The critical importance of failure.

Don Boudreaux at Cafe Hayek says that government has to recognize the importance of allowing businesses to fail at times. The US government seems to think that no major company can be allowed to fail or go into bankruptcy.

Boudreaux quotes from a paper by Pete Leeson that discusses one of the functions of profit and loss:

Profits and losses do for producers what traffic signals do for drivers. They tell them when to “go,” “slow down” and “stop” their productive activities. By communicating which resource combinations consumers value most and which they don't, profits and losses direct “economic traffic,” informing producers how to produce.

If government continues to subsidize companies to prevent them from failing, it allows businesses to continue to employ assets in a less than efficient manner. Allowing for failure permits the redeployment of assets into more productive and efficient business.

It also increases the danger of moral hazard as more people assume that government will bail them out from bad deals. It also provides arguments for government to take increasing control of business, operations and pay scales. If government is going to have to bail out companies for bad mistakes, it has the right to dictate salary structure, risk management, and any decisions to move operations offshore.