Economic Freedom and Government Bailouts

DATE: February 24, 2011

TO: redacted

FROM: Scott redacted

SUBJECT: Economic Freedom and Government Bailouts

SUMMARY

One aspect of economic freedom is the independence to succeed and/or fail. This suggests that government should not aid its citizens in succeeding or failing, nor should government prevent its citizens from succeeding or failing. The federal bailouts of the auto industry in 2008 provide an instance where the government stepped in to attempt to stop some companies from failing. In doing so, they might’ve also prevented others from succeeding. Fortunately for the one company who stuck to free-market principles; foresight, planning and fortune kept them from suffering the consequences of the government’s actions. A recent article in Businessweek details Ford's record sales just two years after declining the bailouts. Although they do not provide us with a perfect example of the consequences of government intrusion on the markets, the bailouts are an interesting case study.

A BRIEF HISTORY

In November of 2008, the big three American auto manufacturing companies went to Washington for hearings on the possible need for a government bail-out of the industry. Poor management combined with the ongoing world-wide economic crisis made the continued solvency of these companies questionable. Whether to stave off job losses, to prevent further perceived harm to the economy or a combination of both, the government intended to backstop these companies with government loans and stock purchases as part of a bailout if necessary. Ford walked away from the talks saying they would not be needing the government’s assistance. The other two companies, GM and Chrysler, hung back and eventually accepted billions in government loans. Within months, both companies were dismantled in unprecedented government-backed bankruptcy proceedings.

THE OUTCOME

Ford should have failed and probably would have failed if it weren’t for a few fortunate circumstances. The government bailout obviously helped those who were given assistance, yet the consequence was that those who weren’t helped were in a less favorable position competitively. Not to mention, they likely lost any hard fought competitive ground gained over the years prior to the bailouts. Fortunately for Ford, however, consumers rewarded them for making what the consumers deemed as the right decision. Refusing bailout money gained enormous goodwill for Ford. Also helping Ford was the fact that, prior to the downturn, they had begun to refocus on making the company profitable. This also garnered consumer favor as this was seen as the appropriate action for the situation. At the same time, and in stark contrast, Chrysler and GM seemed to be in a state of atrophy. For many consumers, their inaction only served to highlight Ford as the only company worthy of their patronage.

Ford did not fail because they were better prepared to weather the economic downturn. Before the market decline, Ford’s CEO had already begun analyzing the company; seeking ways to improve and regain market share. They were beginning to implement changes designed to help the company compete in the small-car market and in Asia, two markets which the company suffered in. Ford’s willingness to cut their workforce, sell off property and focus on improvement in the face of an economic downturn also translated into consumer appreciation and new customers. Consumers who respected Ford’s bail-out decision and renewed profit-mindedness began to file into Ford’s showrooms. Ford’s sales rose and at the end of 2010, they posted their highest profit in over a decade.

General Motors, on the other hand, has taken to avoiding using the parent company name when advertising brands like Chevy and Buick. For Chrysler, this was their second trip to the government for a bailout having received a bailout under Lee Iacocca in the early eighties. They likely held no shame. As might be expected, sales at both companies are up for the year, as well.

CONCLUSION

It is good that Ford did not accept the bailout. Had they done so, then it could have been argued that the bailouts were not market interference. Proponents could claim that equal treatment was received by the entire industry, (forgetting that other industries in the economy shouldn’t be excluded from such an argument) and therefore it wasn’t really doing any harm, only good. But because Ford accepted the bailouts, we now have two examples from which to observe. We can watch the effects on the bailed out companies in contrast to the one that wasn’t bailed out and draw evident conclusions. The present may not be the best time to make any noteworthy inferences, but over the period of perhaps a decade, it should be possible to look back and see the effects of the bailout more clearly.

"Joel Ewanick On The Parent Company | The Truth About Cars." New Car Reviews, Ratings & Pricing, Auto News for New Models. N.p., n.d. Web. 10 Feb. 2011.

Priddle, Alisa. "Despite strong year, profit-sharing, Ford stock tumbles." detnews.com. The Detroit News, 28 Jan. 2011. Web. 9 Jan. 2011.

"The Happiest Man in Detroit - BusinessWeek." BusinessWeek - Business News, Stock Market & Financial Advice. N.p., n.d. Web. 10 Feb. 2011.

Valdes-Dapena, Peter. "AutoNation: GM, Ford, Chrysler driving up sales - Feb. 3, 2011." Business, financial, personal finance news - CNNMoney.com. CNN Money, 3 Feb. 2011. Web. 9 Feb. 2011.

"theblogprof: Take your bailout and shove it! Ford has its best year since 1999; profit-sharing checks to average $5K." theblogprof. N.p., n.d. Web. 10 Feb. 2011.