First, the fears of Boscov’s failing is overstated. As with the automakers – for which bankruptcy is a better option than a bailout – Boscov’s needs to find a business model which is sustainable. Bankruptcy allows them to restructure and do that; it does not mean every employee, or every supplier of products, will lose their job. And even if Boscov’s, or the automakers, did need to liquidate (i.e. go out of business), that isn’t the end of the world either. People will still want to shop, and people will still need cars (or some other form of transportation) – some other business will have to step up to fill in the void left by Boscov’s or the “Big 3” if they fail.
This is the process of creative destruction. Only 71 of the Fortune 500 companies in 1955 were on the list in 2004. As the article in the Concise Encyclopedia of Economics notes, “In 1910, 238,000 Americans worked as blacksmiths. Today, those jobs are largely obsolete.” It would seem silly to suggest that government should have “bailed out” the blacksmith industry a century ago, because it was “too big to fail,” but that is no different than proposal to bail out failing businesses today.
Second, what is unseen is the effect these bailouts have on the overall economy. Many stores competing with Boscov’s have done quite well, but despite their successful business plan Boscov’s gets reward with taxpayer-backed loans. If lawmakers continue to reward failure and punish success, the consequence is that there is little incentive to run an effective business, but great incentive to put more into lobbying for taxpayer funding.
As I pointed out, seeking bailouts for failure has proven to be a good business model for some firms and now we are starting to see that model being followed. Alex Charyna wonders if there is no firm that isn’t “too big to fail” (and also wonders when Governor Rendell will ask for a handout – hate to tell you, but he’s been begging DC for weeks) Bailing out failing businesses may help failing businesses, but is harmful to our overall economy.