AUSTRIAN ECONOMICS ADDICT

Box of Twinkies (Photo credit: Wikipedia)

FREE MARKET CAPITALISM OR CRONY CAPITALISM

I noticed Hostess products are back on the shelves again in grocery stores. It leaves me scratching my head about how this could possibly have happened because I thought they went bankrupt. I remember when GM was going to go bankrupt we were told that GM needed to be bailed out to save the company and all the jobs, because we couldn’t see an America without GM. The politicians and the media were banging this drum as loudly as they could, leaving the impression that if Government (using yours and my money) didn’t step in to help, GM would go under and cease to exist. When Hostess declared bankruptcy, the politicians and the  media weren’t beating the same drums, in fact the drums were silent. I guess if GM was “too big to fail”, and Hostess was “too small to save”! Apparently the only thing that saved GM from going extinct, was the rigged crony capitalist bankruptcy set up by the Government. Therefore I must assume that if they would have gone through a real free market bankruptcy, according the bankruptcy laws already on the books, GM wouldn’t exist today. We must have been lied to because Hostess went through a real free market bankruptcy and the Hostess brand is back in business under new ownership. When politicians and the media are on the same side of an issue, be very cautious about believing the illusion they are trying to sell because the truth is completely opposite.

GM logo (Photo credit: Wikipedia)

NOT ALL UNIONS ARE CREATED EQUAL

The reason Hostess wasn’t bailed out and GM was, isn’t hard to figure out if you understand the incestuous relationship that happens between businesses and Government in our current crony capitalist economic system. The UAW has more members working for GM than the total members of The Bakery, Confectionery, Tobacco Workers, and Grain Millers International Union, and the Teamsters combined who worked for Hostess. The UAW could deliver the votes in return for being given tax payer money to fund its failing pension and benefit plans. (Read this article for in-depth analysis about the GM Deal, GM And The Truth About One Of Americas Biggest Bankruptcies, by Porter Stansberry, at stansberryresearch.com.)

HOSTESS

Hostess was trying to keep its company afloat for the last couple of years. They were on the brink of bankruptcy and it finally reached a point where costs were over running revenue. In the world of “too small to save”, you can’t operate in the red for very long because you can’t get an injection of electronically counterfeited  money to keep your unproductive business venture afloat courtesy of the Fed. {When the Government operates at a deficit, this deficit is funded by selling debt instruments (bonds or T-Bills). These debt instruments are being bought directly or indirectly by the Fed, using electronically counterfeit money. When a company receives money from the Government in a bailout, it is counterfeit money because it is debt that is first laundered through the Fed, read Keynes Was Correct In 1919!). In a free market capitalist system there is no Government to bail you out. If your business is operating in the red for too long, It will be liquidated through bankruptcy. All the salvageable parts, including the brand name itself, will be sold to others who see potential value above the purchasing price. The nonproductive activity, or way of doing business, stops, ending the waste of scarce land, labor, resources, and capital that was being used in an activity that couldn’t produce more than it was consuming. Hostess is back because it went through a real bankruptcy. Will it become a viable business again? Nobody knows, and no one has to know in advance, because the people who are taking the risk are the ones who will bear the cost if it fails, or gain profit if it succeeds.

GM

GM is a perfect example of the “too big to fail” crony capitalism that Government intervention has created, and is in full bloom in today’s economy. Here is how it works. After years of bad business decisions { ie. giving into union demands}, a point is reached where GM was no longer a viable business model in the free market, because costs overran revenue. So instead of liquidating through a real bankruptcy, GM  lobbied Government for a bailout, twice, once under Bush, and the second under Obama which was mislabeled as a bankruptcy instead of a bailout. It was really a crony capitalist bankruptcy. The Government changed the established bankruptcy laws and made up their own, putting the UAW ahead of the bond holders in order to pay off the union by funding their pension. No one was allowed to take a risk and purchase any part of GM and try to make it a viable business, because that would have meant the UAW would have been paid a much smaller % of what they received in the rigged bankruptcy. The UAW would have also had to make concessions to the new management or lose their jobs, jobs the UAW put in jeopardy by incrementally pushing the cost of wages and benefits above what they produced (consuming more than they were producing). This crony capitalist bailout of a “too big to fail” company was portrayed as a legitimate bankruptcy that would take place in a free market capitalist system. Now GM is able to continue, knowing they can count on Government to bail them out again if their new business model doesn’t work out as planned. (Example;The Chevy Volt, read Electric Car Sales Crash Into Economic Reality). GM and the UAW will not bear the cost of making bad decisions, we the tax payer will bear that cost through another bailout. But the real cost, will be the scarce land, labor, resources, and capital wasted in a nonproductive activity, which could have otherwise been used in a productive activity. Each of us as a whole pays the cost, while a small group benefits from the crony capitalist system.

CONCLUSION

People think that costs determine the price of a good or service, but this is not true. The price the market will bear determines the price of the scarce land, labor, resources, and capital that go into producing the product or service. The consumer determines the wages of labor, the price of capital, the price of resources, and the price of land. It is the opposite of what we intuitively think it should be. If costs determined price, all businesses would have to do to stay viable was to raise prices. The law of supply and demand states that less is demanded at a higher price than a lower price. If businesses could sell the same volume of goods at the higher price, they would already be charging the higher price. Unions have raised the cost of production above what the market will pay. In a free market system with no Government intervention, If you can’t run a business that produces more than it consumes, you fail, even though the economy as a whole succeeds. The economy is better off when a business goes bankrupt, because it stops the activity that was wasting scarce land, labor, resources, and capital, even though the particular business is worse off.

Question, should Detroit be allowed to go through a real bankruptcy? What about when it’s California’s turn?

Related article, Hostess Brands Closing For Good, by Chris Isidore and James O’Toole, at money.cnn.com.

Related article,Gov’t needs $95.51 per share to break even on GM (nzherald.co.nz)

Related article, ‘First batch’ Twinkies go on sale at Wal-Mart (wqad.com)

This entry was posted on August 8, 2013 at 12:12 am and is filed under Econ. 101, Government and Politics. You can subscribe via RSS 2.0 feed to this post's comments.

Tags: Bailout, Crony Capitalism, Free Market Capitalism, General Motors, Hostess, Production and Consumption, Supply and demand, The BCTWGM Inernational Union, Too big to fail, UAW