We should have done more bailouts

The case for preserving capacity

Nobody likes a “bailout,” but let’s talk about one aspect of the economic reopening that’s going really well — air travel.

The aviation industry got a pretty sweet deal from Congress in the various economic relief measures, both because aviation needed a lot of help and also because having a heavily unionized workforce comes in handy when you need to do some emergency lobbying. The upshot of these sweet deals is that even though revenue collapsed last spring and summer, nobody went bankrupt. No airlines were sold off for spare parts by private equity firms. And while there were lots of furloughs and anguished nerves among aviation professionals, America’s corps of pilots and flight attendants fundamentally spent their time waiting by the phone ready to go back to work.

And it’s working! Even as airfares spiked last month as the post-vaccination rush toward leisure travel began, prices remain well below pre-pandemic levels.

I expect they’ll keep rising as demand keeps strengthening, but we’re talking about a basically healthy process here that gets aircraft out of the mothballs and puts people back to work — not a price squeeze that causes hardship.

And while most industries did not get that same kind of favorable treatment, Congress and the Fed did try really hard to ensure that super-cheap credit would be widely available so companies hurting for sales could just gut it out rather than liquidating. Last spring, this produced a kind of perverse pincer movement of criticism, pairing ideological libertarians with would-be vulture fund opportunists and leftists who kept insisting that ordinary people were going to get left out in the cold.

There was a lot of concern that Fed lending facilities didn’t include tough conditions on the companies who benefitted, In These Times denounced the CARES Act as a “miserable failure,” and David Dayen in The American Prospect made a big deal out of the fact that CARES benefits to households had scheduled expiration dates while Fed support was indefinite. A Barron’s article argued that “workers are getting the short end of the stick from the CARES Act,” and Zach Carter denounced Bernie Sanders and Elizabeth Warren for backing the worst bill in a generation.

In the end, though, even though CARES relief did expire, it was a huge success at bolstering incomes while it lasted. And it was followed up by $2.5 trillion more in relief. When you look around at the economic situation today, the main problem is that we didn’t do enough bailouts. The airline industry is a highly functioning model where household ability to spend was preserved, but it’s also springing back to life because we preserved the industry’s capacity to serve customers. In other parts of the economy, we’ve preserved consumer spending power but didn’t bail out the producers, so capacity fell. The result isn’t some magical reallocation of capital to more efficient sectors, but waste and inflation.

Used cars had a wild 2020

If you turn the clock all the way back to February 2020, car dealership owners were expecting strong profit growth from their used car divisions. That’s because, by the winter of 2019-20, the long labor market slump was finally really and truly over. Wages for experienced low-skill workers were rising, and people who were on the margins of the labor force were getting a chance to go to work. That meant more dollars chasing the used car market.

But by June, we were in pandemic mode, and Ann Carrns had this report for the New York Times:

Auto rentals fell abruptly when the pandemic brought business and leisure travel to a near halt in March. Hertz, one of the world’s largest auto rental companies, filed for Chapter 11 bankruptcy protection in May.

The fate of Hertz’s fleet remains uncertain, but analysts say the company may sell at least part of its holdings. (The company declined to comment on the outlook for its fleet, which is subject to negotiations in bankruptcy court.) Even before the bankruptcy, Hertz said it had accelerated sales of its cars and canceled orders for new ones. Other rental companies did so as well; Avis said it sold 35,000 cars in March, or about 10 percent of its fleet in the United States.

The additional rental cars for sale, along with a steady stream of cars coming off lease agreements, may push down prices for used cars, said Jeff Schuster, president of Americas operations and global forecasting at the research firm LMC Automotive. “It’s good for consumers,” he said.

For a brief period in the spring, this had car dealerships really worried that the whole market was tanking:

The pandemic that has brought the U.S. economy to a near halt has also made for an abrupt turnaround in the used-vehicle business, a part of auto retailing that franchised dealers have increasingly relied on in recent years. Retail used-vehicle sales and wholesale auction volumes have plunged. Vehicle values are down significantly in the span of just a few weeks. It's left dealers wrestling with how to handle trade-ins and at what volumes to stock their lots in the coming weeks. 

