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.

Doucet:

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.

Let Them Fail: Auto Industry Bailout Would Reward Irrational Business Behaviour

It has recently been calculated by the Center for Spatial Economics that the failure of the auto industry would immediately result in the loss of 323,000 jobs in Canada. This would be particularly disastrous for the already-devastated Ontario economy since approximately 87% percent of the job loss would occur in that highly industrial province. As a result, Ontario Economic Development Minister Michael Bryant has stated publicly that it would be irresponsible for the government to allow such a collapse to occur and so, joining a chorus of voices all across the North American continent, Bryant called for a bailout of the auto industry.

But is a bailout the truly responsible decision for the government to make? Would it serve the interests of the Canadian people and save the economy from the brunt of what promises to be a terrible recession in the long run? The answer is absolutely 'no'.

Canadians are being fed the tired bromide that the fluctuations of the free market are to blame for the current financial crisis and that governmental manipulations of the economy are how we are to best achieve the economic stability and security that we seek. This notion could not be further from the truth. The auto industry is failing because it has been chained by government restrictions for decades and, furthermore, because it has pursued and continues to pursue highly irrational business policies. Rather than being punished for their errors, which would occur naturally in a free market that would force them to adapt or else fail, state representatives are declaring that these businesses are simply 'too big to fail' and that more government involvement is the solution to a problem caused by too much freedom. These businesses cannot be allowed to fail, they say.

But, as Amit Ghate writes, the failure of businesses is not merely a normal occurrence in a capitalist economy, but a crucial phenomenon for the emergence of the highest quality ideas and products. Technological advancements have driven numerous industries completely out of business - Ghate offers typewriters as a relevant example - and these advancements, and the resulting industry failures, are healthy in a free economic system. So why are we hearing so much noise about the necessity of saving the auto industry?

The Big Three are failing because investors have no interest in risking their money on poorly run companies that are already forced to work within the confines of unacceptable governmental restrictions. These restrictions include labour laws that have required companies to submit to short-sighted and financially calamitous union demands as well as fuel economy laws requiring companies to produce small vehicles at extraordinary costs that have no chance of turning a significant profit. A popular mechanics article explains the real cost of these laws:

"It takes money to build more fuel-efficient cars and trucks—lots of it. Want a diesel engine? That’s a $3000-$5000 premium per vehicle. Tack on at least another $5000 for hybrid technology. Plus, new cars and trucks have to meet stringent safety standards, and that adds weight, which in turn lowers fuel economy. Try asking a consumer to forgo the leather interior and rear-seat DVD player in their minivan to save weight. I don’t think so. Not that consumers want pokey cars and trucks anyway: No, Americans like vehicles with good passing power and low-end torque. So automakers struggle to meet all these needs, and it’s still expensive."

Rather than campaign against these governmental intrusions, however, the auto industry has turned to their powerful lobby to attempt to coerce money from taxpayers who weren't willing to give it to them voluntarily. Rather than fighting against the real cause of their trouble, these companies have accepted even greater state involvement as the solution to their current state of crisis. Unsurprisingly, we've seen the entirely predictable consequence of this decision in the United States where the price of the auto industry bailout has been a commitment to produce more small cars that meet high fuel efficiency standards, thus guaranteeing the recurrence of the exact same problems the industry is currently facing. The auto industry is guilty of a complete evasion of the realities of their business. And we believe that this is behaviour worth rewarding?

The loss of Canadian jobs is a terrible thing. However, this wrong will not be righted by prescribing as the solution that which has been the main contributing factor to its current state of crisis. Consequently, the only rational course of action is clear: let them fail. When the government runs the auto industry, the auto industry fails. Let these companies go under and hopefully from their ashes will rise rational profit-seeking businessmen and women who will be able to produce stable long-term jobs for the people of Ontario. The bailout alternative is simply too self-destructive to accept as a viable option.