Tuesday, 24 March 2020

COVID-19 and travel company bailouts

I’m not a medical expert, so I’ve refrained from cluttering the Internet with more potentially confusing or erroneous advice about travel during a pandemic. My medical advice is to listen to medical experts.

But with Congress debating financial proposals related to travel companies, and not health, it’s time for me to speak up.

Let’s get one thing straight from the start: Congress should not be discussing financial measures or how to save “the economy”, even if “the economy” weren’t being used inaccurately as a synonym for “corporations”.

Congress should be debating how to save lives, the economy be damned. Yes, a pandemic will have — and already is having — economic consequences. But Congress should first be focusing its limited decision-making capacity on the most urgent needs, which are medical and logistical. Debating an economic bailout bill is a gross failure of triage in prioritizing scarce legislative resources.

As an aside, this and other current events make a mockery of any claim that the country has invested in protecting “homeland security”. If the possibility that millions of people might die in a pandemic isn’t a threat to global security, I don’t know what is. And if the “Department of Homeland Security” hasn’t already reallocated all of its resources to coping with this threat, the DHS doesn’t deserve to exist, much less deserve its name. But we knew that already, so let’s move on to what’s being debated in Congress.

The proposals under consideration in Congress may have changed completely, and/or have been enacted, before you read this. Rather than try to parse thousand-page trillion-dollar bills that members of Congress probably haven’t even read before voting on them, let me try to articulate some principles that should guide the process:

No bailout money for investors. None.

Travel is a cyclical industry. That’s economist-speak for, “It’s risky, and goes through good times and bad.” Investors who put their money into airlines, aircraft manufacturers, hotels, etc. took a risk. They took more of a risk by investing in companies that were being managed — by the directors those investors elected — to maximize short-term profits by scrimping on cash reserves. These investors gambled. They lost. Too bad. (The prescience of the invisible hand of capitalism isn’t looking too good, either, but that’s another story.)

There is no necessary relationship between keeping enterprises in operation — keeping factories open (possibly making the same products, possibly making different ones), utilizing expensive resources (airplanes, etc.) for useful purposes as dictated by the emergency, and keeping workers busy doing whatever can best help keep themselves and other people alive — and keeping the same names on the stock certificates showing that they own the means of production. Corporations can, and should, be allowed to go bankrupt.

Bankrupt corporations can, and should, either be reorganized under new ownership (with the previous failed owners’ equity zeroed out), or dissolved (also with the previous failed owners’ equity zeroed out) and their assets auctioned or acquired by the government. This does not mean that their activities will be shut down, or that their employees won’t be kept on their jobs by their new owners (or by the government, if the government is the new owner of a failed corporation’s assets). Hotels, aircraft, factories, and other assets formerly owned by bankrupt companies don’t lose their utility for human purposes just because their owners lost the money they invested.

The U.S. government is already deeply in debt (mostly for past and present wars, but that too is another story). Coping with this pandemic will be expensive. The government needs to spend its money meeting human needs, not protecting investors’ net worth.

This has a necessary corollary:

No government money to corporations except in exchange for equity.

Banks wouldn’t make unsecured loans to insolvent businesses. Neither should the government. Any government loans should be fully secured by equity in corporate assets: land, buildings, airplanes, etc. If corporations that hope to recover don’t, and can’t repay government loans, the government should call the loans, and reorganize, repossess, or liquidate those corporations and their assets.

Help people, not businesses.

Businesses, like governments, justify their existence if, and only if, they serve the interests of the people. Proposals to protect or preserve businesses should be evaluated by the sole criteria of their impact on people — including all people.

Too often, one of the things neo-conservatives and neo-liberals have been able to agree on is the “necessity” of saving businesses or industries (banks, automobile manufacturers, etc.), ostensibly in order to “protect jobs”, without considering whether there were better ways to help those workers without having such a large percentage of the bailout money go to investors whose only success was in getting the government to bail them out of their bad investment decisions.

This principle too has an important corollary:

Many workers aren’t employees.

Many workers, like me, are legally categorized as “independent contractors”. That’s not necessarily or always a bad thing, but that does mean that we are ineligible for unemployment compensation, workers compensation, and sick leave.

And because we aren’t “employees”, we aren’t counted in employment or unemployment statistics. As “self-employed” individuals, we are technically each a small business — the most common type of small business — but we don’t show up in most small business statistics either. “Underemployment” of self-employed people is also pervasive but uncounted. We could all be laid off tomorrow, as millions, perhaps tens of millions, already have been or will be in the U.S. during this pandemic, and this would have no direct effect on the official unemployment rate. How convenient for politicians who want to tie government programs to “employment” or “employees”.

Much of this applies to all industries, but there are also some specific issues with respect to travel companies:

Air travel is already heavily subsidized, and always has been.

The air travel industry, including both airlines and aircraft manufacturers, has always been heavily subsidized by governments, and still is.

At some point — and maybe that point is now — we ought to ask ourselves whether those subsidies are justified.

Should the government make air travel artificially cheap, relative to other goods and service or other modes of travel? And if the government is actually going to pay a large fraction of the cost of air travel, shouldn’t the government have a say, through (gasp!) regulations, in how it operates?