But what happened is Congress delivered unprecedented financial assistance to American families. So after crashing in March and April, used car sales rebounded strongly. Incomes held up, but spending on things like restaurant meals and vacations fell due to restrictions and fears about getting Covid. So, Americans bought more durable goods, including used cars.

If you switch from a monthly view to a quarterly view, you can see the pandemic actually led to people buying more used cars than ever.

The problem is that now the car rental industry is back, and the companies who liquidated their fleets last spring are trying to buy used cars to rebuild.

This is uncharted territory for the likes of Hertz Global Holdings Inc. and Enterprise Holdings Inc., which have made their profits by purchasing new vehicles cheaply in bulk, renting them out for as much as a year and selling them at auction. In the past, they have bought some used cars to shore up an occasional unforeseen burst in demand, but rarely for the mainstays of their fleets.

“You would never go into auction to buy routine sedans and SUVs,” said Maryann Keller, an independent consultant who used to be on the board of Dollar Thrifty Automotive Group, which is now part of Hertz. “These are special circumstances. There is a shortage of cars.”

The demand is sending used-car costs soaring. The Manheim Index, which measures prices at wholesale auctions, shows they’re 52% higher than they were a year ago.

Something to note about this is I’ve seen some full employment hawks (a group I normally affiliate strongly with) dismiss the used car price surge we saw last month as an example of something that’s transitory. But I’m not so sure. Journalists who cover the auto industry say that these wholesale auction prices tend to pass through to the retail market with a delay. So we arguably have not yet seen the worst of the used car squeeze.

The missing restaurant bailout

I wish I could tell you that I spent last year presciently arguing for a rental car bailout, but it’s not true.

What I did write was that we needed a bigger and more generous bailout for the restaurant industry, specifically along the lines proposed by Adam Ozimek and Jogn Lettieri:

  • Any qualifying business could get a loan worth the lesser of $5 million or 200% of 2019 expenses. The loan would be repaid over a 20-year period with a 0% interest rate and a three-month grace period with no payments. 

  • Loans would be made and held by private banks, so restaurants could use their existing banking relationships, and the federal government would guarantee the loans and pay banks a modest fee for their trouble. 

  • The funds should be broadly available for legitimate business uses, including refinancing old loans, paying rent, paying staff, investing in equipment, or something else. 

The big idea here was that no restaurant should be pushed out of business by sales reductions from public health restrictions or public fear of illness. At the same time, it is structured as a loan so that it can’t save your business from a situation where you can’t sell food for more than the cost of cooking food. In other words, if your restaurant sucks and nobody wants to order your food, you’d still go out of business (capitalism!). But if it’s just that the need to rely on takeout, outdoor dining, or limited indoor capacity makes it impossible to meet fixed costs like rent and taxes, you should be good for a year.

One way this would have helped would have been by stiffening governors’ spine in terms of the public health risks of allowing indoor dining.1

But the other is that a large fraction of the 110,000 restaurants that closed in 2020 might still be with us.

This is especially important because I don’t see a lot of Schumpeterian reallocation happening in this space. Three of the coffee shops in my neighborhood closed during the pandemic. One has reopened as a new coffee shop, one is a CBD shop, and the other is just still vacant. The Italian restaurant that closed is still vacant. The falafel shop that closed is still vacant. The Mexican restaurant that closed is still vacant. In 90% of those cases — if not more — former restaurant spaces will eventually reopen as new restaurants.

That’s because there’s no magic structural shift in urban retail demand away from food service that requires a reallocation of capital. If anything, it’s the opposite. First, because of big box stores, and more recently, because of online retail, we are still living in the middle of a very strong, technology-driven, structural shift in favor of more restaurants. Closing them and then waiting for new ones to open is a much more awkward transition than simply keeping them around in the first place.

Reopening is hard to do

One big difference is that setting aside all the talk about Unemployment Insurance and other factors, we would be re-adding restaurant workers more quickly if we hadn’t lost so many restaurants last year. Even if those restaurants subsisted on skeleton crews making relatively small amounts of food, their managers would have had an ongoing relationship with furloughed employees that could be reactivated. Making brand new worker/employer matches is harder than going back into business with people who already know each other.

