Bailing out failure guarantees more of it

By Jeff Rhodes

It’s axiomatic in business — or at least it should be — that free markets spawn both successes and failures. And while one outcome is without question more desirable, the other is arguably even more important in the grand scheme of things.

The question is whether the same principles apply in government and whether we have the courage to permit failure in order to learn from the mistakes that caused it.

We’re bombarded daily, for example, with reports of how nations like Greece and Spain, after decades of adhering to an unsustainable economic model that discourages risk and innovation while relying on a shrinking private sector to pay for the excesses of a bloated government bureaucracy, are teetering on the brink of ruin.

Just as irresponsibly, the state of California is currently running a $16 billion deficit but shows little inclination to curb its free-spending, over-regulating, commerce-killing ways.

At the municipal level, the California cities of Stockton and San Bernardino have filed for bankruptcy protection this year alone. And closer to home, a pair of Washington towns — Normandy Park and Gold Bar— have both reportedly considered disincorporation as a last resort means of solving their own financial problems.

The common thread running through each of these cases, of course, is the preferred remedy being suggested by those whose own fiscal ignorance or indifference created the problem in the first place.

In a word, they want a bailout.

Whether it be from the European Union, the federal government, or the taxpayers themselves in the form of levy lid lifts and higher property taxes, the leaders in each of these failing jurisdictions have turned to others to pay the cost for their miscalculations. And in order to make this case, they argue they’re “too big to fail” because the economic chaos created by their demise would have a ripple effect on other nations/states/communities.

And in the short term, that may be true. Certainly no one relishes the pain inflicted on individuals who lose their livelihoods when their employer fails. But in the long term, all you get by subsidizing failure is more of it.

In the corporate world, Henry Ford introduced his Model T in 1908 and by 1921 the company that still bears his name was selling two-thirds of the cars built in the U.S. Five years later, however, with the advent of competition from General Motors, Ford’s market share had slipped to one-third.

And if Ford had responded to the crisis by asking for federal stimulus money to spare his workers the indignity of being laid off and the economy of Detroit from being devastated, the company might still be producing Model T’s. Instead, Ford shut down production temporarily to re-tool his factories and bring the Model A to the market.

Government is no different. At the federal, state and local level, we’re still in the Model T age, hitched to a social contract first conceived during the New Deal, when the average life span was 62.9 years and there were 42 private-sector workers to support one retiree. Today the ratio is closer to 3.3-to-1.

But rather than letting the company fail in order to force those running it to come up with new ideas, we keep subsidizing failure.

Americans have a genius for innovation, but we only use it when we’re forced by necessity. Thomas Edison once famously said his earlier failures hadn’t deterred him because they showed him 1,000 ways not to make a light bulb.

In a very real sense, Gold Bar, Normandy Park and Greece are showing us how not to run a government. The problem is,if we step in to shield them from the consequences of their decisions, that’s all we can ever expect from them.

Jeff Rhodes is the news editor for The Freedom Foundation, an Olympia-based think tank advocating free markets and limited government.