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Don’t Bail Out the Airlines

Summary:
Two of my Mercatus Center colleagues – the intrepid Veronique de Rugy, along with Gary Leff – make the case against a government bailout of U.S.-based commercial airlines. Here are two slices: When the federal government bails out an industry, it shifts resources away from nonsubsidized industries to the subsidized one. Because politics drives the bailout decision, this shifting of resources is done largely independently of the merit of the industry or of its claims of special distress. If it were not for the government action, the resources used in bailouts would be directed naturally by the market to other, more productive uses. So while it is easy to see the companies and the jobs that are today saved by bailing out the airlines, we don’t know what goods and services are thereby

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Two of my Mercatus Center colleagues – the intrepid Veronique de Rugy, along with Gary Leff – make the case against a government bailout of U.S.-based commercial airlines. Here are two slices:

When the federal government bails out an industry, it shifts resources away from nonsubsidized industries to the subsidized one. Because politics drives the bailout decision, this shifting of resources is done largely independently of the merit of the industry or of its claims of special distress. If it were not for the government action, the resources used in bailouts would be directed naturally by the market to other, more productive uses. So while it is easy to see the companies and the jobs that are today saved by bailing out the airlines, we don’t know what goods and services are thereby not produced and consumed because of the bailout, what non-airline companies don’t survive because of the bailout, and what jobs aren’t created and sustained in nonsubsidized industries.

The history of bailouts also suggests that they prop up weak firms long enough to make their dysfunctions worse, thus requiring further intervention in the long run. Economist Bill Shughart, for instance, looked at the history of bank bailouts in the United States and found that

“the record of government bailouts of private financial institutions in the 1930s, of Continental Illinois Bank in 1984 (which cost $8 billion) and of the entire U.S. savings & loan industry in the late 1980s and early 1990s (which cost $125 billion) teaches that emergency loans keep weak institutions alive just long enough for their problems to increase. Bailouts encourage more risk-taking and eliminate the freedom to fail that is just as essential to a free-market economy as the freedom to succeed.”

…..

No one should be surprised that the airline industry was the first to ask for a government bailout, considering its long history as a government-protected industry. Today, despite “deregulation” (which largely means that the government no longer tells airlines where they are permitted to fly and how much they should charge), airlines remain intricately intertwined with government as a means of subsidy and protection from competition.

A bailout of airlines funnels taxpayer money to private airline investors and creditors, and it is not necessary to prevent an economic contagion. Many large US airlines have demonstrated an ability to successfully fly through bankruptcy. And bailing out airlines is an inefficient way to protect workers because it focuses on a single industry’s employees, and only the most visible of those workers, while ignoring the many airline-industry contractors who have already lost their jobs and won’t have work in times of reduced demand.

While airlines should not receive a bailout as a matter of public policy, if politics dictates one, then the process should not become a grab bag of interests and preferred policy prescriptions stapled on in haste. Such bailout packages risk doing long-term damage to the industry that the bailout is trying to save.

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Don Boudreaux
He is a professor of economics at George Mason University in Fairfax, Virginia. Previously, he was president of the Foundation for Economic Education.

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