At some point, likely in the next day or two, the United States Congress will send the biggest economic stimulus bill in American history to the president’s desk—a comprehensive aid package worth $1.8 trillion and a “wartime level of investment in our nation,” Senate Majority Leader Mitch McConnell said in the early hours of Wednesday.
The package is bigger than the $787 billion stimulus passed after the financial-system meltdown of 2009 and bigger than the New Deal’s $47.1 billion ($836 billion today) that aided millions during the Great Depression. The proposed legislation includes aid for small businesses, help for hospitals and schools, and direct payments to individual Americans.
But the bulk of the measure addresses the dire state of much of corporate America. For companies whose businesses have been decimated by the COVID-19 pandemic, there is a $500 billion basket of grants, loans and loan guarantees—most notably some $50 billion, possibly more, for passenger airlines.
And while some argue that it’s not the government’s job to intervene in a free-market economy, even those on the political right are largely in agreement that something big has to be done to save the system from complete collapse. “Legislation to keep workers connected to employers, provide stability for businesses caught in this uncertainty and mitigate the overall economic effects of this crisis is necessary,” Kay C. James, president of the conservative Heritage Foundation, said in a statement released Sunday.
But bailouts for big corporations are a touchy subject, even in unprecedented times such as these. In a survey released this week by GoBankingRates, six respondents in 10 said the government shouldn’t be bailing out big businesses. Another survey, this one conducted by Data for Progress, revealed that close to three-quarters of Americans say corporate America should only get bailout money if it agrees not to lay off workers—that sentiment held firm irrespective of political affiliation.
Even the word “bailout” has become so politically toxic that the current measure on the Hill contorts itself to avoid using it. Last week, Rep. Michael Waltz, R-Fla., tweeted, “Words matter. This is a ‘rescue,’ not a ‘bailout.’” Sen. John Cornyn, R-Texas, said simply, “Bailouts are never popular.”
How did we get here? How did the notion of throwing a lifeline to a company—even one in the airline industry, which employs 750,000 people globally—become such an abhorrent idea?
A quick thumbing through the economic history textbook shows that Uncle Sam has a long track record of bailing out big companies. The Penn Central Railroad, Lockheed Aircraft and Chrysler were just three of the huge corporations the government aided in the decades before the big rescue of JPMorgan Chase, Citigroup and the other big banks in 2008. And while the results of those earlier interventions were a mixed bag and bailouts have always been the subject of intense debate, the idea of bailouts wasn’t always met with the near-universal suspicion it is now.
One reason is that the current crisis—and the need for bailouts—is so much bigger and more urgent than what we’ve seen in the past. “Those earlier bailouts are not the same as something that’s as systemic as this one,” said David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. But the other big factor, Wessel said, is that the last big round of bailouts a decade ago left such a bad taste in taxpayers’ mouths that they’re now demanding terms to accompany the loans.
“We’ve learned that the public will not stand for rescues unless there are some strings attached,” Wessel said. “The two lessons I’d draw is that it’s politically essential to try to put some constraints on the business getting the money, and it’s economically wise to make sure that the taxpayers get some of the upside and they don’t take all of the losses.”
The bailouts of yesteryear
While the U.S. government hasn’t bailed out corporations very frequently, it has been willing to do it when two things were at stake: national security and the jobs of a lot of Americans. And, historically, bailouts have yielded reasonably good results, or at least prevented larger catastrophes from happening.
In 1968, two of America’s biggest railroads, the Pennsylvania and the New York Central, entered into a merger when they could no longer face growing competition from the trucking and airline industries individually. But the merger failed to correct the problems, and by June of 1970, the Penn Central Railroad—with $326 million of red ink on its books—collapsed. It was the biggest corporate bankruptcy in American history and would hold that record until Enron eclipsed it in 2001.
Penn Central had been “too big to fail” before that phrase became fashionable. Its 20,500 miles of track made it the largest freight mover in America. It employed 180,000 people, and its $82 million in commercial paper defaults left every major bank in the United States on the hook. And so, the Federal Reserve stepped in with a liquidity infusion while Congress followed up with loan guarantees.
Out of the wreckage of Penn Central would come Amtrak, the government-run passenger railroad, and freight operator Conrail. The latter was making a profit by 1981 and, five years later, the government returned it to the private sector via an IPO worth $1.9 billion. Though the Fed did lose billions in saving the railroad, the trains kept running, and Amtrak provides long-distance passenger rail service in an era when no for-profit company would be likely to try.
