We are in unprecedented times with the challenges brought by the coronavirus pandemic. Congress and President Trump took an important step last week to address these challenges when they passed and signed the Coronavirus Aid, Relief, and Economic Security Act. We face an extraordinary task in the coming months, and the CARES Act provides needed relief to face this challenge.
Among other things, the bill included $32 billion in grants and $29 billion in credit assistance for the airline industry. This was a wise move: For the United States to return to economic strength and for our supply chains to remain intact, we need our airline industry to stay functioning and whole. The airline industry is vital to our economy, representing about 5% of our GDP, with millions of employees and trillions in annual economic activity. The scale of the government’s aid is critical when you look at the impact the industry will have in getting our economy back to normal.
As with any government program, though, the devil is in the details. Within the details of the CARES Act is one particular devil: the ability for the government to own equity of the airline companies in exchange for grants. The CARES Act doesn’t make this a requirement, but the Treasury Department is given the option of owning stock in the airline companies being given aid. This is a concerning provision in an otherwise vital bill, and the secretary of the Treasury should reject any effort by the government to own airline stock.
One simple reason: An unintended consequence of a government ownership stake could, unfortunately, lead to the airlines rejecting the CARES Act aid outright. This would result in the only other measure available to them as their businesses fail: declaring bankruptcy. If this happens, the airlines could possibly shut down operations, ground planes, or be forced to lay off thousands of employees — all of which would defeat the original intent of the CARES Act.
Already, flight attendants’ unions have come out against the stock buying provisions in the CARES Act. They’ve argued that airline executives could reject the aid because of such provisions — and put at risk thousands of flight attendant jobs. It is a rare moment when labor and management are on the same side, but they are united here. And they’re right.
Why would airlines not want the government to own stock? For the same reason any other business would be uncomfortable with the idea: It is hard for the government to be a neutral, private sector owner of equity. This is a particular problem for the airline industry. After all, this industry is heavily regulated by the government. If bureaucrats in Washington, D.C., are now partial owners of our airlines, they are in the difficult (and possibly unethical) position of regulating an industry in which they have a financial stake.
Such a situation opens up countless market and moral hazards. Consider this: Would the government have a shareholder vote if two airlines decided to merge in the coming year? And if it did vote for the merger, how would that square with the Federal Trade Commission’s merger approval process? Which government agency, the Treasury Department or the FTC, would win out?
That’s just one of countless scenarios. The broader point is one that has been known to free market conservatives for decades: Any time the government gets involved in a industry through direct ownership stakes, it changes the dynamics of that industry forever. When we see state-owned enterprises in other countries, we are skeptical of them. We know that state-owned oil businesses in Venezuela or government-run software companies in China don’t compete on an open market. Investors around the world are suspicious of their balance sheets, their potential for growth, and their decision-making.
The U.S. does not want to invite such cynicism onto our airline industry. If the government takes ownership stakes in its companies, it could damage their ability to operate in the private sector and in the private capital markets. Remember, this isn’t an overnight buy-and-sell-the-stock situation. The government could be rewriting the rules of this multibillion-dollar industry from scratch.
Some will argue that the government needs to be paid back somehow and that ownership stakes ensure such a repayment. But those critics miss the reimbursement to come. Airlines, like other companies, pay federal taxes. When the industry returns to health and their revenues go up, the taxes they pay will go up as well. The CARES Act ensures their survival in the short term, and because they will survive as opposed to going under, taxpayers will be reimbursed over the long haul.
We are facing an unprecedented crisis, and our leaders have taken appropriate steps to address it. But a crisis isn’t the right moment to dispense the principles that make the economy strong and prosperous. We can’t let the next 90 days dictate the next years of our economy. The secretary of the Treasury should reject the idea of any government ownership in the airline industry. Doing so would be the prudent choice for taxpayers, airline industry employees, and our economy as a whole.
Matthew Whitaker (@MattWhitaker46) was acting attorney general from November 2018 to February 2019. He also served as the U.S. attorney for the Southern District of Iowa from 2004 to 2009. He’s now a director at Axiom Strategies.