Bailout Mania

Bailout mania has struck Washington. We are now beginning to see a procession of industries, companies, and state and local governments going up to Washington with their hands out looking for a bailout. It would appear that they see the election of Barrack Obama as a sign that Washington will be handing out money more freely than they have in the past. As commonsense economists, we must ask ourselves two questions. How are we going to pay for these bailouts and are bailouts, or simply giving money to public and private organizations, the best way to solve the problem.

In answer to the first question we need to look at how governments, such as the US government, raise revenue. Governments do not manufacture anything tangible. Governments do provide services but unlike services provided in the private sector, the individual or organization benefiting from the service, as a rule, is not the one paying for it. Let us use an auto mechanic as an example. Auto mechanics provide a valuable service for those of us who are mentally challenged as to how our cars or trucks work. When we need the service of an auto mechanic, we are willing to pay them for it. However, government services do not work the same way. When someone comes to the government looking for service, they are not expecting to have to pay for it. Instead, they are looking for a hand out, anticipating that the government will tax someone else to pay for it. Therefore, the answer to the first question is taxpayers who, most likely, will receive no benefit from the bailout, will be the ones paying for it.

Now, to answer the second question, are bailouts the best way to solve economic problems? The best approach to solving problems as to apply critical thinking. One of the first steps in the critical thinking process is determining the root cause of the problem. When we go to our mechanic with a complaint that our car or truck is running rough, the mechanic does not bail us out by taking money from someone else and giving it to us to buy a new car. No, he instead determines the cause of the problem and fixes it. He then presents us with a bill. If we are unable to pay the bill, we use our credit card, which is the same as taking out a loan. Instead of bailing out the organizations that have a deficit, we need to take the time to determine what the root cause of their deficit is. We can then come up with a solution to the problem and if necessary loan the organization the money to cover their deficit. Now that we have determined the cause of the organizations deficit, they will be able to run profitably and out of these profits, or surpluses for governmental organizations, pay back the loans.

This is exactly what the government did with Chrysler back in the 70’s. They loaned Chrysler the money it needed to remain in business but as a requirement for the loan required that Chrysler revamp its line of cars and reorganize its management. They did this, became profitable, and fully repaid the loan with interest. The common sense economist in me thinks this is a much better solution that will result in stronger organizations without over burdening taxpayers. Please send me your comments on this issue.