With the impending bailout of the financial sector, it’s hard not to consider the implication of the U.S’ current economic policy. I want to mention, specifically, the policy of bailing out large, failing, businesses. The phrase bandied about so often is that a business is simply “too big to fail”. That can mean a lot of things, not all of them meaningful. Following close on the heels of the events of September 11th, 2001, the major U.S. airlines found themselves in a dire financial situation. In reponse, the government poneyed up fifteen billion dollars of tax payer money to prevent their collapse. This wasn’t the first time the government has had to bail out a large industry in the U.S.
If you consider the government’s bailouts of other luminaries such as Lockheed Martin, Chrysler, and even the City of New York, a pattern starts to emerge. One of corporate welfare paid by the tax payers to failing businesses In each case, the business, or businesses, were failing and, in each case, the government deemed the companies to be too “big”, to be too important, to fail. That is a problem, and all we need is to consider how a capitalist free market is supposed to work to understand why.
The fate of a business is closely tied to how it is run. If I run my business into the ground through some combination of bad business practices and/or poor financial foresight, then I have only myself to blame. Nor is it right to blame natural disasters, necessarily, for the failures of large businesses. A small business might not be able to pull in enough capital to reopen. But a large business which fails due to a natural disaster failed because they did not plan for the future properly. Natural disasters, whether natural or man-made, are a regular occurance. Even if you disagree with my contention, I would still argue that there are very few good reasons to help out a failing company–most of which are a combination of philosophical and pragmatic concerns.
A company fails due to poor business decisions. This is not necessarily a good thing. However to bail out the company would usually be a far worse action. Each time you bail out a company, you set a precedence for doing so again. The more businesses feel that they are immune from failure, the more willing they are to pursue reckless or near sighted strategies. This collective unwillingness to allow certain businesses to fail must be partly blamed for our current situation.
Beyond such pragmatic concerns, there is something rather disconcerting about the idea that we should spend tax money to prop up failing businesses. Business so often demand as little regulation as they can possibly get away with, and for good reason. It is easier to succeed if you don’t have someone telling you what you can and can’t do. Yet, few businesses would reject a bailout opportunity from that very same government. It’s selfish. But that’s not bad. Acting in one’s self interest is that idea which most of our markets are built upon. Instead, just as strong markets are built upon strong competition, innovation relies upon the free competition between companies. What we get when large companies are backed up by federal dollars is the exact opposite of competition or innovation. If an uncompetitive business can depend upon it being propped up, it has an unfair advantage over it’s competitors. Yet not only are these payouts fundamentally unfair, they are also responsible for prolonging inefficient and uncompetitive businesses at the expense of their competition.
Thomas Friedman in an interview with Scientific American suggested that no free markets actually exist anymore, and I for one would tend to agree. He stated the position as an argument for regulation. I would, perhaps, use it in a slightly different manner. Conservatives in the U.S. are fond of preaching the religion of free market economics. The truth is however more complicated. A truely free market is dangerous. Few consumer safety and fraud protections are built in. The Gilded Age of the United States provides a handy reference for such a market. A completely controlled market isn’t the answer either, as the woes of the former Soviet Union, following the collapse of the berlin wall illustrated. So what is left? That answer is far from easy to give. However, if we are to have a market that can be called anywhere near free, we must allow for business to succeed or fail based upon their actions. If we are unwilling to stomach the rough seas of the free market, then we must not persist in continuing with these half measures and combine tougher regulation with these government bailouts.
Which brings me to the thought which prompted this whole thing. Considering all of the corporations which were “too big” to fail, what businesses out there might also qualify for such dubious protections. I came up one very good example. Microsoft. Microsoft is a corporate behemoth. Their operating system encompasses over 90% of the PC market. It is also a major player in smart phones. Beyond that, they have their hands in sectors as diverse as video games, digital music players, and web advertising. Not that Microsoft would seem to be anywhere near bankruptcy, but it is certainly interesting to consider the question: “What would we do if Microsoft was gone?”
Minutiae, et al 