And of course, this is also true for customers.

If people who pulled back from restaurants for 12 months suddenly surge forth as customers, of course their first choice is going to be to hit up some old favorites. If those old favorites are gone, a brand new place can’t easily substitute for that. In some cases, restaurants that “closed” really will just re-open as their same old selves. But in other cases, that may not be possible — the failure to give bailouts is going to introduce stickiness into the marketplace that we could have avoided.

Now obviously we don’t normally want to run the economy on this kind of basis. It is true that it’s important to let some businesses fail so that others might grow.

But I really think it can’t be emphasized enough that Economics 101 principles are observations based on the normal functioning of human society — they’re not physical laws of the universe. In general, it is not a great idea to have the government trying to centrally plan capital allocation across the entire economy. That’s a true fact that you’ll find it in textbooks, and I completely agree. But World War II was not fought on that basis. Rather than rely on the disaggregated information-processing power of the market, the Roosevelt administration acted on the belief that the dominant fact in the economy would be its own war plans, and they accordingly instituted a semi-planned economy.

By the same token, the government could (and should) have acted with confidence that the big decline in restaurant meals was not in fact a reliable economic signal about diminished long-term prospects for restauranting. Normally, public officials second-guessing the market is a bad idea, but in this case, we really were in a position to know.

We underestimated ourselves

This comes around to what’s probably the biggest economic paradox of Spring 2021: many of the problems we face come down to the fact that Americans underestimated their government’s own skill in responding to economic problems.

I go back to this April 20, 2020 story from Autonews about trouble in the used car market. Obviously, sales were down short-term because of business closures. And what we now know is that sales were poised not just to return, but to return stronger than ever. Household incomes would hold up even as opportunities to do things diminished, so people would plow their money into durable goods sales. But auto industry experts didn’t see this — instead, they were all talking about whether or not prices would fall through the floor.

One reason could be dealers remain optimistic the economy will reopen soon and so have mostly held steady on retail prices. Some may be leery of marking down vehicles acquired at pre-pandemic prices.

Pollak sees it as an opportunity for dealers willing to mark vehicles down to sell for cash that can be used to acquire fresh inventory at discounted prices. 

Caputo, of Sun Auto Group, said a "nightmare scenario" for any dealer would be to think vehicles are still worth pre-outbreak values and then bury themselves in trades they can neither retail nor wholesale for a profit.

And you saw this throughout the economy.

The consulting group PricewaterhouseCooper (PwC) put out a report on industrial manufacturing during the pandemic. Knowing today what we know now, the subject of the report should have been “How do you accommodate soaring demand for durable goods while trying to keep your workforce reasonably safe?”

PwC does of course address the virus’ direct impact on production. But it also says stuff like we should expect “bankruptcy for some manufacturers, as declining demand, production and revenues, along with debt obligations, take their cumulative toll.” We learn that “slowed economic activity has reduced demand for industrial products in the US and globally” and that “manufacturers are facing continued downward pressure on demand.”

So you see output just plummet at the beginning of the pandemic as companies assumed there’d be no market for stuff.

But at least with regards to the United States, PwC’s analysis turned out to be completely false. Demand for “stuff” has been as robust as ever, and while there’s a complicated supply-chain story behind every particular shortage, the big story behind all the stories is just that a year ago, people who made stuff were anticipating a prolonged slump in consumer demand, but policymakers greatly exceeded their expectations in terms of stabilizing incomes.

The problems we’re experiencing today — which are good problems to have — reflect, to an extent, insufficient bailing-out of the supply side of the economy, and also to an extent insufficient credibility on the part of demand-side policymakers. After watching the American economy flounder for a decade in the wake of a fall in house prices, who could blame the world’s corporate decision-makers for believing a pandemic would plunge us into a depression? Hopefully next time the economy hits a rough patch, there will be more confidence that we know how to handle it rather than prophecies of low demand turning into a crisis of supply.


I used to think this would make a huge difference since indoor dining is clearly unsafe. What I came to realize over the winter is that even the most Fauci-pilled elected officials weren’t willing to actually enforce rules against household gatherings, so the formal restaurant rules probably didn’t make that much of a difference health-wise.