Eakinomics: To Nationalize or To Not Nationalize, That Is the Question

Eakinomics: To Nationalize or To Not Nationalize, That Is the Question The airlines have received grants and loans, but the terms of those agreements have allowed the federal government – that is, the U.S. taxpayers – to become major shareholders. Call it what you want, whether “equity stakes,” “warrants,” or any other euphemism: When the government takes ownership, it is nationalizing a business, industry, or sector. So, the airlines got nationalized (at least in part), and the oil industry may be facing the same fate. But any large firm can borrow from the Federal Reserve lending facilities and remain in the hands of the private sector. Small firms can borrow from the Paycheck Protection Program (PPP), have the loan forgiven – that is, turned into a grant – and face no nationalization either. All of which raises the question: Why do some get nationalized and others do not? Or, put differently, when is it appropriate for the taxpayers to take an equity stake? So, let’s begin with grants to airlines. This has now happened twice. On September 11, 2001, the airlines did their nation a service: They grounded planes that had become potential weapons. The grants were appropriate compensation for that act. Today, the airlines have been asked to keep flying and preserving essential air service, to keep the supply chain flowing, and to keep their employees on payroll. Grants, again, seem appropriate, but adding warrants is an unwarranted (sorry!) kick in the teeth. How about small businesses and grants under the PPP? To the extent that you view keeping workers on their payroll as in the national interest (and I do), this program seems analogous to the airline grants. How about loans to large businesses? Loans strike me as a different situation. The loans are providing the firms the capacity to pursue their private interests with the taxpayers’ backing. It seems appropriate that this support come with a price. But I have yet to have anyone explain why the terms of the loans, restrictions on firm financial policy (no dividends, no repurchases) or restrictions on compensation (especially executive compensation), are not enough for the airlines as well. Why nationalize too? Some say I just think too much. In discussing this issue, I’ve had lots of reporters assert that “they’re just trying to capture some of the upside for the taxpayer and reduce the deficit.” Since we are among friends, let’s be honest: There is no evidence that Congress or, especially, the White House has cared about the deficit. And this is precisely the wrong time to begin to care. But if you take that rationale at face value, the question is, why wait until the crisis? The federal government could borrow and invest the proceeds broadly in equities. If the rate of return on those equities exceeded the borrowing rate, the difference could reduce the deficit. Of course, this is borrowing at a safe, “for sure” rate and investing at the risky rate. (Have you seen the stock market go down recently?) It might not do any good for the deficit. More important, it exposes taxpayers to a risk they may not want. My old colleague and Nobel Prize winner, the late William Vickrey, used to lecture me that “public finance is the field invented to make sure public policy is not done for financial reasons.” He was right, and nationalization is a prime example.