of things.
And, um, and so a company’s use—is use this. If they fail to, uh, to deliver, right, the—the—the—they will—they will go under. That actually is part of the free market, um, information cycle, if you want. And the—the assets, uh, in—will be—will be redirected towards actually activities that are, um, less likely to fail. I mean, people who are investing and looking—looking at what’s happening is—are saying, “You know what? I’m not going to, um, I’m not going to invest in this company because, you know, prices are falling for the goods that this company is selling. Maybe it means this is—this is a no-brainer.”
And, and when a company fails, right, it’s a clear indicator that actually resources could be used somewhere else. The problem when the government steps in and says, “You know what? It doesn’t matter that—it doesn’t matter that, um, that consumers don’t really want to buy this good. It doesn’t really matter that investors, um, uh, that this company is actually doing such a poor job that it’s going to fail, but we’re gonna bail them out.” Uh, it’s—it’s taking—it’s basically shifting—it’s keeping a lot of this capital, a lot of these resources—is keeping them in an activity that is just not—it’s not effective, right?
The other thing that it does that very few people think about is, like, effectively when the government invests in a particular activity, that alone sends a signal that this is maybe actually a safe investment. And so what you end up seeing with subsidies and loan guarantees to different, uh, activities, you end up seeing capital that would have not actually gone to these areas suddenly shift and go to the subsidized company. And so it distorts, basically, it distorts the essential signal that everyone is looking at. That’s the price—that’s the price system for all sorts of things.
The Homeowner Analogy and Price Signals [37:14]
Veronique de Rugy: And, um, and, and it, and basically create a lot of malinvestments, basically signaling to company—oh, to investors—“Oh, we should invest in this,” even though without the government, actually that company would be failing, or, um, it’s, uh, it’s preventing, you know, other company to come in and compete with that company and provide consumers with better product.
Bob Zadek: And what it amounts to, in effect, um, it’s as you were explaining it, Veronique. Uh, I imagined a very simple hypothetical. Two homeowners, uh, living side by side on expensive real estate, expensive homes, right on the coastline. One homeowner—one homeowner says, “I have to protect my investment and my family, and I will buy flood insurance.” It’s very expensive, and it means I don’t get to go on vacation quite so much, and maybe my lifestyle is a bit lower because I’m spending money on insurance. The neighbor says, “What a fool, what a fool. I’m not gonna waste money on flood insurance. The government would never allow me to lose money; they will come in as they have in the past.”
So, therefore, I ask you between those two homeowners, which homeowner is the one whose behavior you would respect more? Who is a better money manager? Well, you would like to think the homeowner with the insurance is more prudent. But in reality, that homeowner is punished for making the right economic decision because he has less money, while the homeowner next door who makes an imprudent decision—a bad decision—on the theory that there will be a bailout. Take that very simple example and say, which one would you rather have managing your airline?
Veronique de Rugy: But you can actually go a step further, right? You can go a step further, which is now that the government has bailed out those homeowners without insurance, what it signals for future homeowners is that actually it is worth not only taking the risk to build a home in a flood zone, but that they shouldn’t be taking insurance either, since the government is going to bail them out. And you have a double whammy of bad decisions that are being made, and it goes on and on and on to the point—and of course, you know, builders are excited about this, and they lobby the government to say, “Please do bail out people,” right? Um, because we want to be building big homes, you know, in flood zones.
Um, and, and it creates—and then, and then it reaches a point where effectively for the government to step away and let all these irresponsible, uh, homeowners, uh, face the consequences of being in a flood zone now that the government is not going to bail them out, is so big that no politicians will dare doing it. And you have a bad system that is maintained in perpetuity. And, and that’s, that’s, that’s a lot of the problems. That’s, that’s a lot of the problem that come with government bailing out or government, uh, interfering with the marketplace in the, in the first place.
And, and, and, and, and certainly all of these interventions, they distort that price signal—that price signal that tell people whether it’s risky, whether it’s safe, whether it’s worth investing, whether it’s worth consuming, whether it’s worth building, whether it’s worth hiring, all of this. And by the way, the government does it, um, they does it, uh, with, with the labor market and, and, and, and wages. It makes—I mean, it’s the government interferes everywhere, and ultimately what it does, it distorts the price system and it distorts this essential signal that allows a complex economy made of exporters, importers, consumers, uh, producers—often those people are, are the same—and, and investors and, and, and stock, stock owners and all of this to actually function, function.
Moral Hazard and the Threat to Capitalism [42:15]
Bob Zadek: Uh, when you were describing, um, your—all the things that are wrong with the bailout, what I also found myself thinking about—and because it’s in the news again—is our relationship to farming. Our—when I say “our,” I mean our government’s relationship to farming. Whenever farmers suffer losses due to an existential, a natural disaster or whatever, the government is right there with a farm bailout because it is an essential industry.
The reason I thought of it is because just this morning in the Wall Street Journal was an article about wheat prices are high because of Ukraine, whatever it is, and farmers are raking in the money. I didn’t see that government was saying, “Okay, since we socialize your losses and we’ll bail you out with a farm bill, too, why doesn’t government take the excess profits when times are good?” It’s a ratchet, which is only one way, and the same thing happens. You mentioned in the beginning of our show how the airline industry had come off a decade of monumental profits. They were loaded with money. Well, one of the things to do with the money is to either buy insurance or do whatever you have to do as a planner to say to yourself, “It’s not always going to be this good. Let’s put some money away.” And they didn’t see the need to do it because of the hope realized by the bailout.
