• Himansu Varghese

Bailout: The Curious Case of Corporate Capitalism

A couple of weeks back, the US Government passed a bill that outlines a bailout plan for the American economy in the face of the unexpected economic slowdown owing to the COVID-19 outbreak. Estimates suggest that 1 in 5 American households have lost their jobs, and the figure in question was close to $2 trillion, the majority of which would go as direct deposits in the accounts of citizens, an

d as a stimulus for small businesses. However, a $25 billion bailout was agreed upon to back the airline industry, while coverage was also given to gig economy workers of companies like Amazon and Uber. This is the part of the bailout that sparks controversy about its morality, and questions the legitimacy of a major pillar of American pride: Capitalism.

Too Big to Fail

"Food Stamp recipients didn't cause the financial crisis; recklessness on Wall Street did." - Barack Obama, Former US President

A bailout is the provision of financial help to a corporation or country which otherwise would be on the brink of failure or bankruptcy. Usually, the Government buys bonds of troubled companies in exchange for an infusion of cash that would help them navigate the crisis. The justification for backing these companies in crisis is that they are imperative to the smooth functioning of an economy, and without them, the consequences of these firms going bust outweigh the capitalistic morality of letting them fail.

We have seen this in many historical contexts; The Chrysler Corporation and the Lockheed Corporation in 1970-80, the banking and financial services sector in 2008, the Dubai World bailout of 2009, and fast forward to 2020, the airline industry that argues that it is a mainstay for the American economy owing to its significance in the transportation sector.   

Capitalism vs Socialism - Why bailout bad companies?

The fundamental idea of capitalism is based on the laissez-faire model which means businesses in a free market economy understand that they are independent of any governmental intervention, and when they engage in economic activities, they are reaping the benefits of the free market, but at the same time are bearing a considerable amount of risk associated with their business. The problem arises not due to unexpected downturns, but because of how these companies act in the years before the shock.

"Its rugged individualism, capitalism and hunger games on the way up, and on the way down its a lot of call signs from the CEO’s that we’re in this together, sort of like a Hallmark channel socialism." - Scott Galloway, Professor of Marketing, Stern School of Business, New York University.

It is important to understand why these firms that demand a bailout must be held to better standards. Executives in large companies like the Fortune 500 are paid their insane remunerations in the form of stock options. They may get a significant sum of money as basic pay, but they reap millions in the form of company stock grants. To beef up the prices of these stocks, firms often indulge in a practice known as stock buyback. Companies use their reserve cash-flows to buy back stock from the common investors and thereby increasing the value of their shares in the market. Instead of keeping the surplus aside to meet the needs of the firm’s interests in case of a rainy day, this directly translates to the executives earning more because the dollar value of their stock holdings go up. Likewise, in the run-up to the 2008 Global Financial Crisis, the financial services industry through negligence, compliance and plain greed, destroyed the very foundations of the global financial system by exposing themselves to risky bets through instruments such as mortgage-backed securities and collateralized debt obligations. In a similar fashion, gig economy players such as Uber who don’t pay payroll tax because technically their drivers are not employees but are partners, are asking the US government to help their workers who are out of jobs, while they never considered them their employees and gave them essential support such as insurance and healthcare coverage.

And when the markets go for a toss, these firms that adopt bad business practices look to the government to bail them out, because they are deemed too big to fail. Why must the taxpayer pay the price for the negligence and greed of the wealthy? You either fully adopt the pillars of capitalism that forces bad businesses to fail, or you adopt the socialistic model which has government intervening to represent the welfare of the people, at the same time not stand by and watch corporations swallow up equity from the common folk. After all, more than half of the top 10 happiest countries on earth are socialistic. 

"I think sometime over the next couple of years, people are gonna have to sit down and think very carefully about whether we want to be in a situation to bail the industry out every 5 years" -  Robert ‘Bob’ Crandall, Former President and Chairman, American Airlines 

But we all know what is going to happen. The cacophony created by equating job losses to equity loss will ensure that a bailout will happen in the future as well, even when it is clear that corporations are only worried about their bottom line. And in the case of the US, they have structural bribery in place in the form of lobbyists to ensure that their voice is heard. This leads to the worst form of socialism there is, which is making the society pay for the negligence of the privileged classes that have the power to lobby.

America is capitalistic for the worker and socialistic for the corporations. 

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