Now is a tough time to be in the US economy. Almost every sector of the US economy is under some degree of downturn. Housing prices continue to decline. Jobless rates continue to climb. The tax base of many states has declined forcing significant cuts in spending to meet budgets. Consumers, who in prior times of adversity plowed ahead and continued spending, have put away their wallets. Everyone is tightening their belts and trying to survive lean times. Everyone that is except Washington, D.C.

Congress continues to look for ways to expand federal spending and is using the current economic conditions to justify massive expenditures of the taxpayer’s money in the form of “bailouts,” “rescue packages,” and “stimulus packages.” All told, the government increased the deficit for the first month of this fiscal year (October) by almost a quarter of a trillion dollars - a new record. Federal spending is completely out of control.

Back in September/October, the financial system’s leaders came forward and explained in stark detail how the US government had to intervene in the financial markets or the entire economy would collapse. To stave off that collapse, the Federal Government acted and passed the Emergency Economic Stabilization Act to the tune of about 750 billion dollars - making it one of the single largest appropriations. Since then, Congress has been deluged by industries and organizations seeking to get funds from the bailout, or alternatively, get their own sources of aid.

These groups that come in search of aid also argue dire consequences unless they are “bailed out.” For example, the auto industry is currently seeking 50 billion dollars for a “bail out” of their pension and health insurance liabilities. The airline industry is looking for a 15-20 billion dollar handout from the Congress because people are not flying as much as they used to (because it’s a recession). There are others who are seeking funds as well, and they all argue the same point - give us money or our bankruptcy will make an already weak economy worse.

Let me say at the outset that I have no issue with the argument’s validity itself. I do believe that if GM, Ford, Chrysler, have to file for bankruptcy there will be severe economic consequences. I also believe if the airline industry goes through the wringer, there will be severe economic consequences for that industry as well. Combined between those two industries alone, I have no doubt that millions of jobs are put at risk by the failure of those industries. Moreover, I as an economist, I recognize that the impact of those failures will b e far reaching beyond the industries themselves.

My argument is simple - so what? America is the land of opportunity and freedom. One of those freedoms is the freedom to fail. Economies in recessions lead to hard times. People lose their jobs. Businesses go under. Factories retool. Employees get new jobs and job training. The economy transforms itself. This is a natural process that ensures that over time the economy becomes stronger, more productive, and ultimately, leads to a stronger healthier economy with a higher standard of living. Without the freedom to fail - this process becomes stagnant and leads to ruin.

American business is the most robust, the most efficient, and the most effective in providing returns to shareholders on invested capital. We take capital from all points on the globe and turn it into returns that are often multiples of what they initially invested. No other country is as effective at generating wealth as the United States. We are so effective because of our commitment to capitalism and free markets. Part and parcel of that commitment is a belief in freedom. One of those freedoms has to be the freedom to fail. For if failure is not a consequence of bad decision making by private enterprise, we will surely fail in the long term in generating wealth. Life without risk, in business, is not worth investing in. All investments are a function of their risk and their reward. Low risk means low rewards. High risk means high rewards.

The automakers, the airlines, industrial manufacturing, the financial services sectors, all made decisions based on their understandings of the risks and rewards in terms of profitability. In making those decisions, they assumed certain business risks. Sometimes those risks paid out well. For example, the automakers enjoyed tremendous profitability for the last decade as a result of the growth in sales of SUV’s, light and heavy trucks, and other vehicles. The airline industry also enjoyed hefty profits as market conditions internationally became favorable for profitability through consolidations and technological improvements. People with fat wallets and a desire to travel fuelled air travel profits to record levels. Similarly, the financial services sectors enjoyed profitability to a level never before seen. The amount of money being paid to hedge funds, holding companies, investment banks, and brokerage houses was truly astronomical. Those industries that prospered in the last eight years did so because they assumed certain business risks and those gambits paid off.

Now times are tough, the choices many of those industries made turned out to be unsustainable in the long term. The auto industry is being crushed not because of the fact they don’t make fuel efficient cars (although that doesn’t help), but rather because their labor contracts and pensions failed to recognize long term market trends. The airline industry is being crushed not just because of the reduction in excursion travel (although again I think it doesn’t help), but rather, because of their long term contracts for fuel, aircraft, unionized labor, and airport fees. Other industries are being hard hit because of the capital investment and business decisions that they made over the past five years.

Why should the taxpayer only assume the financial consequences of risks when the business deals go sour? That is what Congress wants the tax payer to do. In providing these bailouts we’re attempting to do something that is fundamentally not possible, provide low risk and high rewards. If big business will not be held accountable for their business decisions, what incentive is there for them at all to govern their businesses wisely? There is none.

The freedom to fail ensures that business regulates itself appropriately and with full consideration of the business risks. In order to ensure success in the long term, business has to know it will be held accountable for its actions. The alternative is quite unattractive, government regulated enterprise, socialistic economic practices, and lower overall economic and business output. One only need look as far as our European friends to see what not allowing for failure does - lower productivity, lower outputs, lower standards of living when compared to the United States.

Failure is part and parcel of American business. I cannot think of a single biography of a corporate magnate or tycoon that essentially goes like this, “I had an idea, a miracle occurred, we never failed, and now I’m rich.” Instead, American business history is replete with stories of determination and failures. As a matter of fact, there is no better story, no more cherished business myth in America than that of the “comeback.” Comeback from what if there is no chance for failure.

In the past year, however, fear has distorted out faith in the power of American Business to be resilient. Fear of the financial consequences of encouraging home ownership to the poor lead to the biggest “bail out” in US history. Fear of losing jobs will lead Congress to provide incentives to airlines, automakers, and other big businesses that employ constituents. Fear of market risk will possibly entice individuals to allow Congress to regulate or even nationalize their retirement savings accounts. People are afraid, and thus, the bailouts promised by Congress attempt to alleviate that fear. But again, freedom to fail also means that fear of failure is a possibility and will sometimes be a certainty.

The biggest evidence that the freedom to fail cannot be thwarted by government intervention is the current financial markets bailout.

This bailout has largely been a failure. We have pumped in over five trillion dollars in various types of aid, funds, etc., into the financial services market and the market continues to flounder. As a point of perspective, the US economy in total is about 13 trillion. Thus, even with putting more than a third of our GDP into propping up the financial services industry was not enough to stop it from failing and collapsing.

You cannot stop failure unless we fundamentally change American business and become socialists. Democrats in Congress want to do this by essentially nationalizing businesses. The automakers get saved - but become part of the government. The banks get saved - but become part of the government. The airlines will be saved - and become part of the government. Those environments are disasterous to the long term health of the economy.

The government buying up business is not going to help get those businesses back on track and being competitive. Only failure does that. Only though accepting the consequences of failure do businesses learn from their mistakes.

Proponents of bail outs point to success stories such as Chrysler. Those stories are farer and fewer between, I would argue, than the bailouts of agriculture, automotive industry, the savings and loan sector, the airline industry, etc. Subsidies and handouts do not lead to long term competitive advantages. The chances of bailouts working in the long term seems to historically low.

The taxpayers should not be asked to foot the bill for failure. We have a mechanism for accounting for failure - it’s called shareholder liability. Taxpayers didn’t ask to become shareholders in failed businesses that have little incentive to recover if their profit/risk motives are eliminated. Tax payers need their money too. We have to end the bailouts and accept the fact that we are in for a bumpy road ahead. Businesses may fail. People will lose their jobs. Government has a role to play in all that, but, transforming private enterprise into public works is not the proper role if one cherishes freedom… the freedom to succeed… and the freedom to fail.

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