Should the government bail out large failing companies?

[nerdmmb]

Need a bit of help with this one.

[slothpomba]

Care to put forward some points of your own?

[nerdmmb]

Care to put forward some points of your own?

Sure Although, I'm still undecided as to whether it's a good thing or not.
I think that the government SHOULD bail out failing companies for the following reasons:
1. By supporting these large companies, thousands of jobs are saved which is intrinsic for the maintenance of a financially stable economy.
2. It is perceived that by bailing out businesses, heavier taxes will be levied in order to compensate for the assistance provided to the businesses. This is actually beneficial for the economy. If businesses are not bailed out, the government would have to provide financial welfare for employees who lost their jobs. This will not only impose heavier taxes compared to the tax rate in supporting these businesses but will also last longer. Therefore, by bailing out large companies, not only are we preserving thousands of jobs but also saving our own pocket money.
3. All businesses WILL eventually collapse- it is a normal process. For example, just over a month ago, Apple's ipod business collapsed and the revenue plummeted by 55%.
Does this really mean that we should abandon this internationally diverse company? If we are to stop the government from bailing out large companies, we are regressing our growth as a nation- this is unethical and is not a healthy approach to dealing with downfalls faced by companies.

I'm trying to think of more points and I'm not really good with business studies but I hope I worded it right.

[slothpomba]

Is this for English or just general interest? Usually i'd agree with you so i'm taking some what of a devil advocates/awkward position towards myself here but i'll try.

Also just want to make it real clear that i'm not an economics student and i could be hugely wrong.

1. By supporting these large companies, thousands of jobs are saved which is intrinsic for the maintenance of a financially stable economy.

It really does depend though. If the jobs generate $20,000,000 a year for the economy or they pay $20,000,000 a year in salaries, is it really worth it if they want a stimulus package of $200,000,000 ? It seems like it's really not worth it paying all this money to save jobs, it'd be cheaper just to let them go on welfare. Definitely must draw a line somewhere, even the most hardcore person willing to handout money will deny extortionate demands. Take the recent case of SPC, they're owned by Coca Cola Amatail (the coca cola company actually just produces syrup, its shipped around the world to be made up with water and bottled by companies like this local Australian bottler). They're a very rich company. They definitely could have afforded to put money into it anyway.

Take another case, you say its good to save thousands of jobs, it probably is. Consider this though - hundreds of small takeaway stores across the country probably fold every year. This would probably come close to hundreds or thousands of jobs in the aggregate. I don't see much enthusiasm for bailing out the local fish and chip shop. Obviously, its a little different considering the capital investment needed (it's cheaper to buy fish and chip shop equipment than it is for a big plant).

Capitalism is all about creative destruction. Whilst i'm fairly towards the left on the political spectrum, i have a degree of faith in capitalism and the market (a managed sort of kind anyway). There is a reason we don't have many blacksmiths or carriage drivers anymore, we simply don't need them. Their existence didn't match the needs and wants of society or the economy. They lost their jobs but new jobs were created in their wake as well. A degree of failure about things ought to be accepted in a capitalistic society like ours.

2. It is perceived that by bailing out businesses, heavier taxes will be levied in order to compensate for the assistance provided to the businesses. This is actually beneficial for the economy. If businesses are not bailed out, the government would have to provide financial welfare for employees who lost their jobs. This will not only impose heavier taxes compared to the tax rate in supporting these businesses but will also last longer. Therefore, by bailing out large companies, not only are we preserving thousands of jobs but also saving our own pocket money.

Really depends, see above. There's also more complex economic factors at play here as well. If we're bailing out a company that produces something no one wants, that's actually a rather large problem under economic theory. Take something like Christmas. Economists hate Christmas because it's what is termed a "deadweight loss". There's a difference between what people pay for the gifts they give and for what the people receiving them would have paid for them. I might buy you a Justin Bieber album for $30 but if you never wanted it or would use it, we've basically just burnt $30 in an extremely inefficient way. In theory, the market should perfectly reflect peoples wants and needs and should perfectly allocate them as such, economics is also all about rationing out the scarce resources we have (i.e. money) for the most benefit or gain.

Take Ford for instance, they were simply making cars most people just didn't want to buy. If i start a business selling snot flavoured marshmallows and they don't sell very well, i don't think i should be bailed out, that business should just fail, its the forces of the market sending the information its just not a product or service people want and shouldn't exist as we move towards a more optimal/representative market. Toyota was quite different as they were making cars people actually liked, i believe one of their cars was the best or close to the best selling in Australia.

There's also the question of future bailouts. If we give one now, what if they want another and another? Shouldn't the business be sustainable on its own rather than relying on constant bailouts? It all really depends.

3. All businesses WILL eventually collapse- it is a normal process. For example, just over a month ago, Apple's ipod business collapsed and the revenue plummeted by 55%.
Does this really mean that we should abandon this internationally diverse company? If we are to stop the government from bailing out large companies, we are regressing our growth as a nation- this is unethical and is not a healthy approach to dealing with downfalls faced by companies.

