Handout or Helping Hand?

Few issues in American public life raise more passion than federal aid for corporations. In his memoirs former Treasury Secretary William Simon wrote indignantly: "I watched with incredulity as businessmen ran to the government in every crisis, whining for handouts or protection from the very competition that has made this system so productive." The Administration's proposed $1.5 billion Chrysler loan guarantee will add fuel to the old debate about whether public aid is proper for ailing private enterprises.

Actually, the arm's-length relationship between the private sector and the Government, which is widely believed to be an American tradition, has been more myth than reality. When the nation was founded, the idea of mercantilism, which held that government should foster exports, was the prevailing economic philosophy. The second act passed by the first Congress in 1789 granted aid to builders and operators of ships. During the 19th century, Washington helped companies build canals and railroads. The Depression-inspired Reconstruction Finance Corporation, before it was abolished in 1957, made loans totaling more than $13 billion to firms that banks would not finance.

In recent years federal credit assistance to businessmen, farmers or homeowners has exploded. Just a listing of all the plans two years ago filled a 329-page book. While the debate over Chrysler's bailout has been going on, Wheeling-Pittsburgh Steel Corp. quietly received loan guarantees from Washington of $150 million to help the company modernize and install costly antipollution equipment.

The justification of any federal loan programs, whether to local governments or to private companies, is usually national defense or loss of jobs. But politics often determines whether aid is granted. Jimmy Carter carried New York State in 1976 partly because his opponent Gerald Ford had irritated many voters in New York City by refusing to extend the city aid when it was on the brink of bankruptcy. After he was elected, Carter told the Treasury to draw up plans to save the city. But this year when less politically important Cleveland went bankrupt, no aid was forthcoming.

Politics was likewise important in the two major cases of Government aid to troubled companies, Penn Central and Lockheed. In 1970 Congress refused a $200 million loan guarantee to the badly mismanaged Penn Central Transportation Co., leading to the largest corporate bankruptcy in the nation's history. Wright Patman, the populist Texas Democrat, argued that the Government should not rescue "private investors and private lenders who have taken their own risks in a free enterprise system."

But almost immediately, federal loan guarantees of $125 million had to be made to keep Penn Central trains running, and eventually two Government-aided corporations, Amtrak and Conrail, were created in part to take over the company's railroads. Freed from that albatross, Penn Central has become a successful real estate and recreation conglomerate.

Lockheed's cup-in-hand operation was far more successful. In 1971 the aircraft maker came to Congress after losing $484 million because of cost overruns on the Air Force's C-5A plane and three other defense contracts. By razor-thin majorities, Congress granted the company a $250 million loan guarantee. The Government was tougher on Lockheed than it has been so far on Chrysler, forcing it to pledge company assets as loan collateral. But the firm was fundamentally sound and needed only interim financing for a few cash-short years. At the end of 1977, the aerospace company terminated its Government-backed loan guarantees. The Treasury, in the end, actually earned $31 million interest on the agreement. This year Lockheed is expected to make a profit of some $40 million.

A Government loan guarantee cannot guarantee a company's future. It can only give its management time to prove that the firm can turn out products the public will buy.

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