When Everybody’s Bailed Out, Nobody Is

Over the past several days I wrote to expect the airline industry going to the government asking for a bailout. That happened yesterday. They want $50 – $60 billion, in the form of:

  • direct cash
  • subsidized loans
  • tax rebates and tax abatement

Hotels were already talking up a bailout, too, even though there’s less systemic risk with hotels than airlines even. Remember that Marriott, Hilton, and other large chains generally do not even own the hotels. Their businesses are hurting, but not every hurting business is the taxpaying public’s problem, they have their own issues to worry about.

Airport workers, many of whom could be on unemployment insurance soon, are also seeking a bailout.

Now Boeing wants a bailout, too and this is just getting started.

The money actually comes from somewhere. It won’t be coming from higher taxes today. Indeed, with the economy heading into recession tax revenue will fall which means government borrowing will be up even before coronavirus response and the pork and corporate welfare that gets tacked on.

Borrowing money now is a future obligation, one to be paid by taxpayers in common. We need to approach this judiciously. The goal is to stop financial contagion in a leveraged way, not to prop up every business that loses money or risks bankruptcy. Bankruptcy is nothing to be afraid up. People misunderstand and think it means going out of business. It doesn’t.

  • There’s nothing special about workers in airports as such, the concern to address is workers more broadly who may either have lost their jobs (we shouldn’t be requiring workers to look for jobs now to qualify for unemployment) and workers who shouldn’t feel it necessary to go to work sick. Those are issues of concern to the public at large to limit further spread of the virus.

  • Managers and shareholders should take haircuts first. If firms go into a restructuring, and they cannot get capital, a public concern is making sure that resources are deployable going forward – not to backstop the most politically-connected shareholders.

  • Our politics will respond to the loudest voices and the ones that are first in line. It’ll be harder and harder as successive – and perhaps more systemically important – industries and groups come with needs.

  • Bailouts now work at cross-purposes from public health. The government’s strategy is for people not to be working now, to the extent possible. Any jump start to the economy will need to be targeted to idle resources – once the virus threat has subsided.

There are lessons we should be learning from China.

  • Industrial production (manufacturing, mining, utilities) were down 13.5% in the first two months of 2020 – vs. an expectation of 3%. “This was the first decline on record.”

  • Retail sales down 20.5% against a 4% expectation, “again the first decline on record.”

  • Fixed asset investment (infrastructure, property, machinery and equipment) fell 24.5% against 2% expectation “the first shrinkage on record.”

So far while 95% of large businesses in China, outside of Hubei, have re-opened while just “about 60%” of small and medium-sized businesses have.

The economic challenges aren’t primarily in travel, that’s just what’s slowing down first, and when everybody is bailed out no one is.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. What kills me most is that we have had 10+ years since 2008-2009 – when we were busy propping up the economy with plenty of counter-cyclical tools – and we did not do anything to prepare for this inevitable downturn during those good times. Now everyone is lining up at the trough again and our buckets are much emptier than they could have been.

  2. I have two more for you. First, I received a request to sign a petition for the government to bail out the event planning business. Apparently, they are essential to the US economy (although at least much of the sector is small business). But my favorite one so far is a retiree expecting that the government should bail out him and other retirees because they were playing the market with their retirement money and have been “wiped out”!

  3. With all of these bail outs, stimulus packages and free money the Administration has moved quickly to make lemonade out of lemons. Soon everyone will be receiving their “Trump checks” and their “Trump money.” I’m surprised no one, especially the Democrats, saw this coming.

  4. @ Gary — Congress is now completely out of control. It is ridiculous to bail out businesses that have repurchased tens of Billions of dollars of their stock and to send people $1,000 checks. That money should be spent buying medical equipment and paying unemployment benefits, not paying down the student loan of some Millennial. While we are at, maybe we should just waive all of their student loans? It’s like having Bernie Sanders in charge. It is hard to tell who is worse, Congress or Trump.

  5. @Gary. There is another problem with a large stimulus that you left out. It is baseline accounting.

    I am quoting Wikipedia: ‘Baseline budgeting is an accounting method the United States Federal Government uses to develop a budget for future years. Baseline budgeting uses current spending levels as the “baseline” for establishing future funding requirements and assumes future budgets will equal the current budget times the inflation rate times the population growth rate’.

    In other words, suppose if there is a $1 trillion stimulus package. That stimulus is now considered the “baseline”. All hell will break loose, when they try to end the stimulus in the following year, because it would be seen as a $1 trillion cut to the baseline.

    To conclude: in Neo-Keynesian theory, a stimulus might be a good remedy for a short intense downturn; however, due to baseline accounting, I am concerned that this stimulus is a permanent expansion of spending by the USA government.

  6. @Gene: Actually, Elizabeth Warren was on the Cramer Mad Money a couple of days ago and she proposed as part of this stimulus to “waive all of their student loans” as you said.

  7. @Otherjustsaying, fortunately, this would not become a part of baseline accounting as all of these things are not part of the federal budget to which baseline budgeting applies

  8. @farnorthtrader: I can’t imagine seeing your balances drop by 6-figure numbers in the past 2 weeks (I’m mid-30’s and only suffered mid-5 digit losses)…but that is ludicrous. The broad market is only down what, 20-25%? If you didn’t have a significant portion of your accounts in cash or cash equivalents to get you through some rocky years, you’re just not smart, not unlucky.

