VIEWPOINT 1: The Plague of Our Modern Economy – Ila Ghoshal
VIEWPOINT 2: An Effective, Targeted Strategy – MWR Team
GOVERNMENTAL BAILOUTS: THE PLAGUE OF OUR MODERN ECONOMY
Government bailouts reward failure. Bankruptcies are the way the free market regulates itself. Through supply and demand, the market punishes companies that are badly managed and do not have innovative ideas, therefore bailing out these companies ends up being harmful the economy and can hold back smaller but more innovative firms. Furthermore, bankruptcy wouldn’t mean that the company would disappear, it would just be owned by someone new, which means the positive aspects of a company remain but those who took the risk and made bad investments are punished.
It is also unfair to taxpayers, whose money is being used to bailout these large corporations. Since the company’s situation is ultimately their fault, taxpayers should not be the ones to pay for their mistakes. Moreover, the money being spent on bailing out companies is taxpayer money that could be spent on things like healthcare or infrastructure that would actually have a positive impact on taxpayer’s daily lives.
Furthermore, if large companies know that they have a safety net they may be encouraged to make riskier investments. Companies know, in this situation, that they will either make a large profit or they will lose money but the government will bail them out. This situation is known as moral hazard: when financial institutions such as banks believe the government is behind them, they do not take the risk of losses while making decisions because they know that they will not be the ones who suffer the consequences of their risky investments.
For example, the 2008 recession was caused in part by banks speculation in financial markets and led to millions of jobs being lost (CNN, 2009). However, top executives received large payoffs despite their less than ideal management. In fact, William Weldon, the CEO of Johnson & Johnson during the recession, who received $25.6 million as compensation while the company slashed 9000 jobs (Jones, 2010).
Written by MWR writer Ila Ghoshal, edited by the MWR team
GOVERNMENT BAILOUTS: AN EFFECTIVE, TARGETED STRATEGY
Government bailouts are a delicate tool which should only be used in a narrow set of circumstances, as a means to prevent massive job losses at no benefit to a country’s population. The popular conception that government bailouts are costly and constitute corporate welfare by the government is mistaken, since governments do not simply unload cash to a company for it to use as it pleases, but rather obtains an equity stake in an important player of its economy. For instance, during the 2008 financial crisis, the Canadian government bought up around $13.7 billion in General Motors shares, from which it received about $10.2 billion in returns. While this constitutes a $3.5 million net cost, it is far from what equating the equity purchased with the cost would imply, and provided much-needed stability to the Canadian economy during turbulent times by safeguarding a company which directly employs 8,400 Canadians and indirectly employs thousands more.
Part of what makes bailout debates so difficult is that there is a lack of available information on what would happen in their absence. While some countries have been more reluctant than the US and Canada to bail out specific industries like banks, there is not a comprehensive economic account of what would happen if a majority of a society’s most crucial institutions would be allowed to fail. Any argument that limits its scope to the fairness of bailouts with regard to the company is fundamentally misguided, because it critically underestimates the negative consequences of such market disruptions on the day-to-day life of a country’s citizens.
It should be clear from this argument that responsible, equity-driven bailouts by governments of large Fortune 500 companies and small businesses alike can be the optimal solution in major financial crises, as they can prevent the onset of mass unemployment and the possible civil unrest that could follow. Likewise, should insurance companies have not been saved from going bankrupt, millions of citizens would have lost their insurance. Responsible bailout advocates should focus on what these mechanisms should never be used for: to bail out specific isolated incidents of underperforming companies, such as Bombardier, and focus on their utility in preserving an economy’s overall stability at crisis peaks.
Written and edited by the MWR team