Meet the Street: An Economist Argues Against Federal Bailouts

Requests for federal bailouts of industries damaged by the Sept. 11 terrorist attacks continue to mount. First, it was the airline industry, and now there's talk of the government helping the travel, hotel and insurance industries.

The problem is that none of these bailouts is necessary, says David Henderson, an associate professor of economics at the Naval Postgraduate School in Monterey, Calif., and a research fellow at the Hoover Institution. Henderson, who recently wrote a book in favor of less government and freer markets, says the private sector would have responded on its own, and he fears that all of these extraordinary measures will deplete the surplus and eventually lead to budgetary woes.

David R. Henderson Research Fellow, Hoover Institution

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TSC: Your opinion that the $15 billion federal airline bailout is wrong is a rather controversial position. You've said that consumers have voted with their pocketbooks by choosing not to fly, and that the federal government should not be spending our tax dollars to help the airlines. But isn't the airline industry such an important one and doesn't it impact many other industries such as commercial transport, hotels and leisure?

Henderson: Well, it does, but the point is that's the neat thing about a free market: It responds to people's wishes. And if people's wishes are for there to be fewer flights, then there ought to be fewer flights. The other thing is that the airline industry will survive, no matter whether there is a bailout or not, because the bailout essentially bails out the stockholders and the bondholders.

If there wasn't a bailout, you'd have bankruptcies, probably, and you would still have those assets in place. You'd still have the gates. You'd still have the planes. There might have to be a renegotiation of contracts, but that was something that was due anyway. That's why Southwest(LUV Quote) was doing so well, because they didn't have such expensive and inflexible labor contracts.

TSC: Wouldn't a rash of airline bankruptcies be disastrous for the economy and so many other ancilliary industries dependent on the airlines?

Henderson: No. Why would it be disastrous? If [the airlines] go out of business, they're still in business. That's my point. Let's say they go bankrupt. If they go bankrupt, someone's going to want to buy the assets and use them to fly. ...