The COVID-19 pandemic is just beginning—but it is already having profound effects on many large businesses, which could lead to requests for federal government bailouts. Travel, hotel, and leisure industries have seen sharp declines in demand, and service sector activity is very likely to shrink dramatically. Businesses, and the people they employ, will be forced to adapt to falling revenues and will need to adapt to keep their doors open.
When self-help is insufficient, there are standard options for firms in trouble. They can borrow to get through cash flow problems. Or, when credit isn’t there, but the business is viable in the long run, they can ask for bankruptcy protection. Bankruptcy gives them time to execute any needed reorganization and make deals with those to whom they owe money. These options are the default policy stance toward businesses under financial stress.
But at least one industry—airlines—has asked for a huge level of public support: more than $25 billion in outright grants and $25 billion in loans. This is a staggering request, bigger than the annual budgets of many states, which raises the issue of when a large firm or industry should be given public support to endure an economic shock. Making that decision at the current moment requires answers to three questions.
First, does the firm provide goods or services that are essential to meet the health care emergency or to help maintain the operation of the economy during the emergency? Because airlines are an integral part of the national transportation system, keeping them running at least at a minimal level is important to the functioning of the economy.
Second, is the firm a zombie, seeking to preserve its existence with public help? When large, established firms are unable to obtain the finance needed to bridge a demand shock, it usually is a sign that capital market participants judge them to be ready for bankruptcy. It is not clear that any of the airlines are zombies, but it is also not clear that they have gone to the capital markets and offered to pay the going rate for the large sums they say they will need to make it through a big economic downturn. Large businesses typically have assets that could be used as collateral for private loans, which should be done before seeking bailouts.
If a firm can show that private funding is unavailable and that they can repay what they borrow, then the government could consider offering support to keep a liquidity problem in financial markets from harming an important part of the real economy. But absent that showing, the government should instead help the airline go through an expedited bankruptcy, during which it can continue to fly, rather than provide other financial assistance.
Third, does the firm currently have market power? If it does, the firm and its fellow oligopolists will conduct themselves in ways that harm the public interest. They will charge prices greater than the competitive level, offer poor service, fail to invest and to innovate, and generally make the people who are forced to buy from them unhappy. U.S. airlines certainly have market power, and their oligopoly exhibits the undesirable behavior that goes with this market structure. While providing poor customer service and—through baggage fees, change fees, and other pricing strategies—generally earning high returns, airlines have not used their high revenues to build financial resilience. During 2010–2019, the five major U.S. airlines reportedly spent 96 percent of their free cash flow on stock repurchases.
Offering unconditional aid that will allow airlines to resume their current practices once the economy recovers would be extremely unwise, especially when the public is taking a risk that the private capital markets are unwilling to take.
Aid should be conditioned on protections for workers and the public
In the current circumstances, what should the government do for a firm that may provide an essential service, is not a zombie, but cannot get needed finance from private sources? The answer is that finance should be provided in a manner that protects the workers in these firms and also protects and allows the public to participate in any long-term benefits the firm has as a result.
To protect the interests of workers in these firms, aid should be conditioned on forbidding recipients from reducing payrolls, violating existing collective bargaining agreements, demanding wage or benefit concessions from their workers, outsourcing additional work, or increasing workloads during the term of any financial aid. These conditions should be honored whether or not the firm files for bankruptcy. And, especially in the case of airlines, currently contracted workers should also be protected.
Further, firms receiving aid should not be able to engage in any anti-union or anti-worker activities such as opposing workers trying to organize a union or forcing workers to sign away legal rights.
An effective avenue for providing aid while meeting these conditions would be for the federal government to agree to pay a substantial fraction of workers’ wages during the emergency.
Moreover, for every firm receiving aid, there should be a tripartite board—made up of worker, government, and firm representatives—to oversee the execution of any aid. The oversight board will have the responsibility of reporting to the public on the way the firm treats its workers and honors the conditions under which the aid is given.
Members of Congress, including Sen. Sherrod Brown (D-OH), Sen. Edward Markey (D-MA), and Sen. Elizabeth Warren (D-MA), have called for any bailout to include these types of protections for workers, and there is precedent for protecting workers when firms are rescued with public money. When Congress bailed out and reorganized the railroad industry in the 1970s, for example, it included provisions related to collective bargaining, contracting out, hiring, severance, standard industry compensation, and employee stock ownership.
To protect the interests of the public—who will be taking on risk by providing financial aid that might not be fully repaid—any loan guarantee or loan that is made to the firm should require that it cease stock buybacks and dividend payments, cap executive pay at reasonable levels, increase corporate disclosures and transparency, and prioritize loan repayment. A key protection for the public is adequate oversight of bailouts—especially with this administration’s record—so there must be contemporaneous congressional oversight and publicly available auditing and reporting on the use of all government funds.
It is also important that the public benefit from future profits that the investment of public money make possible. This participation in the upside should take two forms. The firms should issue the federal government preferred stock in proportion to the aid provided, which will be convertible to corporate shares at the discretion of the government. This will provide the government with dividends and allow the government to participate in capital gains if the company recovers and does well.
There is both public sector and private sector precedent for providing finance that gives the lender participation in the upside. Stock warrants were issued to the government as part of the rescue of Chrysler Corporation in 1980. And in 2008, Warren Buffett gave Goldman Sachs Group Inc. $5 billion in exchange for $5 billion in preferred shares and a substantial amount of equity warrants.
Under no conditions should firms be given outright grants. The only possible reason for doing so is if the firm were a zombie and unable to survive commercially given the way it currently operates. It is not in the public interest to support that kind of firm.
In addition, firms with market power are a long-term problem for the U.S. economy, and it is in the public interest to limit the effect of that power when providing finance. In order to do this, the government should require that the firm issue additional preferred shares that will pay predetermined dividends that will act as a monopoly tax. While this will not eliminate the firm’s market power, it will limit the funds available to create entry barriers to genuine competitors or fund rent-seeking strategies through lobbying.
If the collective scope of the bailout to big business is large enough, it would also make sense to impose needed structural reforms economywide—such as ensuring adequate competition by enhancing the strength of U.S. antitrust laws and by ensuring workers can join a union by passing the Protecting the Right to Organize Act.
While there may be cases in which the current public health emergency justifies providing finance to essential firms or industries, the best financial strategy to help firms keep their doors open is to ensure that financial markets are providing funds to viable firms. The Federal Reserve’s decision to support the commercial paper market should help large corporations that raise short-term finance there. Small- and medium-sized enterprises, which are more likely to be credit constrained because of lending capacity limits at community and regional banks, could be helped if the Fed were to reestablish the Term Asset-Backed Securities Loan Facility (TALF), which was used to sustain bank liquidity during the 2008 financial crisis. This facility allowed banks to obtain collateralized loans from the Fed and provide needed funds to customers. However, given the likely stress on small businesses, additional measures may be required.
Marc Jarsulic is a senior fellow and chief economist at the Center for American Progress. David Madland is a senior fellow and senior adviser to the American Worker Project at the Center.
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