Now, you—you took a lot of time, you and Professor Leff, in putting together this three-installment policy brief. Has the—is the country worse off as we sort of start to reach the closing part of our show? Is the country worse off because of the bailout only because the federal government has 54 billion less, or are there other residual detriments in addition to the pure loss of 54 billion? Not that that’s not a lot of money, of course it is, but how else are we worse off as a country economically? Big picture, by dint of the bailout, uh, besides simply the money.
Veronique de Rugy: I, I think that the—so the money is bad because, especially since we don’t have the money, it means that basically they borrowed the money, right? And, uh, and borrowing the money, especially as interest rates are going up, it’s, is a problem. We have 31 trillion dollars in debt right now. Uh, so all of this is a problem. But in my opinion, the biggest problem is one that we’ve talked about, and that is the moral hazard that it creates.
Basically, airlines have learned that from now on, forever and ever—and by the way, they’re not the only ones. I mean, individuals have learned that next emergency they’re going to be getting a check from the government. No questions asked, whether they work or not, they’ll be getting a check in the mail. Um, the companies, uh, that are not airlines are going to have learned that it’s very likely that they’re going to be sending them, uh, giving them the ability to borrow money either at very low cost or then the money will be forgiven, whether they were—they needed to get rid of their workers or not.
Um, and then airlines will learn one—once again that, uh, the government will step in and they will be able to make an enormous amount of money during good times, precisely because it will tell their shareholders and investors, “Invest in us because you will never have to shoulder the cost of us during the next emergency,” and that these type of expectations of government bailout, in my opinion, not only is it corrupting the moral—I mean, corporate moral, honestly, uh, where, I mean, it—where basically companies think and shareholders and investors think that it’s totally normal for them to line their pockets when times are good, and they’re going to be bailed out when times are bad.
So that’s, that’s the problem. But, but it is, it is really changing effectively the behavior, and I have to say that we run the risk of, um, this type of behavior is one of the reasons why people are upset about capital—capitalism, right? When people don’t like cronyism, they don’t turn against the government, which it really is the one responsible. If the government didn’t give the money, companies could ask for it and ask for it and ask for it, it wouldn’t happen, right? So ultimately, the government is the source of the bailout, the one we should blame. But they blame companies for being greedy. And that’s a real problem. It actually is corporate welfare, cronyism, however you want to call it, is the biggest threat.
Bob Zadek: I thought—I, I live my life in the world of business credit. That’s my world. It’s been my world for half a century. Therefore, therefore, I jump to—given that the government can’t stop itself from giving 54 billion to the airlines. Let’s assume that. “Stop me before I give again.” Yeah. They can’t stop. It’s baked into the system. Why couldn’t—this is very rhetorical, Veronique—why couldn’t you accomplish all the goals and lend the money to the businesses, make loans under terms that the government’s sort of a lender of last resort, and at market rates? Now, if I say that, then a corporation would probably say, “Might as well borrow it from my bank,” which is exactly the answer I want them to say. So all of these grants, if you—if you have to, if the government feels compelled for whatever reason to give the money to business, why can’t it be a loan? Would that—now that’s sort of my last question that I was looking forward to asking you?
The Moral Hazard of Government Loans [49:08]
Bob Zadek: Would you be a tiny bit happier if the money was lent, or does that not do anything to fix the problem?
Veronique de Rugy: No, I I think I think any government involvement means moral hazard, no matter what form it takes. Look, um, there’s just a lot of government loan guarantees program where actually a bank lends the money, but in case the company can’t pay loans.
Bob Zadek: Yeah, but it but even like you take the Export-Import Bank, right? You like you extend you extend uh uh so the bank extend the money to a foreign company uh and the the taxpayers are backing that loan and public.
Veronique de Rugy: Yeah, and the comp SBA is the same way, and then the company will buy US products. So, what ends up doing, right, is that the decision to who gets those government loans, um who get those loans uh that are subsidized that are better terms that are um and if you default, you know, taxpayers are paying for it. First, the banks are much less careful about how they how they they lend the money, and second, the government picks winners and losers.
Listen, there’s a reason why it’s always the airline being bailed out. Um at the time where they were talking about the second bailout, or maybe it was the third bailout now, I can’t remember. Do you remember the the so they were something like it was maybe like something like 30,000, uh 30,000 uh employees that were going to be furloughed with the airlines and and Congress was all up in arms that this is going to be to prevent it. Meanwhile, all the movie theater’s employees were getting fired, and that was like something like an enormous amount, like four times or five times more than anyone in the number of of reported uh number of airline employees that may be furloughed, right? And no one cared about this.
And why is this? Is because the airlines have a relationship with politicians. So ultimately, the government decides which airline which companies live and dies, and it’s totally unfair. It’s done for political reason. It’s done, it means that you have to be involved and have and have some sort of lobbying branch and be always sure that you’re pleasing you know politicians, so they will be there for you when times are rough. But meanwhile, that’s the system.
Conclusion and Research Findings [53:45]
Bob Zadek: Um and uh we have run out of time, Veronique. Thank you to Veronique de Rugy for sharing with us uh the results of her research on the 2020 bailout by the federal government—I hate even to say the word—of the airline industry and all the evils that befall us as a result. Uh Veronique’s paper, “The 2020 Bailouts Left Airlines, the Economy, and the Federal Budget in Worse Shape Than Before,” is available at the Mercatus Center at uh at George Mason University. Veronique, thank you so much for returning to our show and for sharing your thoughts. And thank to Gary as well.
Veronique de Rugy: Thank you very much. Thank you. Thank you so much, Bob.