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  • Twinkies, Kodak, Bailouts, and the Free Market

    Are you a fan of Twinkies, the cream-stuffed yellow cake confection packed with sugary goodness, wrapped in a thin layer of cellophane? If so, here’s some bad news for your sweet tooth: Hostess Brands Inc., the maker of Twinkies, HoHos and other convenience store delicacies, has filed for bankruptcy just two years after emerging from its previous bankruptcy.

    CBS News and the AP report that Hostess—which employs 19,000 workers in 49 states—has more than $860 million in debt, faces high labor expenses, rising ingredient costs, and a decrease in sales (despite the fact that the industry is flat). And all of this comes despite $40 million in private equity investment and a $20 million loan last year.

    Then there’s another great American corporate icon on the ropes: Eastman Kodak Co. It was reported last week that the 131-year-old film company is preparing a bankruptcy filing if it fails to sell 1,100 digital-imaging patents. The Associated Press writes that Kodak is about to run out of cash and “was reporting a third-quarter loss of $222 million — its ninth quarterly loss in three years.” Their troubles? The company has lost 95 percent of its value in the rise of digital and the fall of film, along with increased competition.

    Certainly if Hostess or Kodak goes down, job losses will follow, causing ripple effects throughout the economy. Those job losses are truly lamentable, and those with a penchant for Twinkies, HoHos, and 35 millimeter film might feel a bit of nostalgia for the brands going bye-bye. But in the free-market system, companies come and go, the strong survive, and good products, efficient management, and meeting consumer demand are rewarded.

    That system is under attack from the inside and the outside. From the outside, the Occupy Wall Street movement has assailed corporate America and profits, decrying inequities and crucifying capitalism. Unions are shouting down corporate executives for not sharing enough profits with their workers, and private equity firms are under attack because under our system, companies can, in fact, go out of business. In short, “success” and “profits” and “capitalism” have become pejoratives.

    From the inside, the free market is under attack from a government that is picking winners and losers and deciding which companies should and should not survive. The Obama Administration has singled out “green energy” as a “winner,” doling out millions to companies like Solyndra because, in its view, producing solar energy is the “right” move for America—even if those companies can’t stand on their own two feet.

    Likewise, when General Motors and Chrysler stood before Congress and begged for a bailout, they argued that they needed taxpayer relief as they struggled with massive debt, high fixed costs (labor/pension/health care costs), and declining sales. The Detroit automakers found a friend in Washington, receiving bailouts under two Administrations.

    Does it seem fair that Solyndra and GM receive taxpayer funding when they can’t make it in the free market? Unfortunately, “fairness” is a word that takes on a new meaning in a crony capitalist society. Under the rules of this game, those with the best friends in power reap the benefits, while all others are stuck playing by the rules they set.

    In the case of Kodak, it appears that the company is trying to play within the rules of the capitalist system, simplifying its structure and cutting its costs—without cutting jobs. The market today responded favorably to the new business plan with shares going up by 45 percent.

    That’s how the system is supposed to work. Kodak didn’t get a bailout, and it’s doing what it can to change its business model, make a profit, and stay afloat. It isn’t relying on nostalgia or good will, political favors or taxpayer bailouts.

    As for Hostess, should the company go bankrupt if it can’t compete? Yes, and that’s the way it should be, even if it leaves a bad taste in some people’s mouths. The consequences of poor business decisions encourage companies to make the right decisions so they can grow and prosper. That grows wealth, creates new jobs, and moves the economy forward—what the free-market capitalist system does best.

    Posted in Featured [slideshow_deploy]

    12 Responses to Twinkies, Kodak, Bailouts, and the Free Market

    1. LetFreedomRing says:

      Capitalism without failure is like religion without sin; it removes incentives for prudent behavior. –Allan Meltzer, Professor of Political Economy at Carnegie Mellon University. The free market impartially optimizes allocation of scarce resources….Econ 101.

      • abccink says:

        I like your "failure" "sin" analogy! Excellent point!
        Nowhere do you read that the public lost interest in the company's products. It isn't lack of demand/sales. It is a burdensome debt structure allowing unions to basically bleed the company dry! They don't need profit-sharing clauses in their contracts (though that won't stop them from trying) because they are getting a huge portion of the profits already.

    2. Fair? Perhaps not, but that's how life is, and so is the capitalist system the founders set up for us. No other system on earth works better.

    3. Fair? Perhaps not, but then this life isn't all fair either. The capitalist system our founders set up for us is the best on on the planet.

    4. David says:

      This is the worse news since I found out that plans to build a White Castle near me had fallen through due to the Obamany.

    5. Josh says:

      Right on, Mike! If only someone in the government understood this common sense…

      • Clare says:

        Oh, they know and understand. They just choose to use our money to further their causes and even Congress is doing nothing about reining in the pres. If they can "save" these jobs, they look good and will get the votes. They just can't see past the end of their own little upturned noses at the big picture and what they are doing to my kids' USA

    6. George says:

      Should 19000 workers suffer over bad management decisions ? The " UNION THUG " employees have voted to give back a subsatial amount and the company has not paid into it's pension funs since July, this is about 1.5 million a week in cost savings where is that money ? We are told to service accounts that we lose money in. I would like to see what bonuses have been paid out over the last three years ?………P.S Tell Gabe Conger his cousin said Hi………….

    7. Erik says:

      Kodak's new business plan– sue 'em over patent infringement. Kodak couldn't make it as a commercial enterprise creating products that customers want. They have to rely on the legal system to bail them out of all their bad management decisions.

    8. Former Kodaker says:

      Kodak is more a victim of a lack of vision by its board and its lackadaisical response to changes in the marketplace. In the 1970's there were over 120,000 employees worldwide. Today, the 10-20 thousand left won't make much of a ripple in the unemployment numbers. As a former employee, Kodak was forced to concentrate more on cost cutting by Wall Street rather than developing its place in the digital marketplace. It seems that the only solution for Kodak is to follow in the steps of its founder as he approached the end of his life span. George Eastman wrote "Why wait?" and put a gun to his head.

    9. ClimateReview says:

      "Crony, Capitalist Society"

      Nice one, Mike, that phrase sums it up.

      "Occupy", who I do sympathise with to some extent, want to destroy Capitalism. So, does the entrepreneur who earned $50million via capitalism, known as Michael Moore.

      “Greed is Good” folks, it maximises the judicious use of risk-return analysis on investment.

      Your post succinctly reaffirms the definition of Capitalism. The anti-globalist, Left movement don't like true, meritocratic Capitalism, they much prefer Crony Capitalism – well, if they're the beneficiaries of the handouts that is.

    10. richard40 says:

      The attack from within, with crony capitalism, is the real threat. Real capitalism can survive, because its benefits are clear, unless too many capitalists go the crony capitalist route. That is the very reason why dems like Obama practice crony capitalism, because they know it will bring down real capitalism. Both repubs and businesses, should attack crony capitalism whereever they find it. If they join in the corruption, then the repub party, and our freedoms, will end.

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