No to Business Bailouts

The reasons are simple, many identical to the case in 2008:

  1. Fundamentally, the economy is being harmed because of production getting shut down. When you shut down a widget factory, you can’t just conjure the widgets back into existence by shuffling money around. You have fewer widgets. Society is poorer. That is just reality. The only question is who suffers the loss. As with all economic questions, focus on production. We are richer than our ancestors not because we have more cash, because we conduct more trade, or because we have more jobs. We are richer because we can produce more wealth. If someone is promising to make society richer without producing more wealth, ignore them. Bailing out some companies results in more production in those companies, but must come at the cost of less production in the rest of the economy, as taxpayers will be burdened with that cost. This does not make us richer. It makes us poorer by allocating resources inefficiently.
  2. This is subsidizing failure. When you subsidize something, you get more of it. Although the specifics of this pandemic were unpredictable, the fact that something bad would happen in the future, whether a downturn or a war or a political crisis or an infectious disease, was easily predictable and companies should have planned for it. They’re gonna come out like children saying “oh, we never could have anticipated anything bad happening and certainly we never planned for it, we thought everything was going to be fine forever.” What nonsense. They didn’t plan because they’ve been counting on Uncle Sam bailing them out. They remember 2008. We can’t let it happen again. No one is to blame for the pandemic and the question is not whether they “deserve” to suffer because of it. The question is whether everyone else, also suffering from the pandemic, deserves to be forced to support them. The standard arguments against moral hazard arguments are “they will do that anyway” and “that’s a good story, but we need to solve problems NOW.” The first is usually just untrue, the second misses the point. We are in this mess because of what happened in 2008. Quitting a drug often has painful withdrawal symptoms, but the correct time to do it is always now. Saying “this will be the last one,” will not work, as companies won’t believe it. Nor should they.
  3. This is not the 1930s. The banking system is much larger, interest rates are much lower. Claims about how companies “can’t get” loans are false. Companies that will be healthy in six months will easily be able to find loans to hold out until then, interest rates are at record lows. If a company can’t afford to do that, it ought to be going out of business. A company which is taking wood worth 100$ and turning it into furniture worth 95$ is wasting resources, and should not exist in a capitalist economy. Capital is a cost like anything else. If a company’s costs exceed its revenue, it should go out of business.
  4. We are not going to “lose industries,” as some uninformed people have been warning. Just look at historical downturns. We lost a lot of tech companies with the dot-com bubble bursting, but we never lost the “industry.” There is zero chance you wake up in six months and find no hotels or airlines. The reason is simple: suppose every airline but one goes bankrupt and is put out of operation. That airline is going to make a fortune. If it is considering going bankrupt, investors will be rushing to grab shares. This explains why the second-to-last airline is not going to go out of operation either.
  5. Bailout advocates play on conflating bankruptcy and going out of operation. The two often co-occur but are not the same thing. When a company goes bankrupt it means its stockholders get nothing, its debtors receive all its assets. If those assets can still be profitably run as a business, they will be. There are many companies that went bankrupt and yet are still here.
  6. Don’t believe the politicians who are going to tell you they are “taking” shares in companies. If the government wanted to acquire shares in a publicly-traded company it could do so in the same way as you or I, by buying stock at the market price. They could work out similar arrangements with privately held companies. They are not doing so because the point is to transfer money to the company. Effectively, the government is paying 10$ for something worth 5$ and telling you it “took” 5$ from the company.
  7. Likewise, ignore other claims of being “tough” on the companies. Restricting buybacks will just mean the company returns value to its investors through dividends. Those are basically equivalent. Restricting executive compensation couldn’t hurt, but it still misses the point. The appropriate amount of support they should be getting is zero.
  8. It will be a massive disruption for certain industries to shut down for six or twelve or however many months. The costs of this should fall on the people who use these services, not on the taxpayer.
  9. Suppose an airline has to lay off its workers while it has no flights. In six or twelve months, it has to hire them back. If a given worker is unemployed, he will most likely eagerly take their jobs back. What if he’s since found another job? Production will be harmed since he won’t be able to do his old job. But production will benefit from his work in his new job. If the old job is much more productive, the airline can offer higher wages to get him to switch jobs, just as in normal conditions. What would massively harm production would be “employing” him on the non-operating airline when there is another, productive job he could be doing in the meantime.

 

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