  9. Any bailout must include handing over all accumulated buyback-stock to the government

  10. @gary shifting burden to a central govt might be a problem for all of us but in the end supporting each person is the right thing to do

  11. Every blood-sucking leech in the corporate world will be lining up to suck on the public teat…in every country. As someone quoted yesterday, the saying in Italy : “ Profits are private, losses are public”.

  12. What everyone else said. Plus, many are saying that as soon as Covid-19 runs its course, the economy will come “roaring back.” If so, why do we need a stimulus? Take care of the health crisis and the economy will take care of itself. Giving everyone or nearly everyone $1,000 next week sounds nice, but won’t people be tempted to just go out and party and spend when they should be staying home? We haven’t seen the details; however these programs appear to be huge transfers to shareholders and bondholders from taxpayers who are on the hook for the debt. It seems like now the government is supposed to be a guarantor against a recession under any circumstances.

  13. Maybe….just maybe….I’d be more inclined to help out airlines and hotels industries. But they have milked and sucked their customers absolutely dry with baggage fees, change fees, resort fees, you name it. No extra work went into any of that to justify those fees. It was pure greed. And pure profit that was not put to the side.

  14. I had a conservative economics Professor in college who said that every businessman becomes a socialist when he thinks it will benefit him. Hence, the pigs at the trough.

  15. There is a great precedent for the government trading $$$ for equity: the 2008 TARP bailouts.


    If DAL or UAL or AA wants $25MM then they need to give the US Government an equity stake that is priced at market. Ideally it would be structured as cumulative pref shares that are priced at an attractive yield, say 6% or greater, so the companies would have an incentive to repurchase them and unburden taxpayers.

    In case you forgot, TARP earned over $15 billion for the government.

  16. Commenter NoFreeLunch is the only one who gets it. It seems that everyone either forgot (or never realized) that the bailouts of the automakers and the banks under TARP actually made the government a ton of money. The same thing would almost certainly happen here in a similarly structured deal.

    As far as the airlines repurchasing stock in times of profitability – that’s what a responsible corporation does to generate value for its shareholders. This isn’t the financial crisis. This isn’t a typical recession. This isn’t a rainy day. There is no way that anyone can legitimately say that airlines should have maintained billions in cash reserves in the event that a virus outbreak occurs that results in countries closing their borders, businesses suspending all travel, cities and counties declaring “shelter in place” mandates, virtually all events nationwide being cancelled for the foreseeable future, and the list goes on… This has never happened before and there was no way for any business to factor the impact into their budgeting and cash reserves.

  17. People have short memories. Didn’t the US Govt give everyone stimulus cheques 10 years ago which everyone used to (sensibly) pay off loans, or buy TVs from Korean and Japanese companies, therefore NOT stimulating the economy?

    This is a cheap parlour trick that will fool only the stupid

    Secondly, this: https://www.bbc.com/news/business-51903947

    I don’t have any sympathy for any airline that looked to inflate it’s own share price by using cash that should have been set aside for a rainy day to buy back shares.

  18. Airport and airline employees should go to the front of the line. They are biggest direct impact of this. Hotels, maybe they could get some assistance, but not a significant amount. Disney – deal with it! Ditto for Boeing. Those deserver positively zero. Disney (and I’m a huge fan) has been a profit engine for decades. Boeing is no longer an engineering company like it used to be, but is now a profit engine for shareholders ever since they were taken over by MD.

    The companies will eventually recover, but the employees and actual people are the ones who need assistance more than anyone. Not Starbucks, but their employees. Not Disney, but their employees. Definitely not AA or UA, but the tens of thousands of employees they are firing. It’s not like if the government gives AA a few billion dollars that they will rehire everyone and fly all planes again. They will leave the planes parked, and keep all employees away. The money will be used to pay for plane leases, airport leases, and of course C-level pay. Put the money into the hands of the people and let demand drum up so that there are profitable planes to fly again.

  19. I wonder how cheap debt has to be in order to convince some people that deficit spending isn’t always bad…

    “The money actually comes from somewhere. It won’t be coming from higher taxes today. Indeed, with the economy heading into recession tax revenue will fall which means government borrowing will be up even before coronavirus response and the pork and corporate welfare that gets tacked on.

    Borrowing money now is a future obligation, one to be paid by taxpayers in common.”

    If someone were offering you a non-collateralized loan at 0% interest you should take the largest one they’d give you and invest it. Not sure why it’s different with the government now–if anything since they print the money they’d have less risk than you.

  20. @TWM, absolutely true, if you were investing in something that would bring you a return. Unfortunately, the federal government is not now, nor has been for many years, investing in anything, they have simply been spending. If they were borrowing to improve infrastructure that would improve taxes later, it makes perfect sense. If they borrow to give big companies a tax break, which then gets given to shareholders, who then spend it, there is no investment. Don’t get me wrong, spending during a bad economy (when interest rates are lowest) is the job of government and I fully support them borrowing to provide stimulus right now, but the borrowing to spend and/or to give out tax breaks over the last 5 or 6 years was utterly foolish.
    Government borrowing is almost never to invest, it is almost always to spend, so comparing them to a person or company, isn’t really apples to apples

  21. Of course it’s not exactly apples-to-apples, and I think you’re probably right about recent history where debt was more expensive, but I think the key point is that the “rate of return” in this situation is the delta between GDP growth absent the spending and GDP growth with the spending. I think that, given current estimates of how things are headed without spending and how cheap the debt is, that rate of return is significant.

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