Welfare for the Airlines?

Should our tax dollars be used to provide corporate welfare to the airlines? If so, should the sum of that welfare exceed the revenue lost during the three days that they were not allowed to fly? Should we also compensate them for the now reduced demand for their services? If so, should we not also provide welfare for travel agencies, hotels, amusement parks, casinos, flight training schools, and other businesses that have been negatively affected?

Are Interstate Highways and their ongoing improvements welfare for trucking companies? Apologies for answering a question with a question. You could say that trucking companies pay taxes but airlines do as well. I would guess that the money paid in taxes by trucking companies is much less than the cost of providing safe and in most cases well maintained highways. The US economy is not a pure capatilist economy. It is a "mixed" economy. The government has a role in the economy to provide for services and facilities that the private enterprise can't provide for themselves. Is the airline industry vital to our economy? I would think so. I haven't studied the bail out package but I think it's important to realize that government does play a key role in keeping our economy functioning.

"Are Interstate Highways and their ongoing improvements welfare for trucking companies?"


It's not analogous, since we all use the highways and the government is not giving money directly to trucking companies. Airlines have similarly benefited from taxpayer money spent on airports.


"The government has a role in the economy to provide for services and facilities that the private enterprise can't provide for themselves."


True, such as protection from terrorist attack. However, the federal government has gone far beyond providing essential services that private enterprise is unable to provide.


"Is the airline industry vital to our economy? I would think so."


Are you suggesting that the industry would cease to exist if they don't receive welfare? Why can't they respond to changing market conditions like other businesses by down-scaling, cost-cutting, merging, increasing efficiency, raising prices, etc? Free market economies usually find a way to fulfill vital needs.

>>It's not analogous, since we all use the highways and the government is not giving money directly to trucking companies. Airlines have similarly benefited from taxpayer money spent on airports. >True, such as protection from terrorist attack. However, the federal government has gone far beyond providing essential services that private enterprise is unable to provide. >Are you suggesting that the industry would cease to exist if they don't receive welfare? >Why can't they respond to changing market conditions like other businesses by down-scaling, cost-cutting, merging, increasing efficiency, raising prices, etc? <<


I would hardly characterize terrorist attacks as "changing market conditions."


"Free market economies usually find a way to fulfill vital needs."


Again we don't have a purely free market economy. We have a mixed economy. The government has a role in the economy to provide for services and facilities that the private enterprise can't provide for themselves. I think it's important to realize that government does play a key role in keeping our economy functioning.

"It's not analagous ... snipped ... Michael's rebuttal "


Yes it analagous.


Michael said that airlines should have to adapt to changing market conditions like any other private business. I wrote that terrorist attacks could hardly be characterized as changing market conditions. I'm thinking of changing market conditions in the traditional sense.


"Free market economies usually find a way to fulfill vital needs."


Again we don't have a purely free market economy. We have a mixed economy (mix of free markets and planning). The government has a role in the economy to provide for services and facilities that the private enterprise can't provide for themselves. I think it's important to realize that government does play a key role in keeping our economy functioning.

NY Times article on bailout link:


http://www.nytimes.com/2001/09/21/business/21LINE.html


I'm not sure what portion of this legislation that your calling welfare. I assume it's the 5 billion in cash that they are getting to offset the costs of the government mandated shutdown and subsequent lost business. First of all understand that even though Reagan "de-regulated" this industry it is still highly regulated. I refer you to the following passage from the article:


"The industry's frailty has made investors increasingly jittery, with some airline stocks shedding as much as 65 percent of their value this week. Recognizing the vital role air transportation plays in the economy, lawmakers say they want to help airlines stay afloat, without turning the assistance into a bailout that goes beyond the scope of last week's disaster."


Understand that this aid won't come close to compensating the airlines for all of the lost business and I'm not saying it should. It's simply an attempt to head off more serious problems down the road. Basically our economy needs the air transportation industry to function well. The administration and Congress recognize this fact. Another excerpt from the article:


"Since the attacks, airlines and the Boeing Company (news/quote), the leading aircraft builder, have announced layoffs of almost 100,000, and industry officials have said that at least three carriers might face bankruptcy if the help was not forthcoming."


The layoffs are happening even with the bailout package so expect the airlines business to have a significant downturn (thus significant losses) even with the $5 billion in cash compensation.

"Yes it analagous."


No it not. /images/smile.gif [see my previous post]


"terrorist attacks could hardly be characterized as changing market conditions"


As I pointed out, many businesses have experienced reduced demand (i.e., changed market conditions) following the attacks. Should we put them all on the welfare roles?


Terrorist hijackings are part of the risk assumed by the airline industry. However, I would not as strongly object to donating a small amount of my tax money to compensate for their lost revenues for the three-day period that airports were closed(assuming this is not covered by their insurance).


"we don't have a purely free market economy. We have a mixed economy (mix of free markets and planning)."


This is certainly true. Perhaps we would not be in a recession if our economy had more freedom and less "planning" (i.e., socialism).

"I'm not sure what portion of this legislation that your calling welfare. I assume it's the 5 billion in cash that they are getting to offset the costs of the government mandated shutdown and subsequent lost business."