As above, sometimes we should just let businesses fail, indeed, supporting unsustainable industries ironically enough might be regressing our growth as an economy (imagine if we still supported horse and cart drivers or door to door milkmen). All things will eventually collapse thats true but i mean the Earth will be engulfed by the sun some day too. It's more about the time scale, we have some very old companies around. HSBC was handling British opium profits in Shanghai during the Chinese Opium Wars, thats how old it is (HSBC standing for Hong Kong Shanghai Bank). Arguably, we should only let the best and strongest businesses survive unless theres some other kind of social aspect to it.

[slothpomba]

You might like to watch these things as well, they'll give you a decent grounding in the theory:

Masters of Money - Keynes (He supported stimulating the economy and i guess in a weird kind of way bailing out some companies, they expand on that much more in the docco)

Masters of Money - Hayek (He supported as little intervention into the market as possible, so, obviously, dead zero stimulus and a very very small government providing a small array of services. Sort of an a reverse image of Keynes in a way.)

There's also a two part rap battle about them, heres part one:

Finally, Commanding Heights. It's great and very comprehensive (3 parts). It's getting a bit old though and was produced before the crisis we have today so they missed a lot of the things the public or scholars have now came to realise. I think it has a bit of a bias towards the free market/libertarianism/conservativism as well but it's still definitely worth the watch (or just a listen in the background).

[nerdmmb]

@slothpomba
Wow! Thank-you for that informative response! Really appreciate it!
It's actually for a school debate but I'm haven't been informed as to whether I'm in the affirmative or negative team.

I agree with you. Although isn't it the responsibility of the government to assist companies such as Toyota which is Australian owned? By allowing these companies to fail, we are somewhat risking devaluation of currency and could also face a reduction in GDP which is highly disadvantageous for the Australian economy on a global scale. Also, aren't the salaries that are paid to employees in Australian companies provided by the government anyways? - it's a cycle where you earn money whilst simultaneously paying tax to stabilise the economy.

I really like the point about companies who are unable to attract consumers. Are there any rebuttals for this? For example, would it be reasonable to say that the funds granted to these failing companies enables them to promote their goods hence attracting more consumers. For example, picture two watch companies: one that is highly reputable while the other is lacking the funds to promote and therefore increases the price of their watches to compensate for that. By bailing out the second company, the company may be able to rise again.

Thanks once again!

[Professor Polonsky]

I think that it's disingenuous to hold a position that bailouts are inherently good or bad. TARP in the US is generally considered to be a success, but certain bailouts didn't turn out too well. Ultimately, it's all about whether the money you spend on keeping that company alive would not better stimulate the economy elsewhere. If there is a clearly-failing industry (such as automanufacturing in Australia), there is a very strong case to be made that the money used to bail-out could be better-used in developing new industries (*cough* clean energy anyone? Biomedics? *cough*)

Of course, it's also very hard to know whether a decision is the right one in the future. All economic predictions are laced with a large degree of uncertainty.

Yes, there are some that claim that any governmental intervention in the economy is bad, and government bailout are obviously a part of that. This view is very much on the fringe, however.

[chasej]

@slothpomba
Wow! Thank-you for that informative response! Really appreciate it!
It's actually for a school debate but I'm haven't been informed as to whether I'm in the affirmative or negative team.

I agree with you. Although isn't it the responsibility of the government to assist companies such as Toyota which is Australian owned? By allowing these companies to fail, we are somewhat risking devaluation of currency and could also face a reduction in GDP which is highly disadvantageous for the Australian economy on a global scale. Also, aren't the salaries that are paid to employees in Australian companies provided by the government anyways? - it's a cycle where you earn money whilst simultaneously paying tax to stabilise the economy.

I really like the point about companies who are unable to attract consumers. Are there any rebuttals for this? For example, would it be reasonable to say that the funds granted to these failing companies enables them to promote their goods hence attracting more consumers. For example, picture two watch companies: one that is highly reputable while the other is lacking the funds to promote and therefore increases the price of their watches to compensate for that. By bailing out the second company, the company may be able to rise again.

Thanks once again!

On the devaluation of currency point, it could be argued quite successfully that a devaluation of the currency is actually what Australia needs right now, in fact rightly or wrongly, the high dollar has been used by some companies as reasoning for shutdowns. Also is argued that although GDP may decrease in the short term by closing down inefficient and uncompetitive business, in the long run, these resources i.e. labor would move to areas of production which are competitive and thus GDP should be higher.

Also, the Australian government doesn't really provide market incomes, incomes received from working in a job, generally that level of income is the result of consumers purchasing goods/services with that spending being funnelled through the various producers to the level of the workers. Taxes can stabilise the economy but ultimately most income earned, for most people, in Australia would be the result of the free market.

The real purpose of bailing out companies is to keep alive companies which on some level Australians do want, however for some reason this company isn't viable without a bailout. If a business doesn't have customers and no one likes it, it doesn't make sense at all for a government to spend so much on keeping it alive, as since no one liked the business there would probably be no political impact aside form those directly involved with the company itself. The real purpose of bailouts is to keep alive business which on some level people do like, for example, a fair few people like the idea of having a national airline (Qantas).

