Dave’s Strange and Unusual World

November 18, 2008

Time to Pull the Plug?

I recently did some research and found that small businesses – those employing less than 500 employees – represent 99.7 percent of all businesses in the US, employ fifty percent of all private sector employees, and have generated sixty to eighty percent of net new jobs annually over the last decade (US SBA). I just wanted to lay out these numbers, which I’ve laid out elsewhere before, to show that our economy depends vitally on small businesses and perhaps not quite so much on large businesses.

Now, to be sure, large businesses do play a huge role in our economy, but their value, as estimated by their “visibility,” should not be given priority over small businesses. For example, we should not consider large businesses – for example, automakers – as being “too large to fail.” The market is built upon efficiency and innovation, and those businesses that cannot compete are really not generating a benefit to the overall economy. Uncompetitive firms become stagnant ponds that only breed disease that hurts, not helps, the overall health of the economy.

The Big Three auto firms have become uncompetitive for a number of reasons, which has a lot to do with managerial decisions and unions. So, what is the net effect on the economy of this? Well, to begin, valuable resources are being utilized to pay people to produce unwanted items. Therefore, a portion of our national human capital is being mismanaged by being employed in a job that produces less than it would in another area of our economy. Instead of paying workers to produce unwanted items, we should be paying workers to produce items that are in demand; this requires a job shift. In addition to this, a portion of our physical capital is being used and spent creating items that aren’t wanted; economics dictate that these resources would be better used in other industries where their value as a finished good is higher to the consumer.

By postponing the inevitable demise of the US auto industry, we are only postponing the necessary and eventual adjustment of scarce resources to their highest use. I’m not saying that the transition of employees from one industry to another is going to be easy, but it is necessary and will ultimately happen unless we become a fully socialist nation. Lawmakers are proposing to give twenty-five billion dollars to the auto industry to keep it on life support for a few more months. But, what then? If this measure passes, what will we do when, in the very near future, the industry is in the same boat as it is now? Do we continue to give money in the hopes that things will turn around, even though we know that there is very little that the industry can do now to really turn itself around?

The answer is that free markets both reward and penalize companies for the choices that they make, ceterus paribus. If companies know their markets, if they innovate, and if they produce things that customers really want, then the market will reward those companies with growth and profits. If companies don’t know their markets, if they don’t innovate and they don’t produce things that people want, then the market penalizes them. So, please, if you’re reading this and thinking that I am a bad guy for my views, remember that this is just a normal outcome of normal market forces. As they say, it’s all business…nothing personal.

I decided that it isn’t very constructive to just throw a bunch of economics out there, especially when most Americans don’t know or consider the economic consequences of their choices and actions. So, in a concilliatory effort to keep the peace, I offer the following helpful advice:

The American auto industry currently employs around 239,000 workers. What could the twenty-five billion dollars do that would be of more worth than keeping the Big Three on life support for a few months? How about providing up to $104,602.51 worth of re-training, re-location and other benefits for each auto worker to give him or her the skills that he or she will need to actually contribute to the new American economy or to move to a location where his or her current skills can be put to use more efficiently and effectively? If we are going to spend the money, at least this option would provide real long-term aid to people.

And, of course, I assume that the twenty five billion dollars will be spent to help out the auto industry, even though that wasn’t originally part of the plan for the seven hundred billion dollar bailout package.  But, as I mentioned before, America is probably going to help out the inefficient large businesses that are “too big to fail” while simultaneously enacting policies to destroy small businesses, which are our lifeblood, through taxation.


1 Comment »

  1. […] worked up over things like the bailout nonsense that is going on (I got worked up over it before: here).  As you may have heard (here and here), the CEOs of Ford, GM and Chrysler flew their private […]

    Pingback by The ‘Big Three’ Stooges « Dave’s Strange and Unusual World — November 20, 2008 @ 2:17 am

RSS feed for comments on this post. TrackBack URI

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

Blog at WordPress.com.

%d bloggers like this: