Cato Daily Dispatch for December 10, 2002
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United Airlines Files Largest Bankruptcy in Aviation HistoryEducation Department Offers Guidelines on School Choice
Sierra Club Supports "Smart Growth" Development Project
United Airlines Files Largest Bankruptcy in Aviation History
The Associated Press reports that United Airlines made the largest bankruptcy filing in aviation history on Monday, saying it was the only way to keep the world's No. 2 airline flying after two years of heavy losses.
The Chapter 11 filing was the sixth-largest ever as measured by assets. The suburban Chicago-based company has lost $4 billion in the last two years due to a slumping economy, flawed business strategies and the Sept. 11, 2001, terrorist attacks. It faced debt payments of $875 million later this week.
"We're in control of United's destiny," United CEO Glenn Tilton said in an interview. "It is in fact Chapter One.... This is a tremendous opportunity for United to transform this company and to emerge stronger than ever."
Tilton's characterization of the Chapter 11 bankruptcy filing as a "fresh start" is misleading, according to Bradley Adler and Lawrence Weiss, authors of a Cato "Regulation" magazine article, "The Debacle of Corporate Bankruptcy". In the article, they argue that the corporate bankruptcy system favors the debtor rather than the creditor, harming not only the latter, but also shareholders and even other corporations.
"Bankruptcy allows the [individual] debtor to begin financial life anew, free from the prospect of perpetual servitude. However, whatever benefit bankruptcy offers individuals, the notion that bankruptcy 'protects' corporations is hollow at its core. Corporations do not need protection from creditors the way individuals do. Corporations, despite the name, are not corporeal beings. Corporations are networks of contracts among individuals. Contracts define relationships among people but are not themselves people, the legal fiction notwithstanding. It is utter nonsense to talk about protecting a corporation or providing a corporation with a fresh start."
Adler and Weiss use the case study of the bankruptcy filing of Eastern Airlines in 1989, which they characterize as "the most spectacular example of how the bankruptcy system can waste assets." Eastern filed for bankruptcy on March 9, 1989, and ceased operations almost two years later, on January 18, 1991. Eastern's continued survival after filing for bankruptcy "not only hurt its own creditors, but also caused other airlines to lose many millions of dollars. Efficient airlines suffered because they had to compete with the excess supply of services provided by the bankrupt Eastern, a firm whose management-intent on gambling-was able to use a wealth transfer from creditors to set air travel prices below true cost."
Education Department Offers Guidelines on School Choice
The lowest-achieving students who come from poor families would get first priority to transfer to a new school under federal guidelines that give parents the option of moving their children out of failing public schools, reports the Associated Press.
While all students at failing schools identified by a new education law would qualify for transfer, the law requires that the lowest-achieving, disadvantaged students take precedence, according to new guidance from the Education Department.
The guidance pulls together details of the law in one publication.
"It's more direction to help states and school districts to make decisions about how to implement choice," Education Department spokesman Dan Langan said Monday.
Expanding school choice must not stop at simply offering parents the option of transferring their children from one school to another within the public school system, but must also include a range of private education options. In a new Cato Policy Analysis released today, "The Need for Educational Freedom in the Nation's Capital", education policy analyst Casey Lartigue uses the historic failures of the District of Columbia Public Schools to show that "change must not be limited to propping up the current system." As Lartigue urges, "public schools that are little more than holding pens must not be sheltered from private competition. The city must find a way to create competition within the system, with the goals of giving parents power over the education of their children, fostering an environment that will create a climate for education entrepreneurs to flourish, and taking education out of the hands of feuding politicians."
Sierra Club Supports "Smart Growth" Development Project
The Sierra Club is involved in a battle over seven acres of land next to a shopping center, according to USA Today. A developer wants to build an apartment complex with modest rents. Nearby residents sued to stop it. The environmental group is on the side of the builder.
Embroiled in the dispute is the Sierra Club -- defender of open space, enemy of development. But in this case, for the first time in its history, the 110-year-old pillar of the environmental movement has gone to court on behalf of a builder.
The club decided it's better to support a housing project on marginal property inside an urban area than to fight it and watch development spread over farmland, forests and hillsides in the rapidly growing corridor between Sacramento and Lake Tahoe. Suburban sprawl, the club says, not only chews up farmland and open space but creates more traffic congestion and air pollution.
While the Sierra Club's support of development in this case may be a step in the right direction, according to a Cato Institute Policy Analysis, "Critiquing Sprawl's Critics", its battle against "suburban sprawl" is based on false premises. Authors Peter Gordon and Harry Richardson note that "although most Americans are living better than ever, many now see 'urban sprawl' as the source of most of society's problems and 'smart growth' as the logical antidote to those problems. The assertions by the critics of urban sprawl do not stand up to scrutiny." In the study, they provide evidence that smart growth policies "increase housing costs for the poor, making it difficult for them to locate near areas that are growing economically," and that "the argument that urban sprawl gives rise to excessively costly infrastructure, excessive transportation costs, and environmental damage is wrong."
Christopher Kilmer, editor, ckilmer@cato.org
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