It was the compensation for "subsequent lost business." However, I believe the 5 billion number is much less than what was initially discussed.


"industry officials have said that at least three carriers might face bankruptcy if the help was not forthcoming."


If this occurred, I would expect the remaining carriers to seize the opportunity fill in any gaps in vitally needed air service.


Regards,


Mike

To the extent that the airlines are really near total shutdown, I believe that the government has to bail them out...but no further. The airlines are a key part of our economy and cannot be allowed to fail enmasse.


Having said that, though, I'd like to make another point...namely that this country has just learned that it has little redundancy for transporting people. I believe this is a serious flaw and one that has already bitten us in the ass.


Notice that when people were stranded by the shut down of the airlines they mostly resorted to renting cars one way (at least most of the stories I heard involved that sort of activity). This is because we have almost no transportation infrastructure that does not rely on the airlines or the personal vehicle.


Amtrak serves a (relatively) few cities with a small number of trains of fairly limited capacity. Greyhound/Trailways serve a few more communities. Neither has the coverage that it had even as recently as the 1960's. It is virtually impossible to move around the country (except to major cities, or those that happen to be on the major routes between major cities) without flying or driving a personal vehicle.


As a contrast, does anyone doubt that an airline shutdown would not have been quite as catastrophic had it occurred in Europe? There are trains or busses available to even the smallest of cities on a regular basis.


It doesn't have to be this way, but without a major investment (which I don't see happening in the present circumstances) nothing is going to change.


Chuck

1. Legal and Social Framework


Government provides the legal framework and the sevices needed for a market economy to operate effectively. The legal framework sets the legal status of business enterprises, ensures the rights of private ownership, and allows the making and enforecment of contracts. Government also establishes "rules" governing the relationship of businesses, resource suppliers, and consummers with one another.


Services provided by government include police powers to maintain internal order, a system of standards for measuring the weight and quality of products, and a system of money to facilitate exchanges of goods and services.


2. Maintaining Competition


With competition buyers are the boss, the market is their agent and businesses are their servants.


Monopolies are not regulated by competition.


US government attempts to control monopolies in two ways:


a. Regulation and ownership.


In a few situations, natural monopolies exist. Government has allowed them to exist but has created public commissions to regulate their prices and set their service standards. Some aspects of transportation, communications, electricity, and other utilities are natural monopolies.


b. Antimonopoly laws.


In nearly all markets, efficient production can best be attained with a higher degree of competition. The Federal government has therefore enacted a series of antitrust (anti-monopoly) laws, beginning with the Sherman Act of 1890, to maintain and strengthen competition.


3. Public Goods and Services


Certain public goods are not produced by the market system because they are indivisible i.e. they must be produced in such large units that they connaot ordinarily by sold to individual buyers. For instance aircraft carriers, highways, space telescopes, and air-traffic control.


There is a principle in economics called the exclusion principle. Buyers who are willing and able to pay the equilibrium price of the product obtain it, but those who are unable or unwilling to pay are excluded from it's benefits. The exclusion principle does not apply to public goods since there is no effective way of excluding individuals from their benefits once those goods come into existence. Obtaining the benefits of private goods requires that they be purchased while obtaining the benefits of public goods (highways for instance) requires only that they be available.


A classic public goods example is a proposed interstate highway. The contruction of an interstate highway would be economically justified if the benefits exceeded it's cost. but the benefits acrruing to one user would not be great enough to justify the purchase of such an indivisable product. Moreover, once it was in operation, there is no way to exclude anyone from using it. Because the exclusion principle does not apply to the interstae highway, private enterprises have no incentive to build it. It's a public good like national defense, flood control, public health, satellite navigation systems,and insect-abatement programs. If society demands such goods, they must be provided by the public sector and financed by the compulsary charges in the form of taxes.


Quasipublic Goods


However, many other goods and services are provided by government even though they could be made exclusive. These are called quasipublic goods which include, education, fireprotection, libraries, museums etc.


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I hope you can see from these few economic functions of government that a totally free market system would be chaos and that government plays a necessary role in our economy. So your comment about having more market freedom lacks specifity and is basically a cop out. Now the airlines are considered to be be a private enterprise but I maintain that there a many public services that have to be provided for the airlines such as air traffic control, airport maintenance and now a bigger presence in airport security to name a few. In fact if these public services didn't exist there wouldn't be airlines and if there weren't airlines I think our economy would be far worse for it. Addressing your comment about letting some airlines go bankrupt and that others would automatically pick up the slack. Well again I think the bailout goes along with the public services provided for airlines and the role government plays in ensuring competition by keeping the playing field level. This package is hardly a windfall for the airlines and I think that maintaining as close to that status quo as possible competition wise is in the best interests of the consummer. Whether or not other airlines would pick up the slack is debatable and capital formation for the airline industry would become non existent I would think. Yes the airlines are a private enterprise but they are highly dependent on publice services for their survival. A strange find of entity no doubt.

"The airlines are a key part of our economy and cannot be allowed to fail enmasse."


I can not see the vital need of airlines to me. Can someone give some better reasons why I should pay tax dollars to support them? I travel 120K miles a year but have never felt the need to fly.