The Lessons of Failure

Several years ago Lee Ioccoca went to Washington to bailout the Chrysler Corporation and began the notion that when all else fails the government is the lender of last resort and can put a company back on its feet if it can convince the Congress and the President that failure is not an option.  Chrysler paid the loan back in a short time and Congress heaved a sigh of relief that the loan did not default and they had added to the taxpayer’s debt.  From this incident Congress should have learned that the possibility of a loan default was a risk they should not be willing to shoulder.   New faces and forgotten lessons now sees all three auto manufacturers scampering to Washington presenting the Ioccoca case for a fresh round of hand wringing.  The dominating philosophy of pragmatism has erased the history lesson that was available and a new more drastic crisis is looming to offer a more cogent lesson than before.

When a company gets in trouble because it is out of tune with the market the rational approach is to look at what went wrong and put in preventive measures to avoid a repetition of the trouble.  In addition the company should put contingency plans in place in case their prevention attempts do not work.  This is normal common sense management that is too often overridden by quarterly and even daily production and profit reports. This is a matter of proper prioritization.  If long term survival is not the priority then necessarily the short term results may not and usually don’t work.  If you don’t plan for a rainy day and don’t have reserves to accommodate setbacks and reversals you need to look to lenders as your strategy.  If you have no plan to counteract lender failures you are placed in a precarious position that has an impact on your long term survival and even your short term survival.  The salaries paid to CEO’s to prevent this are more than justified if they are successful.  As with bankers and saving and loans executives the idea that risk is low with the government at your back.  The planning for prevention and contingencies is overridden by the security of having a lender of last resort in Washington.  This is the legacy of Lee Ioccoca and the policy he instilled.

When Chrysler got in trouble the market was ready for fuel efficient vehicles, economically priced vehicles and vehicles with safety features.  Chrysler wasn’t responding to these market conditions rapidly enough and didn’t have the reserves to recover.  Ergo the government bailout strategy.  Today the big three automakers find themselves in almost the same situation with an additional burden they allowed to balloon, namely the cost of labor.  How a company can operate under intimidating tactics that override their long term survival is easily reviewed.  The companies were unwilling to present the consequences and challenge the “requests” from the unions.  They caved in to greater demands than they could afford and did not follow their competitors lead to lower labor costs and non union facilities.  The union leaders also took a short sighted view much like the politicians who think the well is always full of water and will never run dry.  This again is avoiding the long term priority of survival.

It is easy to point out, “ What about now?”.  This argument is an emotional plea for instant gratification just as we were faced with as the market fell and Congress panicked with a bailout package that bailed out no one and was a waste of taxpayer’s money.  A deliberation that focused on voter disapproval instead of actual long term results was never initiated.  Crisis management centered on “doing something” is the predictable consequence of poor long term planning or lack there of. The government did not offer guidance or refusal when approached as the impact on voters is always the politician’s priority.  The fact that voters are often misinformed and not knowledgeable in the workings of the free market ( along with Congress and the President) demonstrates that reliance on mere popular opinion to understand and implement economic policy is analogous to asking the baby sitter to oversee the household budget.

The upside of learning from failure is the lesson sticks. No amount of rationalization will demonstrate something that contradicts the actual results. Failure is simply failure and the results can be examined, reviewed and new ideas and policies developed to avoid future failures.  Of course some people quickly forget the cost of failure ( like Russia) and try the same thing again.

This subject would not be complete without an examination of the concepts of monopoly and competition and why the free market is the only apparatus for preventing monopolies and encouraging competition.  By bailing out the big three the government would be establishing a monopoly which is contrary to its antitrust philosophy.  This action of bailing out the big three is a detriment to the competition who are trying desperately to gain market share.  A government is supposed to be all about justice but a government that favors one portion of an industry is being unfair.   A meddler who tries to inject his influence in every aspect of every issue that gets any attention is bound to have to pick favorites.  This brings us to the necessity to keep government out of issues it has no business meddling with.  A free market requires a government to protect the individual rights of its citizens but it cannot violate these rights by favoritism.  This is why the defense of a free market is so weak from our politicians.  They don’t understand what it is and why the government interfering in its operation makes it a market that is no longer free.  You cannot successfully defend a free market that you attempt to control and ultimately distort.

The lessons of failure are the lessons of what doesn’t work.  The bungling reckless spending and “oversight” by nations of the world is proof that pragmatism is rampant in the minds of world leaders and they only want a quick fix that will calm the populaces.  This trial and mostly error approach will never succeed.  For price stability to return a rampaging repetition of failed attempts of what brought us to this stage will not and can never work.  Price stability requires assets that are tangible and fluctuate by supply and demand in the same manner and for the same reasons all commodities, goods and services fluctuate.  This brings us to gold as a store of value and a commodity that is transportable ,has high unit value and defers government from deficit spending.  How it does this is quite simple.  As the government attempts to pour paper dollars into the market the value of the paper money diminishes (inflation) and people seeking to avoid loss in buying power prefer gold as a commodity and this forces the government to outlaw gold to force people to use the fiat currency they are printing.  This is historically verifiable.  Another lesson that has been forgotten and/or evidently never learned.

There is really no value in suffering the losses of failure if you don’t learn your lesson.  Keeping up the same activity that led to failure is not going to lead to a different result no matter who repeats failed actions.  Bad ideas and poor planning must be rooted out as the cause of crises.  An analogy might elucidate this.  Suppose you were sitting in a swing and you were being pushed by a benevolent pusher who pushed with even regularity and optimized your movement concerning safety and comfort.  All would be well until the benevolent pusher became malevolent and wanted to push you higher than you wanted to go and was dangerous.  Soon you would be out of control and swinging and twisting in a manner that ultimately causes great fear and possible injury.  In like manner the unfettered market has its ups and downs based on market corrections in supply and demand.  An oil tanker sinks and the supply of oil is affected until the higher prices generated by incentive replace the lost supply and the market swings back.  This happens constantly in all markets and unless the malevolent pusher enters the picture and further distorts the normal swing relative stability reigns.  If an oil tanker sinks and the government cries panic and pours too much additional oil onto the market the new level of swinging is way higher on the supply side and prices begin to fall.  Incentive to produce is reduced and eventually when another tanker sinks the need to respond becomes more critical because of the smaller number of suppliers.  Allowing small swings without interference prevents major adjustments that ultimately lead to disaster.

Much can be learned from the state of the world economy today and the condition of such industries as American car manufacturers.  Likewise much can be ignored.  Attempting government action as stimulus and oversight will only push the swing higher that it should ultimately go.  This is where hyperinflation or depression set in.  The current concern with deflation is a cover-up.  When prices fall consumers buy more.  When consumers buy more the producers produce more to meet demand.  No country ever collapsed because of deflation.  Inflation causes prices to rise because there is too much money/credit easily available.  When money becomes more scarce the value of money increases.  At depression levels the money is very valuable but goods and services are scarce.  If inflation is not re-instituted as it was under FDR price stability will return with minor even swinging.  The currency will not deteriorate into tin slugs and the free market will do the most efficient and effective job of balancing supply and demand.  This in turn will return prosperity and progress.

The lessons of failure are the road to success if they are learned and not repeated.  At present most participants in this failure are scrambling to accentuate what got us to this precipice.  They evidently have not learned anything from the past and are doomed to repeat what previous poor students suffered.  This is not what lessons are for.