Why “Too Big to Fail” is Just Wrong

One of the things that we have had a problem with in recent years is the idea that some companies are “too big to fail”. Under this logic, it is supposedly worth spending tax-payer’s dollars to bail out businesses that have bankrupted themselves with poor business practices, because if the company goes out of business, “very bad things happen” to the country.

I take issue with this for several reasons, but the biggest one at the moment is that, in order for a company to be “too big to fail”, you have to undermine one of the basic principles of capitalism, in this case “Competitive Markets”.

In a competitive market, businesses have to vie with each other for sales of products. The argument that a company is “too big to fail” necessarily means that it controls so much of a market that its loss would destroy some significant part of the economy.  It also means there is not enough competition, because if there was enough competition for a healthy market, then no single company could possibly be “too big to fail”.

In the basic capitalistic process, it is absolutely necessary that while some companies succeed, other companies will fail.  That is the nature of competition.  Ideally, new business is constantly springing up to take the place of the ones that failed, with some new twist to make them a better company than the one before it.  In this kind of world, even if you are the owner of one of those failed businesses, you still benefit from the system because you should be able to earn enough money at a day job to afford the other (“better”) businesses’ services.  That also implies that, since new businesses are constantly forming, there are plenty of choices in the marketplace, so companies must always be doing their best.  As we know too well, this has not been the case in recent years.

Starting a new business is difficult.  One of those obstacles to starting a new business is that it takes exorbitant amounts of money that can only (realistically) be borrowed from a bank.  Why is it so expensive?  Part of it is sometimes the nature of the business, but more often it is because the government says so (literally).  Between taxes on business and interest on your loans, businesses must not just be successful, but be wildly successful quickly (on the scale of “a few short years”) in order to turn a profit – recall that businesses are run by people, and if they’re working at their own business the profit is what they get in lieu of a paycheck.  The process of starting and running a business is made obfuscated by the complex laws of our country and difficult by the onerous requirements of those laws.  However, starting a new business absolutely must be easy in a capitalist country to preserve our competitive markets.

In recent years, the existing companies have been merging, so that there are fewer and fewer companies to choose from; new companies have been unable to get started from want of capital (due to low wages and stingy, unreasonable banks).  Fewer companies means less competition, and that means that we, as a nation, are faced with the prospect of having an economy completely dependent on just a few large companies for all our needs.

Getting into a specific example might help make all this more clear.  Back in 2008-2009, the US auto industry was in deep financial trouble.  Our leadership made the decision to bail them out, citing that they were “too big to fail”, and would take millions of jobs out with them.  My quarrel is not with whether we should or should not have bailed out the companies.  My problem with this is that, in a capitalist country, businesses should not be so large that they can destroy the economy when they fail.

Why are there so few companies?  Most of it has to do with the way regulations are written to prevent business competition.  In North Carolina, you cannot sell more than a small handful of cars without being an authorized car dealer.  In some states (including California), that number is zero – that means absolutely no buying/reselling cars at a profit without a license.  Sales is the lifeblood of a company.  If you cannot sell your product to a retailer, then you cannot get your car to market.  Licensing is used to restrict competition and keep the number of businesses small, for the benefit of those businesses that already exist.  Taking North Carolina’s example, you are required to “have an office”, and that explicitly cannot be your residence.  I’m left asking “Why not?” with no good answer; some other states do not have that restriction.

There is a relatively new car company (Tesla Motors) that has run into problems selling cars because they sell directly to buyers.  For non-competitive reasons, laws prohibit selling cars directly to consumers.  You must be a licensed car dealer in order to sell cars; in particular, Tesla Motors ran into a great deal of trouble trying to get the market in New Jersey opened to their business.  And where Tesla Motors is run by a billionaire who can afford the legal fees and lobbying required to overcome that obstacle, a smaller company would have been stone-walled by the legal process.

This is a specific example in a specific industry, but similar problems are found across most of our economy.  Businesses that do not face competition should be able to function just fine, but it is still a problem to have businesses that are so large but with so little competition.  It undermines the basic principles of capitalism.

So, at its root, the problem with companies being “too big to fail” is anti-competitive laws preventing people from operating start up businesses.  This is the “regulation” that everyone ought to be hating, because it drives our out-of-pocket costs up and keeps us, as citizens in our own country, from being able to participate in business.  (When “regulation” gets criticized on the news, they try to pretend that it is only safety and environmental regulation that people and business are complaining about.)  Licensing is not really about protecting consumers from low-quality work; it is about restricting who can operate a business by making new start ups prohibitively expensive.  Starting a new business is already hard enough, so we should eliminate excessive licensing requirements, not just for car dealers, but for all businesses.

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