Update 434 — Federal Bailout Policy 2020:
Picking Winners/Losers vs. Sacrificing Jobs
The political toxicity of bailouts was perhaps best conveyed by former Republican South Carolina Governor, U.S. Ambassador to the U.N, and Boeing Director Nikki Haley, who quit her Board seat last month, saying “I cannot support a … federal bailout that prioritizes our company over others.” That’s usually what Directors do. And that’s always what bailouts do.
Haley may be a candidate for office again someday, also true of members of Congress. But Congress did not agree with Haley and carved out funds intended for her company in the Corona III package. See, Boeing employs 153,000 people. That’s a fraction of one percent of those who have lost their jobs in the past month.
Below, we explore the profits, the perils, the imperatives, and the key principles behind federal bailout policy 2020.
The CARES Act, signed by President Trump in March, injected $2.2 trillion into the economy, including billions in funds to rescue firms on the verge of bankruptcy. The 2008 financial crisis demonstrated that bailouts can save whole sectors if they go well, but carry withering political risk if not.
Bailouts entail massive reverse transfer payments from taxpayers and decide winners and losers in our economy. In the CARES Act bailouts, the public policy imperative in distributing the kind of relief is obscure in macroeconomic terms.
Americans deserve a more coherent vision for bailout policy. Below, we evaluate the administration’s bailout policy in regards to aviation and hospitals, look at the lessons learned from 2008, and suggest a different approach going forward.
Current Bailout Policy, by Sector
In response to the 2008 financial crisis, the federal government created the Troubled Asset Relief Program (TARP), a $700 billion bailout program for the financial sector and the auto industry. TARP injected cash into companies by buying shares and debt. Its proponents argued the failure of the financial sector would drive us into a depression.
While the Great Recession resulted from reckless lending and banking practices, our current economic downturn is a result of a pandemic. Unlike in 2008, the federal government is avoiding taking equity stakes in companies, it is instead focusing on backstopping Federal Reserve lending facilities. But some struggling industries like aviation and healthcare are receiving direct federal assistance.
The potential blowback of the term “bailout” is clearly a concern for the Trump administration. Treasury Secretary Mnuchin said, “This is not a bailout. This is considering providing certain things for certain industries.”
The CARES Act appropriated $25 billion to passenger airlines, $4 billion to air cargo carriers, and $3 billion to airline contractors in payroll protection grants and loans. Last week, the Treasury dispersed the first tranche of funding to the airliners totaling $12.4 billion.
Passenger airliners struck a deal with the Treasury Department earlier this month. Airline companies awarded over $100 million in aid will receive 70 percent of the funds as grants and 30 percent as loans. In return, the Treasury will receive stock warrants equal to 10 percent of the loan amount. Airline companies that receive bailout money are banned from laying off or furloughing employees through September, cutting pay or benefits, buying back stocks, and providing bonuses to CEOs.
This is a questionable use of taxpayer money for a few reasons. Yes, airlines are suffering. As are cruise lines, hotel chains, theme parks, and ballparks. Also suffering are their suppliers of parts, those transporting them, and those feeding them. Here, an oligopoly of a sector that tacks on irrational fees, provides no customer support, and increases prices while decreasing quality of service is being bailed out after one bad quarter.
The CARES Act and the recent supplement package provided $175 billion in federal funds to hospitals and healthcare providers for coronavirus-related costs. During a pandemic, providing additional funds to hospitals makes sense fiscally and from a public health perspective. Should more hospitals have to go under, both the pandemic and the economic devastation would worsen.
The CARES Act does not require the Health and Human Services Department (HHS) to consider hospitals’ financial assets when distributing funds, so small hospitals must compete with large, wealthy hospitals. Because the CARES Act does not require HHS to consider the financial assets of hospitals’ owners, private equity firms that own hospitals and push them into debt have indirectly received bailout funds.
Lessons from 2008
Despite taking equity, the government made only a small return from TARP. The Congressional Oversight Panel (COP) found that the government did not take enough equity in return for the risk. The federal government also did not demand that banks receiving bailout funds increase lending, so they didn’t. Banks were still lending at decreased levels four years after the crisis.
The response to the 2008 recession focused on helping the culprits over the victims of the economic downturn. During the recovery, corporate profits quickly rebounded, but median household income did not return to pre-crisis levels until 2016. Our federal bailout strategy should seek to ensure that workers can keep their jobs with adequate pay and benefits.
A New Bailout Policy
The administration has directed corporate assistance primarily through Fed lending facilities rather than direct assistance. But the Fed faces limitations for lending to businesses facing insolvency — the businesses that would need a direct bailout most. Some industries may require a true bailout rather than just liquidity from the Fed. But before we bail out another industry, policymakers should establish a clear set of bailout policy objectives and priorities.
- Maintain Employment: A key lesson from the 2008 crisis was that many Americans believed TARP prioritized corporations’ welfare over individuals’ welfare. We must stipulate that any bailout funds first go to keeping workers on payrolls. Once a company has its payroll covered, it could use the remainder of the grant to shore up other parts of the business.
- Prioritize Critical Sectors: The size, centrality, and presence or lack of demand is a better proxy for bailout eligibility than one that puts airlines at the front of the line. The key question in triaging bailout funds is whether the failure of the industry will have spillover effects in the economy. In 2008, the financial industry posed this risk, which necessitated its bailout. At the time, banks were also unable to go through a fast and orderly bankruptcy process, which is an option available to airlines.
Bailout recipients cannot simply be the most politically connected or loudest voices but should be companies with no other financial options and whose failure would unquestionably drive us further into economic contraction or prolong the health crisis.
- Create Potential for ROI: If the government decides to bail out a large public company, it should structure bailouts as grants but also ensure it gets a return by receiving equity options. The condition for equity helps separate the companies who truly need a bailout versus those who are looking for a handout. While Boeing was to receive billions in aid from the CARES Act, the company balked at giving up equity in return for assistance. But if a company needs a bailout, it should be willing to give the government an equity stake. The ability to repay should not be a bar to eligibility but means the bailout terms can be more favorable to the taxpayer.
- Robust Oversight: When it comes to managing bailouts, the lesson from the 2008 recession is that the government should require accountability. The COP in 2008 was toothless; the Congressional Oversight Commission today should have subpoena power, the ability to swear in witnesses, and independent enforcement authority.
Bailout policy as pursued by the administration and Congress in response to the coronavirus has been a part of the relief efforts in Corona bills I-III — money for damage but not desert. Instead, policymakers should resist the siren call of the ad hoc and the connected and invest taxpayer money where it will maintain truly essential services and might even provide a return.