Via Financial Times

Governments have moved with commendable dispatch to avert lay-offs by companies shuttered by coronavirus, seeking to shore up household incomes during the hopefully brief hiatus. But what about more exotic forms of corporate welfare if those measures aren’t enough? 

Some sectors have been quick to stake claims for additional alms, such as the US airlines and the aircraft maker Boeing, whose hardship pleas were rewarded by bumper packages of $50bn for the carriers and another $150bn earmarked for other “distressed sectors”. In Britain, the entrepreneur, Richard Branson, has suggested the UK aviation industry might need an extra £7.5bn to tide it over the shutdown. How should governments go about assessing such claims?

The first thing they must do is to avoid any whiff of caving into special pleading. How such things are viewed in hindsight is important. 

It doesn’t matter that the most affected companies aren’t responsible for creating the present crisis in the way the banks were with their toxic assets a decade ago. There should be no repetition of the unsavoury aroma left by the 2008-9 US bailouts where, writes Nassim Taleb, “bankers who lost more money than ever earned in the history of banking, received the largest bonus pool in the history of banking less than two years later”.

Loan packages should come with clear conditions that preclude such outcomes, and also stipulate continuance of service and employment (for workers, not bosses). And while it’s true they must be kept simple to ensure they can be implemented quickly, there should be no free pass for existing investors. Additional assistance should only come if the state receives an equity stake.

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Some think the taxpayer might actually benefit from providing this form of relief. Not simply because it is in the wider social interest to sustain both employment and sound businesses, according to a recent paper published by the Institute of Public Policy Research. The authors argue that it could also be profitable for the taxpayer.

Share prices in many particularly affected sectors have slumped. Airlines, for instance, have lost 50-66 per cent of their market value since the start of the year. Meanwhile, many governments enjoy a historically low cost of capital. For instance, the UK government can issue 10 year bonds at a nominal yield of 0.5 per cent (equivalent to negative 1.5 per cent in real terms).

This makes the provision of assistance a very different act from bailing out “lame ducks”, the authors argue. It is an opportunity for the state, using ultra cheap capital, to acquire “stakes in fundamentally very strong businesses whose short-term operations have temporarily ground to a halt due to a health emergency”.

However seductive this idea, however, ministers should beware trying to play Warren Buffett. There’s no reason to believe the UK state should be any more lucky on its bets than the US Treasury, which ended $10bn out of pocket on its $80bn bailout of the American car industry at the nadir of 2009. Britain still owns a big stake in NatWest (aka Royal Bank of Scotland) nearly 12 years on.

The objectives of any programme should be confined to helping solely those that cannot help themselves, as well as applying tough conditions to assistance. Consequently there will necessarily be an element of adverse selection: only the worst need apply! This could well also limit excess returns. 

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The UK government has already indicated wisely that it will not offer sector wide packages of the sort seemingly favoured by Sir Richard and the Airport Operators’ Association. There is surely little point in forcing funds on, say, IAG, the owner of British Airways, which has not joined the clamour for help, if it does not want them. 

The US banks may all have been forced to accept state help a decade ago (Britain’s were allowed to seek private alternatives if they could find them). But that was about shoring up confidence in the financial system and not stigmatising individual institutions. No such imperative applies with commercial enterprises today.

There are long-term lessons to learn from this crisis. Pandemics are not “black swan” events, but ones that pose the foreseeable risk of periodic interruptions. Bailouts of companies that utilise excessive leverage or arrange their affairs operationally to maximise returns are another form of moral hazard.

But ministers should keep their eyes on the main objective, which is to protect employees through a lockdown whose length and severity we cannot yet know.

The headlines may scream that this changes everything, but nothing as yet is certain. There will be time for wider policy changes. But for now it should be service continuation and employees first.