Thursday, January 29, 2009

Debunking Bailout Economics: Burn, Baby, Burn

It's interesting to note just how many of the recent reactions to announcements that the Big Three could be going under have been limited to wide-eyed 'too big to fail' expressions of Keynesian corporate welfarist sentiment. Advocates of this business-on-a-government-leash model have been waxing apocalyptic on the subject of a future without General Motors, Ford, and Chrysler for months now. They insist that the only responsible decision politicians could make would be to increase the money flow from the unwilling pockets of taxpayers to the gaping maw of the struggling auto industry. Take money from the productive, they insist, and give part of it back to the productive and part of it to the chronically unproductive. We can call it a 'stimulus package'!

Bradley Doucet of the Western Standard proposes a slightly different response to the failure of inefficient businesses: burn, baby, burn.


Is it bad for the economy if inefficient, badly run businesses go under? That seems to be the thinking behind fears that the Big Three American automakers, GM, Ford, and Chrysler, might go bankrupt if governments do not bail them out. Millions of jobs would be lost, it is argued, including some half a million here in Canada. The effects would ripple through the economy and depress spending all around. Like the major financial institutions before them, interested parties argue that the Big Three are simply "too big to fail." It would be closer to the truth to say that these dinosaurs are too big and clumsy to survive.

In a free market, if a business goes bankrupt, it is because it was badly run, and competitors were able to be more efficient -- that is to say, those competitors were able to produce the same product or service and offer it at a lower price by keeping their costs in check. Alternately, they were able to offer a better product or service for the same price, or again, some combination of a better product or service and a lower price. When in the worst case scenario, a poorly run business is allowed to go bankrupt and liquidate, the capital and labour that were trapped in the inefficient enterprise are freed up to be reallocated to more efficient uses. More successful competitors can expand, purchasing plants and equipment and also hiring laid off workers.

The transition is never painless, of course. Stockholders take a hit as assets are sold off at a discount. Some assets may be of no real use, representing excess capacity or being out of date or run down, leading to further loss. Not all employees will be able to find work in the same fields, as they may have been superfluous; or they will have to take a pay cut, as their wages may have been inflated by decades of legally-sanctioned union extortion. The thing to notice is that, painful as it is, bankruptcy is just the market's way of correcting itself. Economic players have been acting in disregard of reality, and this has consequences. Bankruptcy is a serious form of market correction, but like all market corrections, when it is necessary, it is necessary.

Bailing out an enterprise that should by all rights be allowed to fail is just an attempt to deny reality. It punishes hardworking taxpayers and efficiently-run businesses for the sins of overpaid union members and inefficiently-run businesses. It also sets up an unhealthy spiral, in which those who act recklessly are not held to account, encouraging them to continue to act recklessly in the future. It is corporate welfare at its worst, even though some of the benefits redound to privileged union members at the expense of all other workers.

This is a truly excellent article, a clear look at the way businesses should work in a capitalist economy as well as the effects that governments have on the economy when they bail out inefficient companies. There's much more of the article than what I quoted so it's definitely worth following the link.

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