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Bailing out well, if bail out we must

David Wilcox (PIIE)



The fast-moving and widely expanding coronavirus pandemic is finally prompting US elected leaders and policymakers to consider a wide range of potential countermeasures to stave off economic collapse. For example, the Treasury Department proposes to earmark $50 billion in lending capacity for the airline industry and $150 billion for “other severely distressed sectors.” In its statement on March 18, Treasury sketched out a few conditions under which such aid could be delivered. The scale of the potential public commitment here makes these and other conditions, including continuing government oversight of affected industries, essential to any aid package.

The first priority must of course be to help the most vulnerable among us. They include those with no health insurance who will require expensive life-saving medical treatment (much more than the test itself) and those whose income is going to zero as we speak.

But if helping people is our first priority, it doesn’t need to be our last. Major industries, like our airlines, hospitality companies, and restaurants, and millions of small businesses are facing a literal existential crisis. If the president and Congress decide that bailouts should be part of the response package, how should they be designed?

First, there is the question of whether the airlines and other companies will survive “merely” with the help of massive loans from the federal government. When it put out its terms sheet, Treasury was betting that the answer was yes. If it’s true that loans will suffice, then Treasury’s opening bid is sensible: offer collateralized loans on terms that no private lender would provide in today’s supercharged conditions. Take collateral against the loans. Specify some steps that the borrowers must take. Treasury mentions “continuation of service” for the airlines; I would be more explicit and say: maintain employment. And then hope.

But there is a tougher possibility—that loans by themselves won’t be enough. If these companies are going to survive, the government might need to fill some very large holes. By pouring money in. With no realistic expectation of being fully repaid.

It’s worth recognizing that sustaining these businesses, under the right terms and conditions, isn’t a crazy idea. Take the airline industry, for example: Demand for its services has evaporated. While some have argued that the industry should have prepared better for a situation like this, it certainly had no role in creating the coronavirus outbreak. And it employs hundreds of thousands who serve as baggage handlers, flight attendants, mechanics, cabin cleaners, and pilots—all of whom are staring at massive job losses if action isn’t taken quickly. Not too long from now, we’re going to want a functioning airline industry. And on that day, it’ll be much easier to pull the old companies out of mothballs than to build them from scratch.

So if—as seems entirely realistic—loans prove not enough, the United States needs an approach that will preserve jobs, keep vital businesses viable, and protect taxpayer interests. Here are three key principles for how to do that.

  1. Take a trip through bankruptcy court

If the companies need more than a loan, then by definition they will not be viable as standalone enterprises. It should be made abundantly clear that this extraordinary action is not being taken to protect shareholders and bondholders. Both GM and Chrysler took a trip through bankruptcy during the Great Recession in 2009; the same should be done here.

  1. Include wider social conditions

One key objective is to preserve jobs. Accordingly, a condition of receiving a bailout should be that the company promises to maintain its employment at, say, 90 percent of where it was during the corresponding period last year, until the government no longer has an ownership stake in the enterprise. (See next principle.) And for the duration of the government’s investment, aided companies will have to submit to muscular new oversight—a czar—to make sure that taxpayer interests are respected.

  1. Give the taxpayers a stake

If taxpayers provide critical support to prevent the collapse of a company, they deserve a share in the upside if the rescued company survives. Again, there is precedent in the auto bailout.

With bold action, US leaders can prevent a temporary national nightmare from morphing into an epochal disaster. The time to move is now.

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