How Much Should the Government Help Struggling Businesses in Times of Crises

What the Proponents of Governmental Bailouts Have to Say about Bailing Out Businesses

The ongoing economic and financial crisis due to the Covid 19 outbreak has reopened the debate about how far and how much the government help businesses struggling due to the crisis.

Indeed, this was the same debate that erupted during the Great Recession of 2009 when Big Banks and Big Corporations were bailed out by the Government of the United States to prevent a full scale collapse of the American economy.

As the ongoing crisis due to the Covid 19 shows no signs of abating, the old questions are being asked again as to how far the government should go to help such businesses.

The proponents of the bailouts argue that without governmental intervention, the businesses would collapse triggering a wider breakdown in the stock markets and possibly, a collapse of the entire economy.

Moreover, they point to how Millions of Jobs are at risk if the businesses are not bailed out and which otherwise, would leave Millions of Families at risk of starvation and homelessness.

In addition, they also recall the fact that the lessons from the Great Depression of the 1930s is that unless the government steps in, it would be a virtual free for all in the economy and society leading to disastrous consequences for all.

The Opposite View: Jobs and Socialism for the Rich and Capitalism for the Poor

On the other hand, the opponents of the bailouts argue that the bailouts must be for businesses that genuinely need them and which do not use the bailout funds to pay dividends to the stock holders and instead, channel the monies into paying salaries of the employees.

In addition, they also point out how Small Businesses are worthy of bailouts whereas the Big Corporations have enough resources of their own to combat the crisis.

Moreover, they also ask the Government to honour the Principles of the Free Market where the Survival of the Fittest means that only those businesses that have Solid Business Models survive and those at the Margins can be bailed out whereas those that are likely to collapse anyway need not be bailed out.

In addition, the opponents of the bailouts caution the Government against the practice of what is known as Socialism for the Rich and Capitalism for the Poor wherein Big Corporations are Bailed Out and the Precarious Workers are left Jobless and what more, the monies for the former are from the taxpayers.

What is Moral Hazard and Why it Must be the Guiding Principle for Bailouts

Therefore, there are both pros and cons of Governmental Bailouts and often, the debate is a heated and vitriolic exchange of barbs on both sides.

Our take is that the Government must help only those businesses that promise not to lay off workers and moreover, ensure that the funds are used for productive purposes instead of paying dividends and propping up the stock price.

In addition, our argument is that jobs have to be protected at all costs as well as Small Businesses helped instead of the Big Banks and Big Corporations.

To support this, we use the concept of Moral Hazard wherein those businesses pursuing reckless strategies that bring ruin to them cannot be bailed out thereby creating a moral dilemma as to whether the government is encouraging bad behaviour.

This was the same argument that was made at the time of the Great Recession of 2009 and hence, must be the Guiding Principle now as well.

Moreover, the priority should always be Small and Medium Sized Businesses that are closer to the lives of the laypersons and towards whom; the government has a moral obligation to protect and a duty to help them during these times of crises.

What Economic Theories Have to Say About Governmental Intervention in the Economy?

Having said that, it is also the case that in a country that runs on Capitalist Free Market model, governments usually have a minimal role to play.

They are mostly confined to regulating and oversight of the businesses and not in the business of poking their noses in the running of the businesses.

In this context, it might very well be asked as to why the government should step in during crises when the businesses howl at it for interfering during normal times.

On the other hand, mainstream economics as it developed in the Twentieth Century has always recommended a role for the government during crises, especially in the wake of the Great Depression where subsequent analyses found that the government should have done more.

Indeed, the Do Whatever It Takes Mantra that is being invoked now is the offshoot of such economic theories and their proponents point to how the Government alone has the Power and the Resources to Do Something that others cannot.

Therefore, a case can be made for governmental intervention during crises.

Just that we would like to add that such intervention must be conditional and subject to protecting jobs and helping people rather than dividends.

We Are Venturing Into the Great Unknown

Last, it is inevitable that during crises, all kinds of arguments crop up for and against bailouts. Therefore, one must separate the Wheat from the Chaff and this is where astute and well drafted bailout rules would come in handy.

While there are templates from the past, what is currently happening is a Panic Reaction to the Crisis rather than a Well Thought out Plan to restore the economy.

On the other hand, the Covid 19 outbreak is like Venturing into the Unknown and hence, one cannot be faulted for faltering.

To conclude, we are living in extraordinary times and hence, we do indeed need out of the box solutions.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.