Is the fundamental reason why bailouts don’t work because of the lack of consumer demand in said industries?
I think the rock bottom reason is the swimming pool analogy. The govt doesnt have any money. So any money it gives away in bailouts has to be taken away from someone else first. It’s like trying to add more water to the shallow part of the pool by drawing from the deep part. Similarly, what improvement the bailout causes in one part of the economy is offset by a loss in another part.
Another reason is related to what you said. The bailouts, by definition, are given to firms that have failed. Which means they didn’t know how to run a business or turn a profit. So they won’t know how to turn a profit with the bailout money either.
There is no lack of “demand”. People always want stuff. More sophisticated economists will claim there is a lack of purchasing power, but that cannot be created by printing money, which only redistributes purchasing power.
Purchasing power is created from production. That is, real wages increase when workers make more stuff that the economy wants. Its pretty common sense. If you want to buy more stuff from everyone else, you have to produce more stuff that they want. Say’s law.
Thanks for the clarification guys.
Even if the companies that should fail recieve enough money to get out of the red, the consumers which will support these businesses at this level of production run out of money to spend. Consumers have to run out of money eventually and stop consuming right? It would seem that, while certaintly not the most imporant, this fact plays a small part in why the “bust” occurs in the first place? Even if you finance the spending through taking out loans, once you have to start making payments on those loans you won’t tackle on more.
Thanks for the swimming pool analogy Dave.
If I’m not mistaken, GM would have had to liquidate all of its assets befor claiming bankruptcy assuming the government hadn’t bought it. I agree when you say there’s no lack of demand. That means GM probably would have been selling their lot of cars, buildings, etc. for very cheap prices because people still want cars even after the business has tanked.
But the OP said “Lack of demand in said industries”. So in this case that would be correct. People don’t want to buy lesser quality domestic automobiles.
Andy’s sentence is a descent enough summary. There are other problems caused by bailouts, but for the purpose of the OP, we’re pushing resources into an industry that consumers are trying to pull resources away from.
“If I’m not mistaken, GM would have had to liquidate all of its assets befor claiming bankruptcy assuming the government hadn’t bought it.”
Those assets don’t disappear. They end up with people who can put them to better use.
Well, bailouts “work” if your aim is to keep capital and labor trapped in inefficient economic employments so that you can boast about all the jobs you’ve “saved” as a politician. If, on the other hand, your aim is to promote economic growth, then bailouts don’t work because they prevent the reorganization and redeployment of capital and labor towards more efficient economic activities. Firms fail for a reason.
I detect something here. Mainly the assumption that it’s consumer spending that makes the world go round. That the test of something being harmful is “Does it reduce consumer spending?”
Which, although that’s what you see on TV 7 days a week, and what is taught in almost every school in the world at every level, is a big big mistake.
When you try to get a job, the interviewer will not ask you “How much can you consume?” He will ask “How much will you be able to produce for me?”
Similarly, countries accepting immigrants will not ask them “How big is your apetite?”, but rather “What skills have you to add to the job market?” They have lists of skills that they need, and if you have one them, you get in. Which is rather odd. They should be letting in the eaters, not the producers, right?
But of course, a little thought will make clear that they are 100% right. An economy and/or a country is wealthier, by definition, if it has more goods to distribute. A nation with 10 million cars is wealthier than a nation with 1. So that the key to a wealthier nation is more production.
Using that reasoning, in the bailout analysis, it is enough to say that bailouts do not increase production, but hinder it by giving scarce resources to proven incompetents. That right there is the reason and the definition of the failure of a bailout. No need to go on and say “Besides, the consumers will be able to spend less.”
I know. That’s the point I made.