Uncle Sam fared better in the case of Lockheed Aircraft, a defense contractor with thousands of employees in California. As the venerable manufacturer slid toward bankruptcy in 1971, the federal government stepped in to save the company. It did so with broad public support, marshaled with a PR campaign that pointed to the cost of 60,000 jobs lost if the company tanked. Congress responded with loan guarantees of $250 million ($1.6 billion in today’s dollars). And while the Government Accounting Office feared it wouldn’t see its money paid back on time, Lockheed paid it all back by 1977, even posting a modest profit of $31 million ($201 million today).
The high-profile case of Chrysler
In 1979, a bailout also had a happy ending for the Chrysler Corporation, mortally wounded when high gas prices prompted consumers to turn their backs on its gunboat-sized sedans. Company president Lee Iacocca might not have gotten the government’s attention were it not for the fact that Chrysler employed 360,000 people and also happened to build the M-1 Abrams tank for the Army. On May 10, 1980, Treasury Secretary G. William Miller announced the government would lend $1.5 billion to Chrysler (that’s $5.7 billion in today’s currency), explaining that “there is a public interest in sustaining [Chrysler’s] jobs and maintaining a strong and competitive national automotive industry.”
While a number of free marketeers cried foul, the bailout enjoyed support from the left, right and center—from figures as divergent as Ralph Nader and Ronald Reagan. This was mainly because many people, already dismayed at the erosion of American manufacturing, viewed the prospect of losing one of Detroit’s Big Three (Ford, GM and Chrysler) as a blow to national prestige.
So the bailout went through. Iacocca cut his salary to $1, streamlined operations and retooled the lines to produce smaller, fuel-efficient sedans known as K-cars. Chrysler repaid the government by 1983, seven years ahead of schedule, and taxpayers earned $500 million ($1.3 billion in today’s dollars) from the stock warrants that were part of the deal.
While that’s a pretty good ROI, investor and radio host Barry Ritholtz, author of the 2010 book Bailout Nation, said things would have turned out just fine had the government not intervened.
“We bailed out Chrysler, and think about what happened—Chrysler survives and all the money gets paid back and everyone’s happy,” he said. “[But] imagine if Toyota or Honda bought it out of Chapter 11 and they took it over. American workers would have cranked out efficient, smaller cars. The entire course of manufacturing and auto history would have changed.”
But in these historic examples, “bailout” was not yet the dirty word it is now. And to understand why it is now, look no further than the 2008 rescue of the big banks.
The bailout that changed everything
When the financial system melted down in 2008, the Troubled Asset Relief Program, or TARP, authorized the Treasury to spend $700 billion to keep the banking sector from collapsing by buying up toxic assets—investments so damaged that no market exists for them. In practice, however, little of that actually happened, and the government funneled billions directly to the banks instead. According to data from ProPublica, 982 corporate entities (mostly banks) received bailout money totaling $442 billion—$390 billion of which was paid back.
Many economists say that the 2008 bank bailout was necessary, that it averted a second Great Depression. But such achievements meant little to the millions of Americans who, amid losing their homes and jobs, watched their tax dollars go toward helping Wall Street bankers with no restrictions. Instead of extending credit to consumers, banks made headlines by paying $20 billion in bonuses to their own executives. A report released in the summer of 2009 by then New York Attorney General Andrew Cuomo revealed that 5,000 Wall Street traders received bonuses of more than $1 million each.
Many experts agree it’s the bad memories of the 2008 bailout that not only soured the public on corporate rescues but led to the contentious debates that hung up the passage of the stimulus package in Congress this week.
“There’s very little trust between Congress and the administration and the Democrats and Republicans and, actually, little trust by the public, partly because of all the bad feelings form the last set of bailouts,” the Brookings Institution’s Wessel said. With the current package, then, “you want to put things in there to minimize [what happened last time]. If you take money from the government, you can’t pay dividends and you can’t pay your CEO $12 million and you can’t lay off your workers.”
Ritholtz pointed to another likely reason so many Americans now cast a wary eye toward corporate bailouts: Most of the cash in the current package is destined for the airline industry, which has done itself few favors in the eyes of the public.
“Stop and think about the airlines who have spent ungodly amounts on stock buybacks over the past five years—and now they don’t have any money?” he said. Ritholtz mentioned the well-publicized 2019 finding by the Federal Reserve that 40% of Americans don’t have $400 in the bank for an emergency and ventured that the same applies to companies that have failed to save for their own emergencies.
But one near certainty remains: Irrespective of public ambivalence about corporate bailouts, they’re going to happen if for no other reason than the sheer magnitude of the current crisis.
“In our lifetimes, we’ve never seen anything close to this,” said Peter Nigro, professor of finance at Bryant University. The crisis of 2008, Nigro pointed out, was “primarily the financial system, and the Fed counteracted that [and] did a fairly good job of pulling us out of that. Now, monetary policy will not be enough.”