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Betting on a Big Bailout

By Admin

As Reported By Andrew Soergel for U.S. News & World Report

CALLS FOR GOVERNMENT bailouts are growing louder across industries as the coronavirus pandemic and Americans’ self-isolation response grinds domestic economic activity to a standstill.

Bailouts have traditionally been thorny subjects on Capitol Hill, but President Donald Trump’s administration is pushing lawmakers to prop up industries as the disease wreaks havoc on the economy and looms over his reelection campaign.

“Airlines would be No. 1” for a bailout, Trump said on Wednesday, also acknowledging hotel and cruise industries as “prime candidates” for federal support.

Demand for leisure travel has dried up amid government-mandated travel restrictions and concern about coronavirus exposure. Major U.S. airline companies are requesting roughly $50 billion in financial assistance. Boeing, separately, is calling for a $60 billion bailout.

“They’re going to need to be nationalized,” says Matt Stoller, an author and research director of the American Economic Liberties Project. “The government is going to make a choice to preserve those enterprises.”

Trump on Thursday said the federal government does not “want to pick winners and losers” but is nonetheless weighing which industries should receive support. He also said he would support bailout stipulations floated by progressive lawmakers that include limits on how bailout funds could be used by companies.

For example, lawmakers such as Sen. Bernie Sanders of Vermont and Sen. Elizabeth Warren of Massachusetts have proposed barring companies from using taxpayer bailout funds on stock buybacks.

“It takes many, many people in this case to tango. But as far as I’m concerned, conditions like that would be OK with me,” Trump said on Thursday.

That a Republican president with as much GOP support as Trump is calling for targeted government bailouts – and signaling a willingness to play ball with more progressive policies – speaks not only to the scale of economic threat coronavirus poses but also the likelihood that federal funds are eventually directed toward industry support.

J.P. Morgan predicts economic activity will contract 14% in the second quarter. Treasury Secretary Steven Mnuchin this week warned lawmakers that the unemployment rate could climb to 20% without meaningful government intervention. Initial unemployment claims last week saw one of their fastest rates of growth on record – registering a 33% spike that dwarfs increases during any single week of the Great Recession.

That such extreme economic threats loom over a presidential election year has spurred a traditionally slow-but-steady Congress into action. Coronavirus response bills have been speeding through Capitol Hill, and industry bailouts are believed to be around the corner.

“In the weeks and months ahead, as the country struggles and elections loom, rest assured politicians will have every motivation to fashion a massive recovery package,” David Rothkopf, CEO of the Rothkopf Group and visiting scholar at the Carnegie Endowment for International Peace, wrote in an op-ed this week.

The Trump administration’s focus on aviation for an initial round of government support makes sense, given its size and importance to the U.S. economy. More than 7% of U.S. jobs are attributable to commercial aviation, according to data compiled by Airlines for America. The industry accounts for more than 5% of U.S. gross domestic product. Boeing alone employs more than 153,000 people.

“If the economy is going to avoid a deeper recession, having the aviation industry and other aspects of transportation around will help,” says Larry Willis, president of the Transportation Trades Department at the AFL-CIO. “It’s very hard to get this industry started from the start if we don’t have a workforce in place.”

Willis acknowledges airline companies have been rightfully criticized in recent years for engaging in stock buybacks rather than pumping more money into their operations, their employees’ wages or their rainy day funds. But he notes that these companies come to the table “with cleaner hands” than big banks did in 2008. Airline companies aren’t directly culpable for the situation in which the global economy now finds itself, he says. Financial institutions in the late 2000s weren’t carrying nearly as clean a slate.

But bailout critics have sought to distinguish the coronavirus outbreak from the bank bailouts from the financial crisis, noting that an aviation industry collapse wouldn’t pose the same sort of systemic economic threat as the possible collapse of the U.S. financial system in 2008. But the sheer scope of the coronavirus crisis has necessitated government action, as the White House and lawmakers aim to avoid a domino effect that would turn a theoretically short but steep recession into something worse.

“After a slow start, by the end of the week Congress may have passed more than $1 trillion in measures to combat economic damage from the coronavirus,” a team of researchers at Oxford Economics wrote in a research note on Thursday. “Stimulus spending of this magnitude is not only warranted, but indispensable, though it may still be insufficient to address the widespread economic losses and further measures can’t be ruled out.”

But conservative lawmakers have historically balked at the concept of taxpayer dollars being directed toward industries the federal government has designated as significant. And despite Trump’s apparent bailout support, some are still expected to push back.

“The government is wasting critical time on complex, counterproductive proposals involving bailouts and mandates,” independent Rep. Justin Amash of Michigan tweeted on Wednesday. “We must focus on getting immediate cash relief to Americans.”

Some progressives are also likely to put up a fight if restrictions aren’t put in place to govern what recipient companies do with their government support. Sanders and Warren are among a host of Democrats who have for years argued that the financial institutions that received aid weren’t appropriately held accountable after receiving taxpayer dollars to fix problems that they themselves created.

“Yes, banks were bailed out after the financial crisis to provide liquidity, ostensibly so that vulnerable businesses could protect their employees,” Rothkopf wrote. “But the reality is that the big bankers that caused the crash were never held to account for their reckless efforts to game the system, while many ‘regular’ Americans still aren’t whole more than a decade later.”

But Trump has throughout his presidency been effective at coaxing uncharacteristic behavior out of fiscally conservative and globalization-friendly segments of the Republican Party. With his full support behind an aviation bailout, GOP lawmakers are expected to fall in line, increasing the odds that airline companies will be the first of many to receive some sort of federal support in the wake of the economy’s unprecedented coronavirus slowdown.

“I think every sector of the economy right now will need extraordinary government support,” Stoller says. “You just go down the list. There’s almost no part of the economy that isn’t going to be seriously affected.”