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‘In the Long Run We Are All Broke’

This is an academic essay on Hazlitt’s Lesson and its relationship with TAP’s aid package, written by João Miguel Freitas Casimiro and Pedro Vilhena Andrade Sousa Fernandes, both students from ISEG.

The academic essay “In the Long Run We Are All Broke”, written by the students João Miguel Freitas Casimiro and Pedro Vilhena Andrade Sousa Fernandes, was the winner of the second edition of the Instituto +Liberdade Essay Contest, which was held under the theme “Economy in a Lesson | Henry Hazlitt”.

As media partner of the Instituto +Liberdade, ECO/ECO News publishes the winning essay in its entirety. You can read it below:


In this essay we intend to achieve a rather critical approach to the company Transportes Aéreos Portugueses or TAP for short. This paper sheds light on the terrible management of the company as well as on the opportunity cost of applying for tax-payer money through aid-packages to recover accumulated losses collected throughout the years. In addition, we decided to compare the decisions made by the government to the lessons in the book “Economics in One Lesson” by Henry Hazlitt. It’s worth noting that due to recent changes in Portugal’s political spectrum – the current government will be dissolved – we cannot be sure that the restructuring program for TAP will be kept within the same guidelines. Nonetheless, we will assume the 2020’s plan.


Liberalism is the emancipation of the individual. Western democracies were founded on liberal principles, by pluralizing and decentralizing political power, and by offering the average citizen the possibility of thriving and succeeding in a free world. We strongly believe that TAP’s aid-package is a policy that conflicts with a free economic and political system. Studying the intentions and objectives of this policy is crucial for a better understanding of how illiberal the Portuguese State has been in the last years. Henry Hazlitt’s masterpiece on liberalism should be a “Political Economy 101” kind of book. Instead of that, Economics in One Lesson is constantly ignored by said experts of the “dismal science” and by policymakers all over the World. The reasons for that to happen cannot be explained by intellectual disagreements nor ideological differences, but for selfish interests and political agendas. We strongly believe that the latter are the main drivers for the alienation of the Hazlitt’s Lesson.


Economics in One Lesson is a treatise of how to perdure a free political system. Hazlitt emphasizes the short-term scope of the policy makers and their devoted attention being solely focused on special groups, and not the entire population. Tirelessly, the author reinforces the idea that “Economics is haunted by more fallacies than any other study known to man” and stresses the fact that this isn’t accidental. This entire piece is written based on the assumption that politicians conduct a certain type of policies that are only driven and explained by selfish interests. We could not agree more.

TAP’s aid-package is an “Economics 101” example of how to not spend money if you are a highly indebted country with no relevant economic growth prospects. It is a serious misallocation of capital, and it represents a transfer of money from the taxpayers into a bankrupt, failed, and inefficient company. This decision from the Portuguese Government obviously goes against everything that Hazlitt’s Lesson could have taught us. It’s a policy based on the short-term effects, with its main purpose being the protection of some special groups’ interests.

This type of irresponsible and excessive spending from the Government has real consequences on the life of millions of Portuguese citizens. Even on the ones that weren’t born yet. Anyone should be empathetic with a small kid that automatically owes 25.000 euros since the moment they are born. It’s paradoxical that Governments and several institutions use the argument of future generations’ wellbeing when discussing climate crisis, when at the same time forget that public debt represents a huge burden that will affect them very deeply. However, it’s naive to think that these policies only affect us economic-wise. The constant misallocation of public funds undermines our inclusive political institutions, erodes our democratic foundations, and slowly reduces the confidence of the citizens in the political class.

The biggest problem arising from this policy is the Moral Hazard. The signal that the omnipotent economic agent – the State – transmits to other companies in the market is extremely dangerous. The fact that there is a company “too big to fail” or, in this specific case, a “strategic company to the national interests” that is now willing to increase its exposure to excessive risk because it does not bear the full costs of that risk, is something that should make any Portuguese citizen concerned about its country’s future.


Over the years, decisions at TAP have been rather confusing. From what can be identified as straightforward archaic management mistakes to shady business deals that have perdured for two decades. This isn’t to say that TAP should or should not be state run, but some of these mistakes’ sources are a direct consequence of the latter.

In 2005, while a state-owned company, TAP wanted to expand their business by buying two branches of a Brazilian airline company named Varig. The Portuguese transporter signed a contract for the purchase of two branches. The reasons are cloudy, but the contract was partially terminated, meaning that TAP would only be able to purchase VEM, the Maintenance and Engineering branch. As if a payment of €24M for the unhealthy part of the Varig business wasn’t enough, the branch also managed to bring in about €100M of associated liabilities. What seems rather impressive here is the company’s determination on keeping this branch that hasn’t been able to generate profits for about 20 years. As a last remark, it’s also worth mentioning that this acquisition was under investigation by Portugal’s general attorney for several felonies. Despite none of them having reached a sentence, we feel that the principal works as a barometer to the deal.

