Please, Don’t Use Taxpayer Money to Bailout Investors Like Me

When we invested in stocks and bonds, we knew we might have to face a storm or two. The high returns we received on our investments compensated us for this risk. When the government bails out a corporation, it is letting investors like me keep all the profits in good times without bearing the losses in bad times. 

 

 

Spending taxpayer money bailing out corporations is a huge mistake. The money should instead be spent on the people who are most affected.

 

There are many people who live hand to mouth, getting a paycheck every two weeks to pay their bills. Many of those people work for employers who are shut down and either cannot, or will not, continue paying them while they are not working.  

 

Missed paychecks lead to a vicious spiral. 

 

A missed car payment causes repossession, which then means that there is no way to get to work or find another job. In anticipation of this, most people cut consumption, leading to a drop in demand, further exacerbating the economic decline. 

 

It is these people who are most affected by the shelter in place orders, and it is these people that the government should be helping.

 

Shouldn’t we also be bailing out corporations that have been the hardest hit? The CEOs who are asking for bailouts most often point to their employees as the justification for the bailout. 

 

As I have already pointed out, employees of public corporations are not the only workers who need help. Workers in private businesses also need help. We should help them all, and the way to do that is to send checks directly to them. There is no reason for a middleman here. 

 

When you bail a corporation out, the people you are actually bailing out are the investors in the corporation.  Even though I am one of those investors, bailing people like me out is not only a mistake, it is grossly unfair. 

 

Investors like me are not people living from paycheck to paycheck, we are in a better position to weather this storm. When we invested in stocks and bonds we understood this, we knew we might have to weather a storm or two. The high returns we received on our investments compensated us for this risk.

 

When the government bails out a corporation, it is letting investors like me keep all the profits in good times without bearing the losses in bad times. 

 

Instead, those losses are born by taxpayers. It is the taxpayers who chose not to invest (because they knew that they were not in the position to weather storms) who bear the brunt of these losses, that is, taxpayers living paycheck to paycheck.

 

Corporate titans looking for government handouts will counter that their industries are vital to the economy, and without a handout they would “fail.” 

 

For example, if all the airlines failed, wouldn’t that mean we would no longer be able to fly? No, what it would mean is that airlines would file for bankruptcy protection and their investors would lose money.  So long as there is a demand to fly, and money can be made flying planes, airlines will continue to fly planes. And so it is with every corporation hit by this virus. 

 

Bankruptcy protection does not mean liquidation.

 

 Bankruptcy protects the corporation from creditors and allows it to continue operating. Corporations can operate whether or not they are under bankruptcy protection. By spending money “protecting” corporations from bankruptcy, all the government is doing is protecting investors from losses. No investor left behind.

 

Jonathan B. Berk is the A.P. Giannini Professor of Finance at Stanford Graduate School of Business 

 

ProMarket is dedicated to discussing how competition tends to be subverted by special interests. The posts represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Policy.