Follow

politics, bailouts, competition 

"Some government contractors took out loans from the Paycheck Protection Program even as they were paid for government work during the pandemic"
wsj.com/articles/some-companie

The same thing happened during the housing crisis bailouts of 2009: perfectly healthy businesses, who had plenty of cash on-hand and were operating profitably, took bailout loans.

The same public anger erupted then. But then, as now, they missed something important.

politics, bailouts, competition 

It's a bit romantic, but in a healthy market (and not all are), competition is thriving and businesses fight to survive. Make a wrong move and your competition eats your lunch.

If you're smart, invest (in talented people, ideas) wisely, work hard -- and get lucky -- you're rewarded at the expense of your rivals. You eat their lunch.

This is how it's supposed to work!

But, bailouts change that.

politics, bailouts, competition 

Now, those uncompetitive rivals who were over-leveraged or financially unprepared for even a minor loss of revenue were being given loans under very favorable terms.

From the perspective of a healthy, successful business, this is an unfair subsidy that not only hurts their competitiveness, it distorts the entire market in favor of the uncompetitive rivals. In other words, it's also hurting consumers.

politics, bailouts, competition 

The only logical recourse for these businesses in this scenario, as distasteful as it is, is to seek the same advantages given to their rivals.

This is obviously not ideal, but this is what these businesses will effectively be forced to do every time. We shouldn't be surprised by it.

And from a pure free market perspective, it's hard to argue they don't have just as much of a right to it as their rivals do. Especially at the current scale of stimulus measures.

politics, bailouts, competition 

@argentum > it distorts the entire market in favor of the uncompetitive rivals

How did you reach this conclusion?

The market is naturally working against the uncompetitive rivals, right?

All a bailout does is delay the inevitable: needing another bailout or dying.

politics, bailouts, competition 

@indirection

Yes, a healthy market punishes the uncompetitive and rewards the competitive.

Bailouts, emergency loans, and other forms of stimulus change that calculus, benefiting uncompetitive businesses by resuscitating their corpse.

This market distortion hurts consumers (higher prices) and competitive businesses that do not also seek the same subsidies.

It may only be delaying the inevitable, but it still carries an economic cost in the interim.

politics, bailouts, competition 

@argentum I think my confusion is: what's distorted?

I agree, their prolonged existence hurts consumers, but not any more than before.

I'm not even sure it's productive to talk about uncompetitive businesses; they just end up dying to the competitive ones. Natural selection and all that... Right?

politics, bailouts, competition 

@indirection

In free market economics, any interference into "perfect competition" is considered a distortion. This must necessarily affect prices and other attributes normally decided by the market alone.

Depending on its implementation, stimulus can effectively reward the wrong businesses at the expense of the right ones and consumers. It can, itself, be a huge drag on the economy.

Sign in to participate in the conversation
Mastodon

This is a brand new server run by the main developers of the project as a spin-off of mastodon.social 🐘 It is not focused on any particular niche interest - everyone is welcome as long as you follow our code of conduct!