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Joe Biden’s sweep of primaries means Bernie Sanders’ ambition of socialism for the poor seems out. In its place, Congress and the White House are now devising a $1 trillion package of government grants, unsecured loans and tax breaks to bail out airlines, cruise lines and other highly levered companies. So long, Bernie. Instead, Washington is only interested in socialism for the connected rich, whose share prices have plummeted.

Yes, the COVID-19 crisis has taken us all by surprise. And yes, the economic fallout will be extraordinary. But why are so many companies already in such grave trouble? The answer is excessive leverage.

Start with the airlines. Rather than using their profits from the past five years to pay off debts and save for a rainy day, the big four — American, United, Delta and Southwest — instead grew their combined liabilities to $166 billion, all while spending $39 billion on share repurchases. That number, which is only from the big four, is almost 80% of what they’re asking for now from U.S. taxpayers. Similarly, the three largest Cruise companies—Carnival, Norwegian, and Royal Caribbean—have liabilities of $47.5 billion and engaged in share repurchases of $8 billion.

Airline executives enriched themselves

Had these companies paid down liabilities instead of using stock repurchases to bid up their stock prices, they would have been far better prepared to weather this emergency. Of course, higher share prices made their stock options more valuable. This allowed top airlines executives to pay themselves $666 million in compensation over the five-year period. The top cruise executives managed to haul in $448 million. Now, taxpayers are unwillingly being called upon to bail out their profligate behavior.

The vast majority of the economy is going to be affected by the current crisis. Why should sweetheart deals go out to the companies affected first, the companies that have most imperiled themselves by over-borrowing and spending? Are energy, shipping, dining, entertainment, technology, auto and luxury goods companies next? Since vast swaths of the economy will be affected, an initial bailout to the travel industry would sow the seeds of a second round of broad bailouts. The likely beneficiaries will be the most politically connected.  

Bailouts encourage moral hazard in the form of reckless lending, the kind that fueled the last financial crisis. Why be responsible by maintaining a low debt-to-equity ratio if the government will always be a backstop? COVID-19 is already revealing problems in the rampant lending during the past few years. But let us not repeat the cycle. Bailouts incentivize the worst behavior. Furthermore, academic research has repeatedly showed that government-controlled lending is wasteful and ineffective.

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