From a corporate perspective, there’s a structural problem with permitting a government influence over an airline company – the maintenance of loss generating routes. TAP has kept several of such with countries like Angola and Venezuela. Said routes have been weighing on the performance of TAP SA – the aviation branch – since they were started. But most importantly, the same were kept during Portugal’s recovery from the sovereign debt crisis in 2015 while Angola dived into an economic crisis – due to the crash of oil prices – and throughout the entire political turmoil in Venezuela – resultant from Nicolas Maduro’s presidency. The problem here is self-evident, Portugal had just come out of its austerity policies and the country – although technically deferred – was already accumulating new ways to spend tax-payer money.

This sudden cut in demand for trips in these countries pushed TAP to make a decision that became a double-edged sword. The expansion plan envisioned the increase in transport planes which in turn increased the need for employees in order to create new routes that could compensate for the losses. When analysing historic airline acquisitions, there are two variables that are always downsized: the fleet and the employees. It seems that there is a tendency for flagship airlines to have an excess of both. Needless to refer the negative consequences of this habit.

Moreover, the problem with these routes does not finish here. An aggravation of said problem is how the state approaches TAP’s losses. If the government considers these routes fundamental for some political reason, they then might view any losses from those routes almost as a subsidy, because at the end of the day it’s always the same amount of cash-outflow that’s either given to customers by subsidy or injected into the company to cover for losses. The problem is that for TAP, these scenarios are widely different because a subsidy to customers implies a cash-inflow to the company which can then be reinvested to further optimise operations. On the other hand, a simple injection of capital when the accumulated losses get too big to ignore, precludes the possibility of reinvestment in the company. Logically, we must consider that the source of these past aid-packages is not only explained by said routes but is still another way in which tax-payer money is misapplied in TAP.

Just because privatizations generally lead managers to downsize both in assets and personnel, we cannot assume that state-owned companies are always inefficient both in workforce and in operations. Nonetheless, that tendency cannot be ignored when the restructuring plan for TAP in 2020 – due to bad management – envisioned a reduction in fleet, personnel, and loss-generating routes. It would be unfair to make such remarks and not consider the toll that the COVID pandemic had on the company’s financial health. But on the other hand, we believe that, because of the previously mentioned mismanagement decisions, the pandemic was not a source but rather a catalyser for the need of such a massive aid-package.

Lastly, there’s a final problem with a state-run company with the size of TAP. After this new restructuring plan, the company will have about 9 thousand direct employees and several thousand more indirectly. Just the idea of letting such a company “off of a lifeline” would be political suicide for the one with the courage to shed light on rationale. Hence the “too big to fail” problem which would better be described as “too big to let fail”. As a final note, it’s important to remember that this entire discussion is due to the idiosyncratic tendencies of those who believe that there is an ethical obligation to keep companies – which they consider to be a part of a public utility industry – to focus on the general wellbeing of the population and that the financial health of the company is secondary and often irrelevant.


Portugal’s economic indicators reflect how stagnated the country is. Several nations from the former Soviet Union have already higher GDP per capita levels than Portugal, and the prospects for the foreseeable future are not so bright. With “not so bright”, we mean that Portugal is on its way to become the second poorest country in the European Union, only ahead of Bulgaria. Despite these alarming facts, the Government will continue to heavily tax the productive sectors and subsidize the least efficient ones. The Government will persist on policies that benefit the short-term and will keep ignoring the fact that it created a subsidy-dependent nation.

Instead of the deep institutional reforms this country desperately requires, the Portuguese state intends to spend around 3.700 million euros in a company that only profited twice in the last forty-five years. This disconcerting fact makes anyone acknowledge how wasteful this bailout will tend to be and that the objective of this policy was to simply retain political dividends.

It’s very easy to lose track of the zeros when we discuss public finance. GDPs of developed countries usually have twelve or thirteen digits. For a better understanding, one could say that the TAP’s bailout costs 370.000 euros per employee. With our national health system crumbling and several other unfunded sectors, the Government reinforces its political priorities by spending several thousands of millions of euros delaying the inevitable – TAP’s insolvency.

Portugal’s situation is critical. Its economy is highly dependent on fragile and unpredictable sectors (like tourism) and on European subsidies. The Portuguese qualified youngsters must immigrate if they want to have a successful career, resulting in a “Brain Drain” and consequent ageing of the population. This creates pressure on Social Security, causing the increase of taxation. The increase of taxation incentivizes even more immigration, working like a vicious cycle. The only way for the country to save itself from this nonpromising faith, is for the policymakers to adopt a more serious and long-term oriented approach. Portugal deserves a government where its main priority is not to win elections, but to create conditions for sustained economic growth and the consequent increases in the standards of living that arise from it.

No one can predict what is going to happen with the case of Portugal, or even if TAP will start generating positive returns, but one thing is certain: Portuguese policymakers should read Economics in One Lesson and apply the Hazlitt’s Lesson.

It’s the only way we can expect a future with political and economic freedom.


TAP 3.0 Plano de Restruturação | Dezembro de 2020 











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