[EvangelionZeta]

In answer to the OP, the answer to the question is clearly "Sometimes".  Sometimes companies are failing for reasons outside of their own control (eg. social circumstances) and because of the benefits these companies bring, it is worth the money invested into them.  Sometimes companies are just shit or can never be competitive in the future due to certain factors, and so the government will just lose money by propping them up.  TBH, the question is easier (and clearer) if you just frame it differently: "Should the government spend money on this thing?"  This makes the actual issue at hand more obvious, but also leads to the same answer (just with a clearer understanding of why the answer is yes or no).

[nerdmmb]

On the devaluation of currency point, it could be argued quite successfully that a devaluation of the currency is actually what Australia needs right now, in fact rightly or wrongly, the high dollar has been used by some companies as reasoning for shutdowns. Also is argued that although GDP may decrease in the short term by closing down inefficient and uncompetitive business, in the long run, these resources i.e. labor would move to areas of production which are competitive and thus GDP should be higher.

Also, the Australian government doesn't really provide market incomes, incomes received from working in a job, generally that level of income is the result of consumers purchasing goods/services with that spending being funnelled through the various producers to the level of the workers. Taxes can stabilise the economy but ultimately most income earned, for most people, in Australia would be the result of the free market.

The real purpose of bailing out companies is to keep alive companies which on some level Australians do want, however for some reason this company isn't viable without a bailout. If a business doesn't have customers and no one likes it, it doesn't make sense at all for a government to spend so much on keeping it alive, as since no one liked the business there would probably be no political impact aside form those directly involved with the company itself. The real purpose of bailouts is to keep alive business which on some level people do like, for example, a fair few people like the idea of having a national airline (Qantas).

Great points chasej!
Although, it can also be argued that companies face deficits due to other reasons; lack of funds to promote their products,etc.
On the other side of the spectrum, if businesses are really failing due to low consumer demand then it may be a good idea to abandon it.

Just wondering, would it be true to say that the cost of establishing a new corporation is more costly than bailing out an existing company? And what other alternatives exist for assisting a failing company?

[Professor Polonsky]

The real purpose of bailing out companies is to keep alive companies which on some level Australians do want, however for some reason this company isn't viable without a bailout. If a business doesn't have customers and no one likes it, it doesn't make sense at all for a government to spend so much on keeping it alive, as since no one liked the business there would probably be no political impact aside form those directly involved with the company itself. The real purpose of bailouts is to keep alive business which on some level people do like, for example, a fair few people like the idea of having a national airline (Qantas).

Bailouts of temporarily unsustainable companies, to keep them going for the long-run, makes economic sense. It's not just about keeping companies that we like. The bailout of Detroit industry turned out quite well, with GM rebounding quite strongly. The situation with the financial sector was quite different, but this idea is still very much applicable.

[nerdmmb]

Personally, I think that the pros outweigh the cons. Business involves a lot of risk-taking so there's never a guarantee as to whether you'll be profited or not.

Just like to add on to what Polonomial said, Apple was bailed out by Microsoft back in 1997 and it clearly had a good outcome. So if we are to abandon existing businesses, we may actually be taking an enormous risk.

[TrueTears]

There are advantages and disadvantages documented for both bailing or not bailing our "large" firms. Infact, I've done some research on the existence of the "too-big-to-fail" moral hazard issue. In a banking context, the effect is very dominant in the European banking system, and the situation is only getting worse. One clear effect of this too-big-to-fail phenomenon is the dramatic increase in systemic risk, financial contagion, and heightened increase in excess correlation. Below are some interesting (and recent) papers which documents these effects:

http://www.sciencedirect.com/science/article/pii/S0378426612003214 (JBF)
http://www.sciencedirect.com/science/article/pii/S0261560612001027 (JIMF)
http://www.sciencedirect.com/science/article/pii/S0927539811000028 (JEF)

There are also other less popular documented effects such as the "too-many-to-save" and the "too-many-to-fail" phenomenons.

[slothpomba]

Don't know if she can access those papers being in year 11 and everything (let alone understanding them haha). I think in the case of bailouts, especially large ones, the government should be definitely getting stock in the company or a guarantee of something. Sometimes you just cant' tell whether a bailout is a good or bad idea ahead of time, especially in murky scenarios, it's only after you have or haven't bailed out a company that you can tell after the fact. Those documentaries i linked above are really worth a watch (probably in that order too) if you want a deeper understanding.

I think some risk or competition is essential to a healthy economy and innovation, so, we definitely shouldn't bail out everyone. It really should remain an extraordinary measure (in particular if the government gets nothing concrete like stock out of it).

[Professor Polonsky]

Yeah, the consensus mostly seems to be that it is a tough choice, and will ultimately depend on the individual situation and the surrounding market circumstance. As I said in my first post, I think it's incorrect to take the position that bailouts are either inherently a 'good' or 'bad' thing.