Corporate Bailouts?

Robert Reich, the Secretary of Labor from 1993 to 1997, is a well known liberal economist and lawyer. He brought to my attention yesterday, moves being taken by the current administration in support of American industries.

I’m of mixed mind about what’s being proposed. Yes, it’s true that right now the US economy is headed not toward a slow down, often described as a recession, but to something potentially much worse. It’s reasonable and appropriate for the federal government to find ways to mitigate the damage and promote a recovery.

However, and this is according to Reich, “The biggest U.S. airlines spent 96 percent of free cash flow over the last decade to buy back shares of their own stock in order to boost executive bonuses and please wealthy investors. American Airlines alone repurchased more than $12.5 billion of its shares over the last ten years. Now, they expect taxpayers to bail them out to the tune of $54 billion.”

By any measure that’s a staggering amount of money and my question, and perhaps that of Mr. Reich, is whether we might all be better off if that money we’re instead directed to airline employees and the vast infrastructure surrounding aviation, and not simply bail out the corporate entity itself. What happens if we give American Airlines $50B and instead they use it to buy back more stock to benefit their CEO and upper level executives?

He (Reich) continues: “The airline industry should not see one taxpayer dime unless the bailout comes with significant strings attached. Two of the biggest unions representing airline and aviation workers, as well as some Democratic lawmakers, are demanding limits to stock buybacks, dividends, and executive bonuses, as well as guaranteed long-term protections for workers and consumers. It would be unconscionable to hand the airline industry a multibillion-dollar blank check after years of irresponsible behavior; this bailout absolutely must include these provisions.”

Now read these words from Brandon Kochodin \ 20.03.16 \ https://tinyurl.com/rzx3ypk

 

The biggest U.S. airlines spent 96% of free cash flow last decade on buying back their own shares. American Airlines Group Inc. — which is not shown in the chart but is included in overall figures — led the pack, with negative cumulative free cash flow during the decade while it repurchased more than $12.5 billion of its shares. United Airlines Holdings Inc. used 80% of its free cash flow on buybacks, while the S&P 500 Index as a whole allocated about 50% for the purpose. As the industry reels under the weight of the coronavirus outbreak corporate leaders are seeking federal assistance to ease the burden.

The coronavirus pandemic will bankrupt most airlines worldwide by the end of May unless governments and the industry take coordinated steps to avoid such a situation, an aviation consultant warned.

Many airlines have probably been driven into technical bankruptcy or substantially breached debt covenants already, Sydney-based consultancy CAPA Centre for Aviation warned in a statement Monday. Carriers are depleting cash reserves quickly because their planes are grounded and those that aren’t are flying more than half empty, it said.

“Coordinated government and industry action is needed — now — if catastrophe is to be avoided,” CAPA said. Otherwise, “emerging from the crisis will be like entering a brutal battlefield, littered with casualties,” it said.

Most of the biggest carriers in the U.S., China and Middle East are likely to survive because of government help or support from their owners, CAPA said.

Airlines have been among the biggest corporate casualties of the virus outbreak as the coronavirus grinds air traffic to a halt. Carriers from American Airlines Group Inc. to Australia’s Qantas Airways Ltd. have slashed capacity, while some like Sweden’s SAS AB have temporarily laid off most staff. Flybe, Europe’s biggest regional airline, has already collapsed. Carriers could face as much as $113 billion in lost revenue this year, according to the International Air Transport Association.

My thoughts are these: Money spent by the US Government need to flow to individuals and families who livelihoods are most compromised by the current economic freeze. There’s an economic rule called the multi-plyer effect. If I have $1 and I spend it, the person who receives it will spend a large portion of it, and so on down the line. The net effect of that one dollar has a multi-plyer effect such that it grows to maybe $5.

 

My point is that if you give American Airlines $50 billion and they only spend $10 billion of it such that it has a similar multi-plyer effect as described above, you’ve only generated $50 billion of economic activity as opposed to $250 billion if the same $50 billion were to flow to people like you and I.

 

Sure, some of it will be spent on frivolous things. Like booze. But once it’s spent at a liquor store, the store pays it’s employees, who in turn buy groceries and stuff, all down the line.

 

Does any of this remind you of 2008-2009 when we bailed out the banks? Sure, we kept the banks alive, but the damage to society and the economy was still very significant. Oh, yes, the stock market grew like a bandit in the following decade. But at what cost? Think income inequality, student loans, 1 in 5 seniors living in poverty.

 

Since we’re talking about my money, and yours, I want it spent where it’ll do the most good, not bailing out some airline executive who regardless of whether his company goes bankrupt, will still take home millions of dollars before year end.

One thought on “Corporate Bailouts?

  1. Tony Broadhurst

    Dude….it’s Robert Reich…..not even HE believes his own nonsense…..he only says what he says to be fawned over by Berkeley co-eds….

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