Wednesday, February 11, 2009

The Importance of Failure

Tyler A. Watts reminds us that failure is a necessary part of success.
There is much discussion these days about bailouts. Are they needed? Are they just? I say no on both counts. Yet many economists, politicians, and businessmen tell us that bailouts are needed to prevent catastrophic economic collapse. Without commenting on the justice of bailouts, they warn that we are facing massive economic pain if we stand aside and let markets run their course. Bailouts can staunch this pain, they claim, and restore order and calm to the economy.

I don't buy the probailout folks' predictions of impending economic chaos. But what if they're right? What if the short-run pain in store is just too terrible to endure if we don't start bailing out key industries? After all, we're talking massive unemployment, a new wave of foreclosures, a shrinking economy — in a word, recession. If the dire forecasts of the bailouters are correct, we'd be stupid not to do it; we'd be like a beaver caught in a trap: slowly dying, yet too timid to chew off his own foot to escape.

Capitalism depends on three highly complementary, yet distinct, institutions: prices, property, and "profit and loss." Classical-liberal economists have demonstrated the essential role of these pillars of prosperity for centuries. These fundamental institutions of the market economy are like legs of a stool. If we gradually weaken one leg, we will eventually bring the stool toppling down — economic collapse.

In this light, the implications of bailout are clear. Bailouts are designed to insulate people from the effects of bad decisions. When market prices change dramatically, exposing yesterday's poor investment choices, bailouts come "to the rescue," promising those left holding the bag that they won't have to endure the full cost of their errors. Read the full article here.
The question is not whether someone must bear the pain and costs of bad decisions already made; there will be pain and costs. Government cannot remove the pain and cost, but it can redirect them away from the people who made the bad decisions and spread them across all Americans.

The Dow Jones dropped nearly 400 points following Mr. Geithner's press conference precisely because he made no clear, unambiguous statements about who would bear the pain and costs already in the pipeline. Someone must take the losses expected from the so called "toxic assets." Until the government quits stoking the uncertainty about who that will be, neither the market nor the economy will be able begin a recovery.

Redirecting the pain and cost will only perpetuate the bad decisions already made. Bailing out sick financial institutions and failed business models will only make them sicker. One does not cure a cancer by spreading it across the whole body; one removes the tumor if possible. Private enterprise will remove the tumor, if we can get beyond politicians' promises of something for nothing.

Private enterprise and voluntary exchange are very robust institutions. Those institutions gave us the quality of life Americans enjoy today. If we allow government to change the rules of the game when it goes badly for the wealthy, failure that is necessary for future success will be short circuited.

It's time to allow those who made bad decisions to bear the pain and costs themselves. What's going on now with the full support and cheer leading of BHO is not "change we can believe in."

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