Who deserves a bailout?

Outside editorial

Posted: Thursday, October 11, 2001

The following editorial appeared in today's Washington Post:

The talk of economic stimulus certainly has stimulated lobbyists. The airline industry has bagged $15 billion, which it hopes is only a down payment. The insurance industry wants government help in covering future terrorist attacks; the hotel, car rental and fast-food industries all pronounce themselves in need of sustenance. The steel industry, which demands government help when the economy is booming, sees no reason to let up now.

The task of distinguishing deserving claims from bogus ones starts with a simple question: Does distress in a given industry cause only local hardship, or does it threaten wider chaos? After the terrorist attacks, the Federal Reserve rightly offered unlimited loans to the banking industry, because cross-lending between banks means that distress in one will spread quickly to others, and because distressed banks can destabilize hundreds of businesses. By contrast, the closure of a particular hotel or fast-food chain has few ripple effects. If one hotel or hamburger joint goes bust, the others grow more profitable, not less. Likewise, the closure of weak steel mills would help surviving competitors by reducing overcapacity; there is no danger a shortage of steel will harm construction firms or carmakers.

The ripple-effect test suggests why Congress was right to help the air industry. The closure of one or two airlines might not be a bad thing; the collapse of half the industry, which seemed possible after Sept. 11, would hurt thousands of firms that rely on air transport to move employees and goods. But having made the decision to help the airlines, government needs to be careful how it does so. It must give money only to airlines that can prove they are viable - even if viability requires airlines to cut workers' pay, renegotiate contracts to buy new aircraft and take other tough cost-cutting measures. There is no point in throwing government money at weak carriers that go out of business three months later anyway.

For a similar reason, Congress should help the insurance industry, not with the cost of last month's attacks but with future challenges. The European reinsurance market is capping its exposure to terrorist risk, leaving primary insurers in the United States no way to protect themselves. If U.S. insurers respond by refusing to cover terrorism, thousands of ordinary companies will be forced to carry the risk. That is a less-serious ripple effect than the loss of access to an air network, but there is some resemblance: The ability to insure risk, which is important to the sound financial management of firms, will have been compromised. Other countries that face terror, including Israel and Britain, have turned to government to help ensure against it.

In time of war, government's role is bound to grow. But government cannot hold everyone harmless from the effects of terrorism or hard economic times. After Sept. 11 fewer people will fly. This is a rational outcome, and everyone from Hertz to Days Inn to Starbucks must adjust without expecting government rescue.



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