Bailing out

>> Thursday, October 02, 2008

An industry has mismanaged itself to the point that a crisis threatens national catastrophe. There are desperate mergers and buyouts for the fortunate companies while the unfortunate corporations are casualties, nationally-recognizable trademarks vanishing from the American landscape literally overnight, here yesterday and gone now. The fat cats and CEOs who created the problem will get their bonuses and buyouts, but thousands of people are out of their jobs. And a ripple effect potentially threatens every other business sector in America, with large companies and small businesses alike facing the prospect of being unable to conduct their business as usual. Every American, whether he or she knows it or not, faces the possibility of a radical restructuring of every aspect of their life from how they work to whether they get to play. And then, as if to add proverbial insult to ongoing injury, the American taxpayer is asked to bail out these bastards in business suits, to save an industry that has invested itself so deeply in an unsustainable business model that the failure was predicted by cooler heads and seems inevitable now. Conservative economists, possibly oblivious to the human toll the disaster will take, argue against a bailout: the industry needs to readjust, companies should be allowed to go out of business, people need to realign their expectations to match reality and forget about how easy they've had it (it was never a realistic worldview). Other economists point to the human toll and ripple effect and say the public should spend billions of dollars to save the foolish investors and managers from themselves for the sake of the nation. And the public is bitterly divided: unwilling to give up the lives they've known, but full of hate at having to pay off the people who have ripped them off.

And yet, in retrospect, bailing out the airline industry seems to have been a good idea. The 2001 airline bailout program cost $5,000,000,000 in fast cash and around $1,600,000,000 in loan guarantees (with a $10,000,000,000 ceiling), and ended up profiting taxpayers $300,000,000.

The case for letting the airline industry go to hell remains what it was in 2001. The American airline industry is premised on an unsustainable, unprofitable model: the ability to shuffle people and goods from point "A" to point "B" almost at will with regular, around-the-clock flights linking every major population center and many minor centers. This inevitably means some flights will be grossly under-booked so that supply is available whenever it's needed. That's not necessarily a problem when jet fuel is relatively cheap and abundant--but increasingly, it's neither. And letting the industry shake itself out might have resulted in stronger, more sensitive companies offering a better or at least more tailored set of services. And the bailout rewarded many investors who, by definition, were taking risks when they put money into the airline industry, and saved the careers of CEOs who had made bad decisions leading up to the post-9/11 industry crisis.

As Scott McCartney writes in the previously-linked Wall Street Journal piece:

The airline bailout was controversial at the time and today still rankles many taxpayers and fliers. Lots of people believe the government should have let big airlines fail; after such a shakeout, they say, maybe we’d have better service from stronger survivors and creative start-ups today. Others still argue that the airline industry is vital to our economy, and a widespread collapse could have been devastating at a time of enormous economic and emotional trauma for the nation.


There were alternatives to the airline bailout. We could assume that freight takes days or weeks, whether it's a book from Amazon.com to be read for pleasure or a human liver on ice intended to save someone's life. We could allocate days or weeks for things to be shipped by boat or rail--such delays don't seem to have adversely impacted life in the 19th Century too badly. The prospect of great distances might keep people close to the homes they grew up in and might lead employers to allocate more time off for employees--indeed, there's a prospect that sounds not only bearable but maybe preferable to the present state of things. (Should the Wright brothers be blamed for breaking up families, dividing communities, and indirectly birthing the rat race? I ask facetiously.) Life might become a little more interesting and complicated for residents of Alaska and Hawaii, but I'm sure they could have survived.

None of the things in the previous paragraph were going to happen, however: the real point is that even if the airline bailout had netted a major loss for the public, we're not going back to the 19th Century, regardless. There is no segment of the population, public or private, corporate or individual, that could seriously imagine air travel becoming something rare, exotic and expensive: daily or weekly flights replacing the hourly schedules we're dependent on, "I'll have it to you tomorrow" being replaced by a hopeful assertion that "it" will arrive probably by the end of the week, an arduous trek 'cross-country by road and rail replacing the red-eye flight to be at a distant family-member's side during a crisis. Jon Birger, writing for Fortune, dryly observes, "Four major airline bankruptcies and thousands of layoffs later, 2001's $15 billion airline-bailout bill hardly looks like taxpayer money brilliantly spent," ("The airline bailout bounty," February 21, 2007), but the reality is that it had to be done even while we all held our noses and damned and stayed up all night with lights in our windows damning the airline execs who haven't seemed to learn the hard lesson they theoretically would have received from suffering the full consequences of their choices.

The consequences of a catastrophic failure might be far worse than taking a desperate gamble to at least secure a gradual failure: four bankruptcies and thousands of layoffs over a six-year period is at least a little easier for a nation to cope with than multiple bankruptcies and thousands of layoffs over the course of months, weeks, or even days. Sometimes the necessary action--for the country, the economy, the world--is a painful one that involves the appearance of rewarding failure for the sake of the many who depend on things going on with some degree of continuity and consistency.

3 comments:

vince Thursday, October 2, 2008 at 1:06:00 AM EDT  

OK, the new picture scares me. Is that a good thing, or a bad thing?

And I think I'll go watch some Marx Brothers before I go to sleep. Maybe Duck Soup. I think that would be the most appropriate movie.

Ilya Thursday, October 2, 2008 at 6:35:00 AM EDT  

I often envy the apparent ease with which you make your arguments. Must be a lawyerly thing. Well put, Eric!

But I second what Vince said. I liked ducks much better!

Eric Thursday, October 2, 2008 at 10:52:00 AM EDT  

It's a good thing the new picture scares you, Vince! That instinct will keep you alive during the zombie apocalypse! Just remember: in a zombie apocalypse, your worst enemy isn't the horde of drooling, moaning undead, but the darker tendencies of human nature. Also, remember to park the helicopter where biker gangs can't see it.

As mentioned elsewhere, the current header is a tribute to Halloween--there'll be a new one at the beginning of November. Meanwhile--they're coming to get you, Bahr-brah!

:-)

Or should that be the Cthulhu smiley:

8E

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