Fly the Federalized Skies

Don't use tragedy to bail out failing businesses

President George W. Bush signed a $15 billion aid package for domestic airlines on Saturday, September 22. The question: Is this package a one-time emergency measure related to the events of September 11, or is it the first in a series of checks Congress will be cutting in hopes of stimulating the economy?

America is enjoying tremendous unity, and nobody can afford to be seen as trying to profit off the attack. Public rhetoric reflects this. Insurance company executives wasted no time assuring Americans they stood behind their policies. "We are not, as an industry, trooping up to Capitol Hill and asking for something," an insurance industry spokeswoman told the Washington Post. The U.S. Chamber of Commerce isn't interested in narrowly tailored government aid either. Says chamber head Thomas Donohue, "We can't see this as an opportunity to line up at the trough."

Yet there's often a massive gap between public pronouncements and private maneuvering. "[The insurance industry's] approach is, the airlines are coming to you; you're helping them out," a Democratic leadership staffer told the Post. "We're next in line after them. They're absolutely making it known they have a problem." Other industries making their needs known on the Hill include travel agents, rental car companies, and aerial photographers. And the needs are certainly not limited to the private sector. In addition to the military and intelligence buildup, there's a push for more border guards and funding for Amtrak, which seems to be suffering from too many passengers. Said Senate Minority Leader Trent Lott (Miss.), "You've got every imaginable collateral company saying, 'What about us?'"

Well what about them?

For some, the attack's aftermath serves as a new hook on which to hang old agendas. Amtrak, for example, has been seeking more money for some time. That's not to deny there are legitimate issues. In a time of crisis, old public policy boundaries become porous, and we rethink proper functions of government and allocation of monies. As economic historian Robert Higgs points out, crises grow government and alter the relationship between the government and private sector. But if the boundaries must shift, they should so in ways that minimize economic distortions.

With that in mind, here are some things to consider:

Policy makers should separate the issues of improving general systems to adjust to new security realities from those of economic micro-management.

Rep. John Dingell (D-Mich.), for example, wants to spend more money on border agents. Given that we're tightening security on the border, that guarding the border has always been a federal function, and that major players in the U.S. economy depend on cross-border commerce, and that border traffic is backing up due to tighter security, hiring more people to help process crossings may make sense. Likewise, the Federal Aviation Administration will need more money if it takes over airport security. (How it gets the money is important. Markets, even ones in which governments are major players, work best when prices reflect costs and feedback loops connect customers and providers. If we are to go to government-provided security, it ought to be funded by a surcharge on tickets and cargo fees, rather than out of the general tax fund.)

In contrast, the guaranteeing of billions of dollars of loans for airlines that were already struggling makes less sense. Ditto for handing more money over to Amtrak for previously planned projects. Policymakers must remember that the economy was going through an adjustment period before September 11. Airlines were already on track to lose up to $3 billion this year. Many other businesses were destined to fail. Lawmakers obviously can't let a collapse in the insurance market ground every commercial carrier, but they ought to let weaker carriers go bankrupt. University of Pennsylvania Law Professor David A. Skeel Jr. reminds us that our bankruptcy laws were developed to handle the collapse of an industry critical to the 19th century-the railroads.

It's painful to watch business failure and unemployment piled upon the attack on the Twin Towers and the Pentagon. But it's critical that politicians avoid the seductive path of relying on public policy to prop up failing businesses while trying to manage a failing economy with expansionary fiscal policy -- that is, by spending more taxpayer money. That's the Japanese model of the last decade. And it doesn't work.