Hello all,
I am not the most well versed in economics and am curious why the government bails out big businesses (like airlines etc.). On one hand I see posts and articles arguing it’s because those big conglomerates are in league with the government and then on the other hand I see it’s to protect workers/employment. In the grand scheme of the US economy, is it that bad to let businesses/corporations fail? (Regardless of whether those corporations are greedy/poorly ran.)
Thank you!
In: Economics
it depends who you ask and their take on economics and the roles of government.
many people will say government has no business keeping failing businesses afloat and others will say that its critical that certain business doesnt fail.
economic policy isnt a wholly settled subject and there are still good arguments for many different aspects…..like government intervention towards failing businesses
It’s going to cost the government less money to bail out an essential business than to let it fail.
That’s the long and the short of it. The government can loan a bank 1 billion dollars, or let it implode and spend 2 billion cleaning up the mess while the economy and taxpayers suffer.
The government steps in to save business, typically when it will do more damage to let them fail. For example in 2008 bailing out the banks was unpopular, but it probably saved us from another Great Depression. It keeps industries moving, keeps America in favorable positions, and keeps people employed.
Also it’s a common misconception that the companies just get a big bag of money to do whatever with. They are often loans that get paid back, or sometimes they are just to keep payroll going so people are not laid off.
So there’s three theories behind “bailouts”. Firstly is the idea that the whole “free market capitalism” idea of “if a business fails another will come along to replace it” is kind of fine in *theory* but ignores the idea that economes are made up of..oh what’s the word I’m looking for. Oh yes. People.
And yeah *in theory* if an airline or bus company or bank fails another might come along *eventually* to fill that market gap but in the mean time actual people with actual lives and actual responsibilities need to *do things* and sometimes when you live in the real world, and not this black ink on white paper rule of economic theories sometimes market inefficiences are necessary to protect *actual living human beings and the things living human beings need to do* because the hidden cost of “market corrections” that extend beyond raw numbers is human suffering.
And a lot of us think that’s bad.
Secondly, it’s disruption. And sometimes when the building is collapsing it makes better financial sense to pay money to prop it up for a while until it can be repaired. Economic downturns leave a lot of human suffering in their wake (there’s that term again) and if you can throw money at a problem to stop it from happening. Does it produce market inefficiencies and potentially bad downstream economic effects? Yes, yes it can. But governments are there to protect the people, not the economy. Sometimes that’s a choice you make.
And to that point, it may not actually introduce the worst economic outcome. One of the most world-regarded economists once stated, essentially, that in a recession the government should pay people to dig holes one day, and fill them the next. Meaning just..keep money going. Keep money circulated. Pay people to do busy work that *does not matter.* That you need to disrupt the death spiral, by any means necessary.
And on the third point..the world is a whole lot different now than it was then, and this idea of “another company will take the place of the one that left” …may not be so true. Like if a major microprocessor manufcaturer goes belly up your neighbor Bob ain’t picking up a hammer and going “alright, lemme take a crack at ‘er”. Our technology is complicated, this isn’t the 18th century. You can’t just “start” doing some sorts of jobs. There are significant barriers to entry.
There’s a whole lot of debate about whether government interventions are good economically or bad economically and it’s hardly settled. What is broadly accepted though is there’s more to the world than an economy.
It depends on the company/industry.
Banking is sort of fundamental to the economy (for example). Without functioning banks, the rest of the economy would crumble and the government loses control. Since banks are quite tightly regulated, the government will intervene in cases of major systemic risk.
Certain companies employ lots of people, take many decades and billions of dollars to establish. Things like transportation tend to be fundamental to economies too. And, in some cases, things like pandemics or banking crises affect these companies in ways that the company itself cannot do anything about. Rather than allowing hundreds of thousands of working Americans lose their jobs (and the government on the hook for unemployment and welfare) bailing out some firms is a much less costly and disruptive solution.
Other critical services – energy/electricity, hospitals, insurance, pension funds etc are regulated and are essential for the welfare of citizens broadly.
In general, it’s good to let businesses fail when they are poorly run. However sometimes when there is a powerful external shock to the system that is affecting the entire industry, it makes sense to have a bailout. For example, the 9/11 terrorist attacks which involved hijacked planes made people afraid of flying on planes. Airline industry revenues dropped of a cliff. This is not a type of event that companies are expected to be prepared for. However, the airlines themselves could still be profitable in the long run once the market returned to normal. In those circumstances, it made sense to give the airlines a bailout to ride out the storm.
Which bailout?
The Covid loans were designed to keep people employed while lockdowns and supply chain disruption were happening.
The auto bailout was because they are iconic companies and it would be a bad look for them to go under and their unions are politically active.
The bank bailouts during the Great Recession were to keep the credit system from locking up entirely and have to go through a depression before it could be reconstructed.
Usually, governments bail out businesses because of the wide ranging economic or geopolitical impacts that will be felt if they do not. It may be to keep banks from failing and causing all sorts of terrible financial effects (2008 could have been way worse). It could be to keep manufacturing base domestic as hedge in case of war — what if there were no steel production or vehicle manufacturing and war broke out with key suppliers of those industrial supplies? Airlines play key parts in terms of overall business, tourism, trade/shipping, etc. And for many countries, their flag carriers are a source of national identity/pride.
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