In September, President Bush signed into law a bill that provided the nation's airlines with $15 billion in grants and loan guarantees to compensate them for their direct and indirect losses from the hijackings on 11 September. Already, the nation's insurance companies have asked for billions of dollars in federal guarantees to cover future losses. Now John Potter, the Postmaster General, has asked a Senate subcommittee for up to $5 billion to protect its customers, the American public, from anthrax and other biological materials sent through the mail.
The Bush administration and a bipartisan majority in Congress eagerly gave the arilines what they wanted. Insurance companies have already convinced a House committee to approve a bill that would protect them from losses in future terrorist attacks. But the Post Office faces an uphill battle for its request for funds, especially given recent threats by President Bush to veto any funding beyond the $40 billion approved for homeland security in September. Republicans in Washington have shown already that they are eager to protect important private industries from the worst vagaries of the free market. However, in spite of the talk in Washington of homeland defense, little funding is available for the agency that can actually provide defense to the homes of Americans.
Most United States airlines were having a horrible year even before the events of 11 September. Corporations had cut back on business travel, and airlines that relied on the high fares that many corporations were willing to pay were suffering. Before the hijackings, stock analysts had expected the industry to lose $2 billion in the calendar year. Only a few airlines, like JetBlue and Southwest, which undercut other airlines on price but fewer empty seats, were having good years.
After September 11, the situation in the airline industry was fundamentally the same, only more exaggerated. Southwest still expected to break even for the fourth quarter, even though its planes—like those of its competitors—were grounded in the aftermath of the hijackings. But larger, fatter, airlines like United and USAir were in dire straits. Some commentators, like Steven Landsberg in Slate.com, argue that the federal bailout benefits the stockholders of the airlines without really benefitting the public by changing the profitability of any one flight. Indeed, the bailout bill provided huge short-term benefits to the airlines and only the vague promise of payback to the government in the form of warrants or stock options. While the bailout bill prohibited pay raises to top executives for two years, it did nothing to keep the largest airlines from laying off large numbers of workers, and it provided no specific aid to workers whom the airlines would lay off.
The aftermath of the 11 September atrocities underscores the need for the federal government to act in instances in which the invisible hands of the market are ineffective or worse. An unfettered market would present drastic choices to several of the largest airlines. They could choose bankruptcy; or drastic cuts in service with attendant layoffs; or desperate mergers with one of the few financially healthy airlines. Although the dire straits of the airline industry are due only in part to what happened two months ago, the government on the whole did the right thing in propping up the industry. What the government got wrong in its bailout came from the rush to get something done immediately after the 11 September attacks.
Likewise, the recent action in the House of Representatives to provide guarantees to insurance companies against major terrorist actions is an admission that the free market has its limits. If properly drafted, a law to protect insurers could prevent insurance rates from rising needlessly, without protecting from all risk an industry that is supposed to take risk. The program from which Congress should learn is the National Flood Insurance Program. It provides reasonably priced flood insurance to homeowners and businesses, and in doing so protects the insurance industry from catastrophic losses from flooding. As a backstop to an industry that has inherently limited liquidity, it is important. But its availability allows building and rebuilding on barrier islands, flood plains, and beaches, ensuring that flood insurance claims will occur in large numbers, year after year. Any backstop to insurers against terrorism must be significant without being total.
The national Republican party has shown by its deeds and words that the federal government can and must intervene when the free market has a crisis. Its reluctance to help out the United States Postal Service is therefore quite odd. This year had already been a poor year for the Post Office, as it had been for the airlines: the Post Office had already expected a deficit of $1.35 billion. The Postmaster General explained in his recent Congressional testimony that the expenses were extraordinary for environmental testing, medical testing and treatment for employees exposed to anthrax, and for equipment to detect or kill anthrax in the mail. Out of the $40 billion already approved for "homeland security," the Bush administration allocated $175 million to the Postal Service. Yet the equipment needed to keep postal employees and customers safe from anthrax will cost billions more.
Since 1969, the Postal Service has operated as a self-sufficient, independent agency. But the revenues from its services are inadequate to cover the necessary and enormous expenses to keep people from being killed by anthrax spores sent in the mail. In an ideal world, the Post Office would simply issue another Elvis stamp to raise the necessary funds. In the real world, even the most popular of commemorative stamps generates only modest profits, because most stamps are actually used as postage.
President Bush announced last week that he would veto any further emergency spending, apparently including any additional funds for the Postal Service. His newfound fiscal discipline, so absent in his support for cuts in capital gains taxes and for the elimination of some corporate tax breaks, is misplaced here. The Postal Service is the only agency that can stop any anthrax in the mail from reaching its intended destination. Most Americans do not get the special treatment that mail sent to the White House or Capitol can receive, inspection of all mail by offsite military personnel. To keep anthrax or other biological toxins in the mail from killing Americans, the Postal Service will need to treat all of the mail that it handles. Doing so will not be cheap, but it will be necessary, as necessary as keeping American and United Airlines flying, and as important as keeping Travelers Insurance solvent. The Bush administration has proclaimed its seriousness about homeland defense. It needs to get serious about the only agency that visits most American homes six times per week. Homeland defense should begin at home.
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