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  • Recession is Latin for Tough Love

    “There is no disagreement,” said President Obama, “that we need action by our government, a recovery plan that will help jump start the economy.” Those chilling words were said in January, but we were reminded of that sentiment yesterday when President Obama claimed that “…economists on both the left and right agree that the last thing a government should do in the middle of a recession is to cut back on spending.”

    Markets work and there are many companies and entrepreneurs making the best of the current recessionary environment despite the burdensome regulations emerging from Congress and a dragging economy. This is not to say these firms are recession-proof, rather they are simply performing well, if not better, during this recession.

    In a recent Wall Street Journal article, Roy Calcagne, CEO of Craftmaster Furniture Inc., said, “We’re stealing market share.” But that is not because of government intervention, but rather the free market adjusting to market forces. Mr. Calcagne company produces high quality furniture below market prices, not only allows them to stay in business but to grow.

    A recession hurts, but it can also send signals on how to correct an ailing economy. Companies that cease to be competitive will go bankrupt or lose a significant portion of their market share. One leading example of these forces at work is the relationship between Blockbuster and Netflix. Blockbuster ceased to meet the changing demands of consumers and Netflix filled that niche market; when companies compete, consumers win. There was no government intervention and as a result, consumers receive a good they desire and Netflix has turned a profit, one of the few winners this past year.

    From furniture and movies to beer or online dating, the market is at work and making economic lemonade out of lemons. The dollar menu at McDonald’s is a big hit and Wal-Mart is also in good shape. It is imperative that we let companies fail and allow the free market to work. When we use taxpayer dollars to prop up failing businesses that produce goods no one wants to buy is when we get into real trouble. Economist Peter Leeson describes the benefits of failure well, saying,

    In a market economy, business deaths are like death itself – an unfortunate but inevitable fact of life. However, recent government bailouts have tried to stop the inevitable by intervening in the market, at least temporarily saving failed firms from the economic grim reaper. Before putting the next failed business on life support, it’s worth remembering why it makes sense to let struggling producers expire. When failing businesses are allowed to fail, resources are released from employments where they don’t add value and made available for employments where they do.

    Far from cause for concern, this failure is cause for celebration. When ineffective producers fail, resources committed to producing goods we value less are freed for producing goods we value more. Polaroid’s failure released resources for the production of digital cameras; Commodore Computers’ failure released resources for the production of IBM computers; and Chi Chi’s restaurant’s failure released resources for, well, the production of food that tastes good. Who better to sacrifice the resources required to expand production of the things we want than producers of the things we don’t?

    When failing businesses are allowed to fail, producers learn how to combine resources in ways that create wealth. We take it for granted that producers know what we want. But this information doesn’t appear magically. It has to be produced. The profit-and-loss system produces this information – but only when government lets failing businesses fail.

    Profits and losses do for producers what traffic signals do for drivers. They tell them when to “go,” “slow down” and “stop” their productive activities. By communicating which resource combinations consumers value most and which they don’t, profits and losses.”

    Members of Congress cannot cure a recession but they can certainly prolong it. Consumer confidence won’t change overnight; it will take time. As certain firms capitalize from the recession, it is important to recognize there are winners and losers. Granted, there are more losers than winners, but that by no means suggests the government should distort the market by propping them up. That’s when the real loser becomes the taxpayer.

    Addendum: MSN Money has ten reasons to love a recession, one of them being business start-up opportunities.

    Jeffrey Hubbard co-authored this post.

    Posted in Economics [slideshow_deploy]

    One Response to Recession is Latin for Tough Love

    1. Barb -mn says:

      There you go again, Mr. President Obama. Taking credit where you don't deserve it.

      Please, Mr. President, tell the children the truth. Stop deceiving the people. We don't need you. You need us. but you are cruel and unfair to us. You are not worthy.

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