Swings, roundabouts, bailouts

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swings-roundabouts-bailouts

In the US, Congress has passed a $17.4 billion bail-out package to its auto industry. In the UK, there are calls that the government should do the same with Jaguar LandRover - even though the Indian holding company, Tata, says it's injecting 'tens of millions of pounds'. Meanwhile the Confederation of British Industry is demanding urgent government action to preserve 800,000 jobs in carmaking, and Toyota has just reported a huge loss. The trade union Unite says jobs are hanging by a thread, and wants the same.

Should governments support distresed carmakers? Probably not. It's tough to say because many people will indeed lose their jobs and thre will be knock on effects in other industries. But think about it. If the government is to support carmakers, where does the money come from? It can only come from higher taxes, higher borrowing, or by printing more of the stuff. If it comes from higher taxes, then as the tax burden takes up more of our earnings, everyone else will find it that much harder to make ends meet. Small businesses in particular will struggle, and lay off workers. You will still have unemployment, it will just be more diffused and will catch fewer headlines. But it will be real.

If the support for carmakers comes from borrowing, the same is true - it's just that the unemployment will be felt in a few years time, when the borrowing has to be paid off. And if the support comes from printing money, then money becomes less valuable, prices soar, and planning for the future becomes harder. That messes up investment, and eventually it costs jobs once again.

So the government cannot 'save' jobs. It just passes the unemployment on to others.

When you have a long boom, as we have had, people tend to splurge out on luxuries, like homes and cars. When that party ends and the headache sets in, they still buy the necessities but cut out the luxuries. So if you make cars, or sell houses, you know it's going to be a rough time. The sensible thing to do is to put cash aside when times are good so you can get through the downswing. If people enjoy good business in the boom but know that the government will bail you out in the recession, that's hardly a good way to run an economy - particularly when the cost falls on people who don't have the PR might of Unite or the CBI are the ones who get made redundant as a result.