We need a Federal travel privacy law.

There’s been talk of coupling airline bailouts to new consumer protection rules. If we’re going to take that route, here’s my short list of airline consumer protection priorities. But most of the consumer protection measures being discussed in the current bailout bills, although well intentioned, wouldn’t address these fundamentals.

One place where there’s particular urgency, however, is the need for a Federal data privacy bill applicable to airlines.

Even with a Federal bailout, some airlines (we don’t know which ones) are likely to go bankrupt. Under current U.S. law, if an airline goes bankrupt and is liquidated, its assets including its database of information about travellers not only can, but must, be auctioned to the highest bidder — which would most likely be a data mining or direct-marketing company. No current U.S. law restricts how the buyer could use that information.

Congress should change that, ASAP.

Is there any silver lining? Maybe, but only if we recognize and act on it:

This is a once-in-lifetime chance to make changes and choices of priorities.

Nobody who can avoid it is travelling now, or will be for a while. If the government bails out existing travel businesses, it will be making a choice to reconstruct those industries after the pandemic in their present form, or in whatever form their owners (who have, we should not forget, proven their lack of competence and foresight) decide. Perhaps that seems the natural choice for a President who is among other things, we should also not forget, the failed former owner of an airline that went bankrupt.

But if we are going to make a choice, with government money — the people’s money, and a lot of it — as to what should be done with these assets, is this the choice we want to make? And is anyone in Congress thinking about this as a choice at all?

Is the best use of buildings as hotels or AirBnbs? Or as housing for the unhoused?

Is the best use of factories to build airliners and automobiles? Or would the people of the future be better off if we took this opportunity, after they are acquired by the government, to repurpose some of them after the pandemic to build trolleybuses and trains? Or something else?

And do we want to rebuild a transportation “system” based on personal automobiles for local transportation, and airplanes for long-distance travel? Or a system based to a greater degree on local mass transit and longer-distance higher-speed trains?

This isn’t about a choice between socialism and capitalism. Capitalism says, “let failing businesses fail.” Any sort of “bailout” is an intervention in the market economy that necessarily involves public policy choices. The question is whether, in investing the people’s money, the government is making the choices the people want.

Right now, Congress is debating how to spend a trillion dollars to shape our future. What future do we want?

Link | Posted by Edward on Tuesday, 24 March 2020, 20:40 ( 8:40 PM)

Some information about the "stimulus" bill:


Posted by: Edward Hasbrouck, 25 March 2020, 13:54 ( 1:54 PM)

Normally, I just enjoy your newsletters, and thanks for that! But in the interest of getting things straight, I've got to say that the idea about investors making bad decisions isn't entirely accurate. The investors made TWO investments: one in the travel company / airline / etc. and the second in the government through "lobbying" AKA bribes.

The first investment may have gone bad, but the second was a great investment. In effect, the government bribes act as a hedge against losing money if the company fails.

The problem is, of course, allowing the government to get involved in the economy. Government in this country is basically for sale, and until we limit its powers, this will continue to happen.

Posted by: Name withheld by request, 26 March 2020, 13:19 ( 1:19 PM)

Economic Policy Institute, Working Economics Blog (25 March 2020):


"The single biggest tranche of money in the package is a large pot of money aimed at industry rescues, but with no guardrails to ensure that public money is directed toward saving the jobs, wages, and benefits of typical workers rather than the wealth of shareholders, creditors, and corporate executives....

"We could undertake a key test for whether corporations genuinely need public aid or are simply trying to exploit this crisis to grab public money by demanding these companies give the federal government equity stakes in exchange for immediate aid. By granting the government equity, these companies would dilute existing shareholders’ claims on future profits. If these existing shareholders are unwilling to allow this dilution, this is a clear sign that they firmly expect the company to continue operations even without a bailout. This can be seen in Boeing’s response to suggestions of granting equity stakes in exchange for aid—the company said clearly they would find other ways to cope. But if there are other ways to cope, then a bailout is, by definition, not needed."

Posted by: Edward Hasbrouck, 26 March 2020, 20:03 ( 8:03 PM)

Hubert Horan on airline bailouts (4-part series at NakedCapitalism.com):

Part 1: What Will It Take to Save the Airlines? (3 June 2020):


Part 2: Can Collateralizing Frequent Flyer Programs Help Save the US Airlines? (6 July 2020):


The Airline Industry Collapse Part 3 – Recovery Expectations Were Always Dreadfully Wrong (4 August 2020):


Airline Industry Collapse Part 4 – Total Paralysis Continues (14 September 2020):


Posted by: Edward Hasbrouck, 17 September 2020, 19:51 ( 7:51 PM)

Follow-up on COVID-19 and travel company bailouts (25 November 2020):


Posted by: Edward Hasbrouck, 5 December 2020, 08:51 ( 8:51 AM)

"This is what you get for $19 billion: The airline bailout kept U.S. carriers afloat — but what about passengers?" (bu Christopher Elliott, 2 Dcemeber 2020):


Posted by: Edward Hasbrouck, 5 December 2020, 08:55 ( 8:55 AM)
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