On a practical matter, when such tragic disasters strike, the federal
government *wants* to get involved; at least in part to show how important
it is to keep them around.  Each and every bailout (Long Term Capital
Finance?) increases the moral hazard.  I think Chapter 11 should be enough,
but politically, now, it isn't.

Government money because a) the airlines did not provide enough security
themselves, and/or b) the airlines were underinsured, are both terrible, and
are sure to lead to pork snort requests from others.  

Government money to support the weakest competitors, and avoid too much
concentration, is a much better reason, but may still be
insufficient--SouthWest Airlines proves that the long term barriers to entry
are not TOO high in the air industry.

Is airline security a government (fed or otherwise) function?  Possibly
some.  If so, then gov't money due to gov't mistakes is clearly reasonable.

However, the moral hazard issue remains.  
Dear John, does Cato (or anybody) have any policy recommendations about
"conditionality" of bailout aid to reduce moral hazard?  In the IMF and
World Bank development debates, conditionality seems a reasonable, athough
controversial subject.  

I would suggest (some of) the following:
a) offer the aid as a "package" to individual airlines, which can take it or
leave it.
b) include pay reductions, especially for top executives, as part of the
conditions (eg 5% of income > $25k/year [approx US avg], 10% of income >
$100k/yr)
c) "give" the aid as a special loan, to be repaid:
        1) at a minimum, 5% of total revenue, to go to pay the loan
(optionally more)
        2) give 50% tax credits, carry-forwardable, on such repayments
        3) put a commercial rate on the loan (previous year's avg rate for
all credit?)
                (prime rate + 3%?)  (fed rate + 5%?)

Such an emergency aid package would likely reduce the desire of other
porkers to ask for it--the above is, in some sense, a standard-semi Chapter
11 workout, based on a fast emergency government loan at commercial rates.  

I suggest this due to my thought that most requests for government money are
requests for "other people's money", while the tax credit element and loan
element above start to change this package to "one's one money, with time
delays".

So, in order to avoid my more boring money grubbing work, I'd be interested
in hearing about recommendations that allow the government to "offer" to do
something, but reduce what they actually do to things that, in theory, the
market could do.  As I write this, I can imagine a higher interest rate,
that would then allow the gov't to offload the financing onto private banks.

Thanks,
Tom Grey




-----Original Message-----
From: jsamples [mailto:[EMAIL PROTECTED]]
Sent: Wednesday, September 26, 2001 8:38 PM
To: [EMAIL PROTECTED]
Subject: RE: Airlines


As I understand it, the government intervened to provide insurance for the
airlines. Prior to September 11, each plane was insured for $1.5 billion.
After September 11, insurance companies were willing to offer only about
one-third of that sum for each plane. The market for risk would have shut
down the airlines had the government not provided the insurance. Some part
of the $15 billion bailout is that insurance (which the government is still
providing for next couple of weeks or so).

The insurance companies now say annual premiums for airlines will go up in
the range of $1.5 to 3 billion. Leaders of some of the companies are now
arguing that the federal government should pay part of those premiums.

Just after September 11, airline executives estimated that the government
shutdown of airports cost them $300 million each day for four days. They
initially requested $24 billion in public assistance and settled for $15
billion. The National Journal reported that even K Street types were
astonished by their chutzpah.

John Samples
Cato Institute

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