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October 28, 2010

Lessons from Milton Friedman: Don't Bailout Large Companies

Milton Friedman may be gone, but his lessons in economics live on. One example is regarding bailouts. In the late 70s, the government lent Chrysler $200 million to keep the struggling automaker alive. Today, the government has lent close to $60 billion in taxpayer dollars to Chrysler and General Motors.

But, as Friedman put it, government bailouts distort the profit and loss system that we live in.

Losses play an important part in our free market. Losses force companies to make improvements or go under. Losses communicate to businesses that consumers do not want the product or service they produce. Losses may indicate deeper systematic or efficiency problems within a company's systems.

Subsidizing these losses with outside money creates the risk that these discoveries are not made. Why?

Because, by eliminating the probability of a total failure, companies do not have the incentive to make improvements. To liberals, corporate failure equals job loss, a movement of increased market share by foreign entities, and an overall loss for America.

However, corporate closures create new opportunities for America. Those foreign entities that are taking market share in the U.S. are doing so by manufacturing in the United States. This increased production means more jobs, which is good for our country. The attitude that an American must be owning a company that produces in America is not going to encourage outside investment into the U.S. The United States has been the largest beneficiary of foreign investment since 1918 hands down. This is paramount to continued economic growth in the U.S.

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