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Airlines frequently go bankrupt

Summary:
[Pierre Lemieux recently did a very good post on the airlines. But since I’d already been planning one myself, I’ll post it anyway.] Since 2000, dozens of airlines have gone bankrupt, including US Airways, United Airlines, Northwest Airlines, Delta Air Lines and American Airlines. Typically, airlines continue to fly even as they go through bankruptcy proceedings. The coronavirus epidemic will dramatically reduce the number of flights for an indeterminate period of time. But that will be true regardless of whether we bail out the airlines or not. The demand is simply not there. The same is true of airline employment, which is likely to fall sharply in either case. Some argue for bailouts on the grounds that the airlines are suffering from economic shocks that are

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[Pierre Lemieux recently did a very good post on the airlines. But since I’d already been planning one myself, I’ll post it anyway.]

Since 2000, dozens of airlines have gone bankrupt, including US Airways, United Airlines, Northwest Airlines, Delta Air Lines and American Airlines. Typically, airlines continue to fly even as they go through bankruptcy proceedings.

The coronavirus epidemic will dramatically reduce the number of flights for an indeterminate period of time. But that will be true regardless of whether we bail out the airlines or not. The demand is simply not there. The same is true of airline employment, which is likely to fall sharply in either case.

Some argue for bailouts on the grounds that the airlines are suffering from economic shocks that are beyond their control.  But there have always been companies that fail because the market turns away from their product for a variety of reasons.

It’s possible that there are a tiny number of essential industries where government subsidies are necessary. But for the most part the government should refrain from bailing out failing businesses. Instead, any fiscal stimulus we decide to do would be more useful if aimed at the unemployed, including those who currently don’t qualify for unemployment insurance (such as the self-employed.)

The best way to promote a fast recovery is through NGDP level targeting. Once consumers begin spending again, firms will supply the goods and services being demanded. The big Boeing and Airbus jets won’t fall apart in the next 12 months, and the pilots will still be capable of flying.

The actual problem we will face after the coronavirus crisis is over is not a business sector that’s lost its ability to produce goods and services; it’s a lack of nominal spending.

Airlines frequently go bankrupt

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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