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Twinkies, Kodak, Bailouts, and the Free Market

Posted By Mike Brownfield On January 10, 2012 @ 5:37 pm In Featured | Comments Disabled

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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 [2] 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 [3] 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 [4].

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.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2012/01/10/twinkies-kodak-bailouts-and-the-free-market/

URLs in this post:

[1] Image: http://blog.heritage.org/wp-content/uploads/twinkies-2.jpg

[2] CBS News and the AP report: http://www.cbsnews.com/8301-505123_162-57355920/sugar-crash-twinkies-maker-facing-cash-crunch/?tag=cbsnewsLeadStoriesAreaMain

[3] The Associated Press: http://www.cbsnews.com/8301-500395_162-57352673/kodak-bankruptcy-report-spooks-stock-holders/

[4] shares going up by 45 percent: http://www.bbc.co.uk/news/business-16498261

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