A Proper Perspective of Industry Bailout

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Industry BailoutI’m rereading Economics In One Lesson by Henry Hazlitt – an absolute must read.

I was compelled to share his explanation of industry bailouts to shed light on a topic that has stolen the wealth of the American people.

This is an excerpt from the book concerning the bailout of The X industry (any industry).

After showing how a bailout of The X industry can only be done at the expense of all other industries, Hazlitt goes on to say…

Similar results would follow any attempt to save the X industry by a direct subsidy out of the public till. This would be nothing more than a transfer of wealth or income to the X industry. The taxpayers would lose precisely as much as the people in the X industry gained. The great advantage of a subsidy, indeed, from the standpoint of the public, is that it makes this fact so clear. There is far less opportunity fro the intellectual obfuscation that accompanies arguments for tariffs, minimum-price fixing, or monopolistic exclusion.

It is obvious in the case of a subsidy that the taxpayers must lose precisely as much as the X industry gains. It should be equally clear that, as a consequence, other industries must lose what the X industry gains. They must pay part of the taxes that are used to support the X industry. And consumers, because they are taxed to support the X industry, will have that much less income left with which to buy other things. The result must be that other industries on the average must be smaller than otherwise in order that the X industry may be larger.

But the result of this subsidy is not merely that there has been a transfer of wealth or income, or that other industries have shrunk in the aggregate as much as the X industry has expanded. The result is also (and this is where the net loss comes in to the nation considered as a unit) that capital and labor are driven out of industries in which they are more efficiently employed to be diverted to an industry in which they are less efficiently employed. Less wealth is created. The average standard of living is lowered compared with what it would have been.

These results are virtually inherent, in fact, in the very arguments put forward to subsidize the X industry. The X industry is shrinking or dying by the contention of its friends. Why, it may be asked, should it be kept alive by artificial respiration? The idea that an expanding economy implies that all industries must be simultaneously expanding is a profound error. In order that new industries may grow fast enough it is necessary that some old industries should be allowed to shrink or die. They must do this in order to release the necessary capital and labor for the new industries. If we had tried to keep the horse-and-buggy trade artificially alive we should have slowed down the growth of the automobile industry and all the trades dependent on it. We should have lowered the production of wealth and retarded economic and scientific progress.

We do the same thing, however, when we try to prevent any industry from dying in order to protect the labor already trained or the capital already invested in it. Paradoxical as it may seem to some, it is just as necessary to the health of a dynamic economy that dying industries be allowed to die as that growing industries be allowed to grow. The first process is essential to the second. It is as foolish to try to preserve obsolescent industries as to try to preserve obsolescent methods of production: this is often, in fact, merely two ways of describing the same thing. Improved methods of production must constantly supplant obsolete methods, if both old needs and new wants are to be filled by better commodities and better means.

Hazlitt goes on to explain how nearly all forms of government interference in the free markets are harmful, and he does so with such ease and clarity.

The book is easy to understand and fun to read; which is saying a lot for an economics book.

It’s a must read for anyone looking to understand the desperate situation our economy is in after a century of increased bureaucratic interference. It should also be required reading for anyone looking to serve in public office.

Check if your local library has a copy or buy it on Amazon.


Resources and further reading

“I strongly recommend that every American acquire some basic knowledge of economics, monetary policy, and the intersection of politics with the economy. No formal classroom is required; a desire to read and learn will suffice. There are countless important books to consider, but the following are an excellent starting point: The Law by Frédéric Bastiat; Economics in One Lesson by Henry Hazlitt; What has Government Done to our Money? by Murray Rothbard; The Road to Serfdom by Friedrich Hayek; and Economics for Real People by Gene Callahan.

If you simply read and comprehend these relatively short texts, you will know far more than most educated people about economics and government. You certainly will develop a far greater understanding of how supposedly benevolent government policies destroy prosperity. If you care about the future of this country, arm yourself with knowledge and fight back against economic ignorance. We disregard economics and history at our own peril.”

– Ron Paul, Representative from Texas

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1 Joseph Lalonde

It always amazes me how little the average person knows in regards to economics. I believe it’s due to so many people being driven by emotions rather than facts.

The world will end, so many jobs will be lost, or any other such explanation plays on that part of us. We feel guilty. Something must be done. We let our emotions control our actions.

If people could overcome this, I think we would start seeing a huge change in our economic climate.

2 Matt Jabs

Yeah, unfortunately fear of what “might happen” in the immediate is what drives our economic policy nowadays rather than sound decisions based on what the effects will be on all groups in both the short and long term.

3 Joseph Lalonde

Yup, and we all wonder why we’re in the mess that we are in. Thanks for shedding light on the issue. Hopefully people will see this and be moved to action.

4 Matt Jabs

It would be GREAT if people read this book; it truly is the best representation of what is wrong and what we must do to fix it (which only starts when we educate ourselves).

5 Kristen

Matt what a great book to highlight. I know you read a lot and wanted to see if you’ve read The Vigilant Investor? It’s another good book that deals with the economy and how people get taken advantage of through their investments. It’s an easy read as well so I wanted to mention it.

6 Matt Jabs

Thanks Kristen. I haven’t read that book, I’ll have to see if my Library has a copy. 🙂

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