Saturday, December 27, 2008

Bailout: Shoe On The Other Foot

One issue which is largely ignored in the bailout vs no-bailout debates is the precedent being set on international trade. The US has consistently imposed tariffs when it has felt that international government subsidies for foreign companies have disadvantaged American companies. By bailing out domestic auto makers, does the US lose all credibility in this regard?

It would now seem quite hypocritical for the US to argue that free markets should decide which companies should survive. Just three months ago, the US threatened sanctions against China for export subsidies on textiles. If China can make a case which parallels the arguments the US uses to justify bailing out domestic auto makers (e.g. the threat of widespread unemployment, serious harm to the economy etc.), does the US have any moral authority anymore?

It would seem that it is now open season on bailouts. Any government that wishes to bail out certain industries or companies which are headquartered in its jurisdiction is now free to do so. Unfortunately, this strategy is harmful to overall productivity, which is the driving force behind our standard of living, as we discussed here. By sustaining the least profitable companies rather than allowing the superior companies to grow their market shares, we all lose in the long run.

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