The Obama Administration and the Importance of Failure

How the President has forestalled positive entrepreneurial action.

One of the most damaging faults of the Obama Administration is how it tries to deal with failure and its attempts to avoid failure--except, of course, when it pumps money into high risk “green” projects. In those cases, failure doesn’t matter to Obama because it’s only the taxpayers’ money at risk.

As a general economic rule, however, failure is essential for learning and leading to eventual success. It is not something to steer clear of at all costs.

Our country’s free-market system is so vibrant not because all efforts always lead smoothly to success, but because they provide a way to learn from mistakes as well as the incentive to correct mistakes. Business people make missteps. But they know that when they’ve got it wrong they set out to get new information for a new course needed to get it right the next time.

More than half of all small businesses, for instance, fail in the first five years, according to Small Business Administration records.

The Obama Administration’s auto bailouts was a particular example of failure avoidance. By not letting Chrysler and General Motors fail during the Great Recession, Obama forestalled a positive entrepreneurial response by this gross misuse of government resources.

“The bailouts created two types of negative incentives,” explained a study published in The Freeman, the respected libertarian journal. The auto companies were encouraged to continue to build cars even though their losses showed the resources and labor could better be used elsewhere. Also the Administration kept any new entrepreneur from entering the industry and succeeding where others had failed.

The bailout was defended on the theory that many thousands of autoworkers would be without jobs. And when labor union workers are involved they must be treated with the respect accorded royalty--in the Obama Administration rule book.

But, as economists Steven Horwitz and Jack Knych, pointed out in The Freeman November article, “When hundreds of thousands of workers become unemployed they do not disappear.” Many find different jobs “that would contribute to society in a better way than working for a bankrupt auto company.”

The physical assets of bankrupt companies also become reallocated to alert entrepreneurs who may be looking for bargains.

So, failure drives change. “While success is the engine that accelerates us toward our goals, it is failure that steers us toward the most valuable goals possible,” the Freeman authors wrote.

Obama hop-scotched around the country insisting the U.S. needs a $470 billion spending bill to create jobs and spur the economy. He has learned nothing from the results of his earlier $800-plus billion ineffective stimulus package. It and other federal spending produced a dangerous increase in the money supply, yet were ineffective in stimulating the economy or job growth. His policies could be described as failures--never to be acknowledged.

So, the Obama Administration continues on the narrow, bumpy path of Keynesian economics: stimulus I, stimulus II; maybe stimulus III is next. The Administration’s policies remind one of Albert Einstein’s quotation that doing the same thing repeatedly but expecting a different outcome is a definition of insanity.

Obama has learned nill from the Keynesian experiences that have flopped both here and abroad. But he’s blind to the failures.

He fits Nobel economist Friedrich Hayek’s observation that the most orthodox disciples of Keynes have consistently “thrown overboard…all that used to be the backbone of economic theory, and in consequence, in my opinion, to have ceased to understand any economics.”

It may be correct that if the government had not stepped in and dictated the terms of the auto industry restructuring, G.M. and Chrysler would have collapsed and a million jobs would have disappeared at those companies.

Yet “commandeering the bankruptcy process was not...the only hope for G.M. and Chrysler,” observes David Skeel, professor of law at the University of Pennsylvania, in a Wall Street Journal column. He says the long-term costs will be “enormous.”

Both companies were required to file for bankruptcy. And, instead of restructuring under usual bankruptcy rules, each company pretended to “sell” its assets to a new entity created as part of the sale. Other bidders could not qualify unless they had the same deal the government had, namely a big payment to the union retirees.

The “sale,” which gave the government 61 percent of the GM stock was what Professor Skeel called a “sham.” The Obama Administration decided there was no need to let “the pesky rule-of-law considerations interfere with its plan” to help the unions and “other favored creditors.”

The companies would not have collapsed if the government hadn’t intervened. General Motors could have been restructured under the regular reorganization process. As for Chrysler, its Jeep division would have survived in a normal bankruptcy, Skeel maintains.

The claim that the bailouts were conducted at little cost, is quite dubious, Skeel points out. The taxpayers “are still likely to end up with a multi-billion dollar bill...” The car bailouts sent the smelly message that if a politically important industry is in a fix Uncle Sam will step in and dictate the results it wants. It won’t permit failure.

Our Keynesian government has thoroughly disrupted the process of economic information sharing by restricting the ability to fail. Farm subsidies, for example, permit U.S. agriculture to stay in business artificially, blocking its failure and limiting access to new parties who may be able to identify methods of farming that would not lean on government support.

If the main purpose of the market were merely to allocate known resources to currently efficient uses, we would be stuck in a primitive world, the Freeman authors observe. For example, if a plow is determined to be the best use of iron, “how could iron ever be allocated for a new invention such as a tractor?” Horwitz and Knych ask.

“Competition figures prominently in this system,” the authors add. “It promotes entrepreneurial activity and the discovery of knowledge” by empowering decision-makers to find new ways of using resources.

“Centralized planning, like other forms of government allocation, necessarily relies on the knowledge of fewer people, limiting discovery, and restricting knowledge-dissemination to fewer channels, “ Horwitz and Knych explained.

For a high standard of living we must “constantly change how we do things.” Change won’t be fueled by “lucky guesses or bureaucratic decrees,” but instead by entrepreneurial activity in the face of possible failure in the market. That has always driven the train of progress. “The tracks must be cleared of government obstacles.”

Freedom Center pamphlets now available on Kindle: Click here.