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 Thoughts from Roland F. Sennholz:

Too Big to Fail?

October 28, 2010

I'm sure you've all heard it at least once before: “the company is too big to fail.”  Somehow, by virtue of reaching some arbitrary size, a company becomes too large to be allowed to fail.  Why?  Because the government considers it too integral to the country's infrastructure, or allowing that many people to be unemployed at once would be disastrous for the economy.

A company is like the human body in more ways than you might think.  Companies try to regulate themselves, deal with internal clogs and problems fairly well, and aim to feed themselves with a steady stream of profits... but if they feed on bad loans and poor marketing decisions, or promise their employees too many benefits, sooner or later they're either going to starve to death or die from heart failure.

“Okay, so companies are never too big to fail according to economists,” you might say, “But we need those jobs.  We can't just allow thousands of people to become unemployed overnight.”  Some might agree, some might disagree, but one thing is certain, if governments bail out one company, other companies (and individuals!) must pay more in taxes to pay for the bailout.  They will suffer and pay the price for saving the bailed out company.  In other words, when you use your money to support a company that should have gone under, you can't use your money to patronize a company that wasn't going to go under.  Now, which company sounds like the better choice?  The company that is earning a profit for its owners, providing goods/services at a low price for consumers, and employing happy, productive, and secure employees, or the one that is losing money for its owners (and taxpayers), shedding employees and producing uncompetitive goods/services for consumers?  Compare UPS with the U.S. Postal Service!

“Okay, but the economy can handle a little inefficiency, right?” might be your answer.  “What's the worst that could happen?”  My answer would be: Japan.  A few decades ago, their economy was booming, until a bubble popped.  The government bailed out the major companies and banks, and after a lot of trouble, their market stabilized at a much lower level.  The only problem is... the market still hasn't reached its former level.  Its growth has been sluggish for two decades.  One government intervention led to the next, and Japanese businesses are too busy supporting their bureaucratic government and inefficient businesses to prosper.  Any reason we can’t duplicate that performance?  None that I can think of.

So, the next time you hear someone say, “the company is too big to fail,” just remember that we taxpayers will pay to bail them out and all the profitable businesses will be “rewarded” by paying more in taxes, growing less, and we consumers will have to pay higher taxes and higher prices for our less efficiently produced goods/services.  I hope you came to the same conclusion I did…everyone can (and should be allowed to) fail…even the U.S. government.

Roland F. Sennholz