Acton Institute Powerblog

Bailouts, moral hazards, and the scapegoating of the taxpayer

If pandering is the politicians’ pastime, then we owe a special debt of gratitude to those who resist this seemingly irresistible force. Today, UK Prime Minister Boris Johnson confirmed that he refused to extend a £150 million government bailout to prevent Thomas Cook, the world’s oldest travel agency, from going bankrupt.

Moreover, the prime minister explained his actions in both economic and moral terms.

“It is perfectly true that a request was made to the government for a subvention of about £150 million​,” or $187 million U.S., said PM Johnson during a flight to the UN General Assembly early Monday morning.

“Clearly, that is a lot of taxpayers’ money,” he continued, adding that bailing out the failing company “sets up … a moral hazard in the case of future such commercial difficulties that companies face.”

National leaders need to find ways businesses “can protect themselves from such bankruptcies in [the] future” and put systems in place to “make sure [they] don’t in the end come to the taxpayer for help.”

Johnson has faced significant backlash from Labour Party and union leaders, who say he should have saved the company’s 9,000 UK jobs.

“To just stand to one side and watch this number of jobs go” is not “wise government,” said John McDonnell. The Labour Party Shadow Chancellor, who calls himself a “Marxist,” accused Johnson of “ideological bias.”

Others have wondered why, if previous governments could bail out banks during the financial crisis, Johnson would not do the same for the 178-year-old travel company. But their objections prove Johnson’s point.

A “moral hazard” creates an incentive for a company to take risks, because it will not bear the full consequences of its poor decisions. Bailouts on either side of the Atlantic encourage CEOs to take high-stakes gambles with their shareholders’ money. If the risk pays off, the company stands to make windfall profits, shared through higher dividend checks. But if it fails, the government will stabilize the company’s bottom line with an infusion of taxpayers’ dollars.

Crony capitalism has single-handedly soured an entire generation on “capitalism” – and rightly so. The knowledge that taxpayers will bailout large corporations lets private companies “socialize the losses and privatize the gains,” said Joseph Stiglitz, a harsh critic of capitalism and winner of the Nobel Prize in economics. Occupy Wall Street protesters – and average Americans – often asked, “Where’s my bailout?” Today’s socialist leaders ask, if the government picks winners and losers, why does it always pick Wall Street over Main Street?

Forcing taxpayers to foot the bill for failed corporate decisions presents other problems, to be sure. The government has no constitutional authority to use federal money to prop up a private corporation. Bailouts reward bad behavior by shielding people from the consequences of their own actions. Because bailouts only go to companies deemed “too big to fail,” they favor large corporations over their small and mid-sized competitors. Politicians reward politically connected companies – connections often forged with political donations. This creates a fiscal cycle that expropriates taxpayers’ dollars from private individuals, gives them to large (and poorly run) businesses, then helps re-elect the politicians who initiatied the process. This is a cozy relationship for two of the three parties.

But the biggest drawback of government bailouts is incalculable: It is the impact moral hazards have on future behavior.

Some have criticized Boris Johnson for not giving Thomas Cook £150 million, because the airline’s collapse left approximately 150,000 UK citizens stranded abroad, and the government will pay an estimated £100 million to bring them home. “The government’s ‘do nothing’ attitude has left workers and customers high and dry while landing taxpayers with a bill of hundreds of millions of pounds,” said Len McCluskey, general secretary of the UK-based union Unite.

Why, critics ask, did Johnson not “save” the company, rather than pay nearly as much money in airfare? A little infusion may have kept the company solvent until it could be bought out by the Chinese conglomerate Fosun International, they argue.

But the £100 million is a one-time cost. Thomas Cook posted a £1.5 billion loss in May and has hemorrhaged money for years, meaning this bailout would not have been the last. Worse, it would have set the precedent that any private company of sufficient size could turn to the government during financial downturns and expect to continue business-as-usual.

By encouraging companies to engage in bad – and sometimes morally questionable – business decisions, the government would become an ethical partaker in those decisions. Moral guides say someone who provokes another person to sin shares in that person’s guilt.

But in the case of endless corporate crashes and bailouts, the situation is more akin to a scapegoat. It is innocent taxpayers who pay the price for others’ iniquity.

(Photo credit: Russell Lee. This photo has been cropped. CC BY 2.0.)

Rev. Ben Johnson

Rev. Ben Johnson is the former Executive Editor of the Acton Institute's flagship journal Religion & Liberty.