Bailouts hurt our standard of living

By | December 5, 2008

The Mighty Bargain Hunter blog has a great write up this morning on why bailouts are bad.  (This is still an important topic due to the current discussion on the Auto Bailouts and ongoing bank bailouts.)

A bailout of the auto industry will save a few jobs for a little while.  OK, it will save a lot of jobs for a little while.  But in the long run, a bailout reduces everyone’s standard of living.  It’s interference in the free market, and causes a misallocation of resources.  It’s a misallocation because the market has already given the company the thumbs-down, in that the company has not been able to deliver a product profitably at a price that the market is willing to pay.  A bailout says to the market: “You’re wrong.  This company deserves to stay in business.”

This wouldn’t be the first time we have bailed out the auto industry either.  Since they are back for a handout again, doesn’t that imply that bailing them out just doesn’t work?  If I start a small business and run it into the ground should someone bail out me?  Certainly not, it would turn into a failed business.  I would have to evaluate why it failed and how to avoid that in the future.

The article makes a number of good points, this one being key as to why bailouts are bad:

We all lose because the resources have been re-allocated inefficiently by force, against what we, the customers, have already said we want.  We instead get more of the failing business’s products and less of the succeeding business’s products, and have to pay for this situation to boot.

Short version: They failed, you have to pay more for a product (due to higher wages, poor management, etc) AND foot the tax bill for the bailout.  I encourage you to go read the full article over there.  It makes some excellent additional points.

[tags]bailout, politics, auto bailout[/tags]

Leave a Reply

Your email address will not be published. Required fields are marked *