Friday, February 24, 2012
The First Federal Bailout
In the summer of 1971 I was home in Glendale between my junior and senior years of college, working at my father’s plastics business in Burbank. Just down the road (literally less than a mile) from that business, history was being made in the form of America’s first corporate bailout.
Lockheed, the venerable aircraft firm, was in trouble, largely owing to its connection with the airplane engine division of Rolls Royce, which had just gone into receivership. Lenders were unwilling to lend further without a guarantee, and without capital, Lockheed would be unable to finish building its Tri-Star airplane, on which it had more or less bet the company.
President Richard M. Nixon, with the help of Treasury Secretary John Connally, drew up a loan guarantee proposal that would provide Lockheed with $250 million (about a billion and a quarter in today’s money) in loan guarantees. It was a controversial and hotly contested proposal.
There were strong arguments on both sides. Opponents screamed bailout. Sen. William Proxmire, Wisconsin Democrat, who gave monthly “Golden Fleece” awards for wasteful government spending, was a leading naysayer. Alan Greenspan, then a young economic adviser to the president, cautioned that if the government bailed out one company, where would it end.
On the other hand, there was a concern that if Lockheed failed, owing to problems with its British partner, America would lose a critical defense contractor, a key aviation firm, and about 60,000 jobs once the ripple effect was factored in. Right up to the time Congress voted, no one knew how it was going to go. Being so close to Lockheed’s main plant, we were all acutely aware of the fear and anxiety in the air, and it sometimes seemed as if Lockheed was all anyone was talking about that summer.
Being in college, I of course knew everything, and had a strong position on the matter. Like Proxmire, I was against it, figuring that the government shouldn’t be bailing out large companies that had messed up. As a matter of abstract philosophy, it was an absolutely tenable position.
My father, a dyed-in-the-wool Republican who believed in Free Enterprise and distrusted the federal government, was for the Lockheed loan guarantee. On the eve of World War II, he had worked as a night watchman at Lockheed and had a soft spot for the company, but his main concern was jobs. He didn’t see how you could throw 60,000 people out of work if there was a way to avoid it.
In the end, Lockheed got the money by the narrowest of margins. The vote in the Senate was 49-48, and in the House of Representatives 192-189. There were divisions in both parties. Republican Congressman H. Allen Smith, whose district encompassed the Lockheed plant, voted no, based on solid conservative principles. After doing so he decided not to seek re-election in his solidly conservative district in 1972, “retiring” from Congress at the age of 63.
Forty years later, it’s a bit easier to see the picture. Greenspan was right about other bailouts following, but Lockheed and its jobs survived for another quarter century before the company merged with Martin Marietta. I’m now at about the age my father was at the time, and I’ve come around to his point of view. In the abstract, the government shouldn’t be bailing out large companies, and there are limits to when it can and should. But the people who get hurt aren’t abstractions, and it’s far from a sure thing that the free market will step up and replace the failed firms with minimal pain and disruption. Some times the philosophically weaker position becomes the lesser of evils.