CoinDesk columnist Nic Carter is partner at Castle Island Ventures, a public blockchain-focused venture fund based in Cambridge, Mass. He is also the cofounder of Coin Metrics, a blockchain analytics startup.
The moral case for bailouts often sounds a bit like this:
Unlike prior crises, like the mortgage-fueled crash of 2008–09, there is no villain in 2020; instead, we have an act of God, an undead bundle of proteins wreaking havoc on society. Since this could have been neither predicted nor reckoned with, and since the closure of the economy was a government-mandated response, there is no one at ‘fault’, and hence, all suffering businesses should receive government support. Preserving the current corporate status quo will allow the economy to “restart” when appropriate, returning to its pre-virus makeup.
This logic is unsatisfying for several reasons. First, as I and others have pointed out, bailouts send a signal to the market that alters corporate behavior, encouraging rent-seeking behavior and rewarding excessive risk taking. This is a negative externality that must be acknowledged at the very least. Second, the emphasis on the artificial nature of the crisis is contrived. The economy would be in bad shape even without mandatory lockdowns. And, even in historical cases where exogenous shocks torched particular industries, bailouts failed to restore them to glory, calling into question the merit of deploying those funds in the first place.
Lastly, the virus will not leave society unchanged once it is eliminated; it will fundamentally change the nature of many industries for the foreseeable future. Bailouts ignore this, vainly attempting to preserve the economy in amber, laboring under the misapprehension that society’s pre-virus resource allocation is optimal for the post-virus world. Corporate destruction and reorganization under well-understood bankruptcy processes would allow our resources to be deployed in a fundamentally more productive manner, rather than simply entrenching the existing corporate balance of power.
This is not an artificial crisis
One justification I find puzzling is the notion that this is a government-imposed crisis, as if one day every country worldwide decided to arbitrarily shut their borders and suspend commerce. This is such a staggeringly naive notion that it’s a wonder anyone expresses it. While government inaction certainly exacerbated the crisis, it is not the sole cause. This crisis was set off by the spark of the virus, an epidemic the likes of which we haven’t seen in 100 years, igniting the tinder of a fragile, indebted, globalized economy. If governments had simply chosen to let the virus wash over their citizens, commerce would have ground to a halt anyway. The economic damage from shutdowns cannot be extricated from the damage caused by the virus – it’s all the same phenomenon.
Plagues are not good for the economy, government action or not. Indeed, foot traffic in cities dropped sharply long before any mandatory lockdowns were instituted. According to Opentable, restaurant bookings in New York City had dropped by 100 percent (relative to their level 12 months earlier) on March 17; the mandatory lockdown in New York City didn’t begin until March 22 at 8 pm. This pre-lockdown business slowdown was evident in multiple U.S. cities. Highly contagious diseases tend to impair one’s desire to consume.
This is a genuine crisis, not an artificial one. The existence of dramatic government countermeasures is not moral justification for a bailout. Simply enforcing the natural inclination to self-quarantine – which happens in every pandemic – is not sufficient reason to give outsize handouts to shareholders of public companies.
There is no return to the pre-virus era
Bailout supplicants like to claim that if only we can keep corporations intact, we can restart the economy in a pre-COVID-19 state. This is utopian thinking at best. Not only is it looking increasingly clear that we are in for a drawn-out battle, the world seems to be changing dramatically, too. Blindly supporting the largest incumbents in a given sector under pre-crisis assumptions is an easy way to install a zombified, anti-competitive system.
History gives us a fine example of an exogenous, unforeseeable shock that justified a bailout. In 2001, with air travel interrupted by the 9/11 attacks, the government hurriedly passed a $15 billion bailout for the airlines, which would swell to $50 billion over the following years. The airline industry after the 2001 bailout was a shambles: every major U.S. airline filed for bankruptcy protection between 2001 and 2011. US Airways filed twice, in 2002 and 2004. It’s obvious in hindsight that a government guarantee for an industry faced with serious structural issues was inappropriate, and simply ended up deferring their decline.
According to a NY Times postmortem:
The bailout program may actually have made matters worse, some experts say, by forestalling a badly needed shakeout in the industry, keeping the weakest carriers alive at the expense of the others and perpetuating a glut of flights and seats.
An exogenous shock. Moral justification for rapid bailouts. A shakeout forestalled. And an industry on permanent life support, unwilling to reorganize itself into a more efficient model. It all sounds awfully familiar. Airlines will exist post-virus, but in a world of persistent geographical encumbrances, green and red zones, and 14-day quarantines. International travel may well decline in importance. By bailing out airlines and keeping their corporate structures intact, the state attempts to preserve the status quo. But I’d be willing to wager that demand to consume air travel in a post-COVID-19 world will be meaningfully suppressed.
Air travel is an obvious example, but there are numerous sectors looking to maintain a corporate lifestyle which may not suit a post-COVID-19 reality. Travel, cruise liners, amusement parks, tourism, restaurants, outsourced just-in-time manufacturing, commercial real estate – these are a few sectors that may well suffer long-term aftershocks from the crisis. By selectively bailing out industries that might otherwise be justifiably shrinking, consolidating, or chasing efficiencies, the government attempts to dictate market outcomes, recalling Canute’s crusade against the tides. There’s a better way: Let the free market, not the state, price these companies, and let capital flow only to those evaluated as solvent.
What’s more, the bailout itself contains information. It communicates to CEOs that the coffers are open and the opportunity exists to obtain a free insurance policy from the government, provided you play politics well enough. If in two years’ time, air travel still hasn’t picked up, what’s to stop airline CEOs from returning to the table, asking for more? They will still be able to make identical arguments about the societal virtue of keeping their staff employed and their fleets operational. After all, the virus wasn’t their fault.
No limit to stimulus
There is no natural limit to bailouts, once this form of stimulus is normalized. Virtually every crisis, shock, or disruption, will be used to justify requests for handouts. If preserving employment and retaining the existing corporate setting is prided at all costs, we will end up with a handful of implicitly state-owned enterprises, completely insulated from market rigor. Even if the shocks that provide feedback are unfair or unforeseeable, that doesn’t mean that they are somehow invalid or must be suppressed. And if it so happens that the world changes such that their business no longer boasts the stature it once had, then the market-clearing outcome is for that sector to shrink.
Despite what the stimulus apologists would have you think, there’s no moral case for a bailout – just a reflexive desire to avoid short term pain. If the inflationists truly wanted to reduce harm on a society-wide scale, they would agitate for direct payouts to individuals, rather than demanding instead that these funds be processed through an inefficient corporate filter, which pays out hedge funds on the way.
Some trends cannot be reasoned with or forestalled. If climate change threatens polar bears, so be it. The bailout supplicants would have us install air conditioning in the Arctic.