Why Government Bailouts Destroy Wealth

A friend and I had this discussion recently with GM as the example. I thought this might be a good topic for my blog!

GM (General Motors or Government Motors) must have been doing great at one point. They had benifits, high salaries, and a ton of workers who created a huge supply of cars to fill a huge demand of cars. Out of no where the demand fell, people either had less money to spend or decided to that a competor had a better product. GM stayed positive still creating a vast amount of cars while the demand decreasing. Spending all this money building cars with no one buying just means GM is destroying wealth. The supply was too great, so cutting costs and profit margins was not effective enough to create a decent profit. The owner has several choices. Reinvent the cars with a feature noone else has, start creating a new products, downsize, or sell.

If GM decided to down size then they would lay off a ton of workers, cut salaries and create a smaller supply to fill a smaller demand. Over time after the market corrects itself and the demand will increase so will employment, salaries and profits. If GM decided sell, some one will come along buy up GM reinvent it and try to increase profits by fixing the flaws.

If the Governement bails them out or takes over, it would destroy wealth. If GM is failing giving GM a billion will only prolong its demise. If their is no demand the business will fail. If you give a company a billion dollars to create a supply where there is no demand all you are doing is destroying wealth, wasting efforts, wasting money, and wasting time creating products that wont sell. If the government bails out any company they are either printing up money out of thin air causing the exisiting money to loose its value or taxing people and using those taxes to restore that company. Either method used will hurt the people or the buyers. If more of our money is taken away from us, obviously we have less money. If we have less money we are less likely to buy causing demand to shrink.

Now since GM has been renamed Governement Motors, you dont realize it but whether or not they sell cars they are getting your money. If you buy from GM your moneys going to the governement, if dont buy from GM your tax dollar will go into GM keeping them alive. Let nature take its course! GM is becoming a burden to society by destroying wealth.

As for layed of workers they can find employment elsewhere contributing to other industries or start new companies eventually employing others.