Question

why are bailouts for large companies should not be allowed?

Answer 1

The CARES Act passed in response to the COVID-19 crisis provides billions of dollars in industry-specific loans that will go to large corporations like Boeing and the major airlines. These provisions are part of a larger compromise that also puts important funds into the hands of individuals and small businesses. But one should not be fooled into thinking the provisions benefiting large corporations and their shareholders were a necessary part of a coronavirus bailout. Instead they go against the core principles that should guide policymakers in responding to a crisis of this sort.the guiding principles for bailout policy are relatively straightforward. To put it simply, a bailout should preserve value in the way that is as fair as possible to ordinary individuals while minimizing administrative costs. Thus, the principles fall into three buckets: value preservation, fairness, and administrative costs.

The first bucket limits bailouts to situations where they are necessary to reduce systemic risk from unexpected shocks that threaten to spread massive damage throughout the economy. The second bucket argues in favor of bailouts for ordinary individuals rather than corporations or those with political connections whenever possible. The moral case here is straightforward, but there are at least two non-moral bases for this idea. First, perceived equity lends legitimacy to the government action. This will foster popular buy-in and preserve the possibility of public support for future bailouts. The enduring public animosity to the financial-crisis bailouts demonstrates this point. Second, a commitment to equity across individuals can constrain government abuse and cronyism. The third bucket directs the government to choose the most straightforward way to inject bailout funds into the system.A common challenge in a financial crisis is that these three ideas cut against each other. The most obvious recipient of a bailout aimed at reducing systemic liquidity risk is usually a financial institution. Likewise, administrative costs often favor distributing funds to a single large recipient rather than millions of individuals. On the other hand, considerations of fairness rarely cut in favor of payouts to large financial institutions. In this way, the 2008 financial crisis presented government actors with difficult choices guided by conflicting principles.To put it another way, the risk is not that an airline won’t be able to resume operations after the crisis. The planes and the firm will be there, and as others have pointed out bankruptcy law is a tried-and-tested method of restructuring the liabilities of large corporations while preserving operations. Instead, the worry is that an airline (or other similar business) will run out of money in the meantime and will stop paying its creditors and its employees. That creates systemic risk but only in one of two scenarios.

First, if businesses across the economy stop paying their creditors, we could have a financial crisis. But if that is the case, all principles point against bailouts targeting one industry and in favor of those targeting financial institutions.Second, if businesses across the economy lay off workers, we could have an economic crisis in the form of mass unemployment. This appears to be the immediate threat. Because that unemployment crisis is not limited to a small set of industries, any response must be systemwide. The simplest remedy for economic inactivity is a set of payments directly to inactive workers and small businesses. Doing so achieves three fairness goals: 1) it favors individuals rather than corporations; 2) it avoids political favor or the appearances of political favor; and 3) it allows for benefits to go to vulnerable workers across the economy – not just those working for favored industries.They should not spend tax dollars on that. Companies will never end up paying it back. Just like with the auto bail out. As soon as they started making money again and got the bail out money they gave the executives a bonus. They should have been paying that money back.