All About Bailout

“Bailout” refers to the gratuitous act by the State of lending or infusing capital to a business to prevent bankruptcy or insolvency. Merriam-Webster defines it simply as “a rescue from financial distress,” but most economic watchers and ordinary citizens are reminded of Goldman Sachs and the three big auto manufacturers GM, Ford and Chrysler, when they hear the word.

There is always much disagreement and controversy attached to bailout plans. It is an established principle that taxes are the lifeblood of the state, which is why bailout controversies often center on the wisdom of spending taxpayer money on “corporate welfare.” Public debates are especially wild and hard-hitting when there is evidence that the enterprise or industry subject of the rescue plan is failing because of mismanagement.

Despite the public outrage, countries all over the world have bailed out industries—especially those imbued with public interest such as banking and investment—since the 20^th century. The rationale is Machiavellian: the end—which is the urgent needs of the company or industry to be bailed out—justifies the means—which is reallocating taxpayer money previously allocated for social services, for example, to benefit private industries.

Supporters of free market consider emergency government bailouts as nothing more than a scheme to pass the buck to taxpayers who don’t deserve the burden of saving mismanaged companies. According to them, enterprise managers have the obligation to maintain the liquidity of their companies, and those who fail should be made to suffer the organic death, thereby allowing startups to emerge into the free market.

In contrast, bailout supporters have referred to bailouts as “necessary evils.” While it may be undeniable that mismanagement is a factor, letting companies fail completely is unacceptable. This is especially so when such failure is likely to cause turbulence in the state’s macroeconomics, as when closing shop could mean the loss of three million jobs, as in the case of the US’ Big Three automakers.