Ninety six airlines have been given payroll support grants out of the CARES Act. The way airline bailouts were sold is that we just needed to fund them until the end of September when things could get back to normal, but that isn’t happening.
The money was supposed to mean that everyone kept their jobs at full pay, but airline lobbyists got the language changed so that money could be freed to prop up equity holders. Employees had to stay on payroll, but could be forced to work fewer hours and paid less.
Airlines like to point out that the CARES Act wouldn’t have covered their full payroll but that’s disingenuous because it was never supposed to. Airlines weren’t going to furlough everybody (and certainly not nearly as many people based on their thinking in March). So the funds were supposed to top them off enough to keep on at full pay the people that would have lost their jobs.
At the time I argued that government should be the last place airlines looked for money. Even after the bailout was passed they continued to go to financial markets to raise money. And that shareholders and creditors should take a hit before taxpaypers – especially when an airline bankruptcy doesn’t mean the end of air service it just means someone else owns the airline.
Nevertheless “full pay for all” won the argument. We now know that was just kicking the can down the road, since United is promoting massive layoffs and Delta is candid about having far too many people on their payroll.
President Obama’s chief economic advisor says this wasn’t just a waste though, it leaves the airline industry in worse shape and slows down the process of airline industry employees finding the new jobs they’re eventually going to need.
Larry Summers was President Obama’s chief economic advisor, Bill Clinton’s treasury secretary, and President of Harvard University. He drove the U.S. response to the Mexico economic crisis of 1994 and the Asian financial crisis in 1997. And he led the Obama administration’s response to the Great Recession. He’s even been referenced in The Simpsons.
In this talk, at 29 minutes and 5 seconds, he explains why the payroll support grants were “dumb.”
Some of the time it’s dumb to maintain employment… What conceivable logic is there [in the airline baul out] in telling Delta Air Lines they have to retain every flight attendant until October 1st? Delta Air Lines is years away from needing the number of flight attendants it has now. And it is zero percent probability to want to have those flight attendants back on October 1st.
So what conceivable purpose is achieved by the government mandating that the illusion that those flight attendants have jobs to come back to is perpetuated as a condition for giving money? The right answer for those flight attendants is more generous unemployment insurance, and for them to get unemployment insurance and figure out what’s coming next.
…Ultimately for these industries to be viable they probably have to shrink.
Summers explains that by trying to keep all of the airlines alive, you assure that they all have excess capacity and that they’re all unprofitable. That has long-term consequences for the whole economy, “the failure to allow the appropriate economic adjustment is kind of the mistake that Japan made in the 1990s. We need as we realize how long this is going to play to be aware of those risks.”
He argues that we should have provided money to people suffering and “grants to the airline industry seem to be a classic example of something that won’t work.”