State bail outs are usually bad news.
They are clearly bad news for taxpayers. We get lumbered with having to pay for businesses which have lost money and become too expensive for their shareholders and bankers to keep going.
The British experience demonstrates that they are often bad news for the very people a bail out is designed to help. In the 1970s UK government put huge sums into leading industries, only to make them some of the worst employers, endlessly sacking staff despite the hand outs. The nationalised coal, steel, and rail industries fired large numbers of people, whoever was in government and however much taxpayers money was tipped in.
The bailed out industries were not good news for their customers either. Far from enjoying cheap subsidised prices, they often faced big real increases in prices. Where bail out was allied to monopoly customers were clobbered.
In “Going for broke” I made the case against state subsidy of industry in the early 1980s, based on UK experiences in the 1970s. We won those arguments. A new generation of politicians, Labour as well as Conservative, started to repeat the new mantras – “Government is no good at backing winners” and “ Subsidy just delays sorting the bad business out, it doesn’t save the jobs”.
It is worrying that these crucial lessons seem to have been lost on both sides of the Atlantic. The US and the UK authorities seem to think these rules do not apply to banks, for some unspecified reason. Now the US is considering a second bail out of GM and Chrysler, just a few weeks after the first bail out. When will they learn?
It is not difficult to see why bails out rarely work. If senior management think cash comes from taxpayers, they devote their energy and time to wooing the state instead of wooing their customers and sorting out their businesses. If employees think the state will rescue their job it takes some of the pressure off to help the company find the new customers it needs to pay the wages. Above all it stops the energy and thought of how to change the business to make it successful.
What would happen, some ask, if the state does not step in and buy shares in banks and car companies? The answer is the radical restructuring needed takes place more quickly, perhaps reducing the total loss and pain brought on by subsidised delays to the process. Of course no main bank should be allowed to go under, as the Central bank is their lender of last resort. If they need last resort lending, it should be made available on promise of radical restructuring and slimming down, to get the bank back into commercial shape. If a car company needs money it can get it from its own bankers. If they are not obliging, then it needs to sell assets and find new equity backers. They will be there, even in these conditions, for a business plan which makes sense. Only the state finances dud business plans as a matter of course.