07 May 2010

The Freedom to Fail

Among the plethora of freedoms, real and imaginary, touted by politicians and pundits, one fundamental freedom is glaringly missing: the freedom to fail. Governments create welfare programs to save us from personal economic failure, health care to save us from health care failure, business and banking regulations and agency to save us from bank and business failure. Unfortunately, we learn by our mistakes. More importantly, the risk-taking entrepreneurial spirit requires the right to fail completely in addition to the right to windfall profits if it succeeds.

Without the right to fail, we become capricious and stop taking precautions to avoid suffering. Why save money if the government will provide pensions? Why buy health care if the government will provide it? Why be skeptical of bank interest rates that are too good to be true if the government guarantees our savings will be safe from loss? Why save for a rainy day when the government provides steadily growing unemployment insurance? Why cautiously rent when the government rewards us for taking a mortgage?

Unfortunately, when you take away the right to fail, you must also take away the right to succeed. Without the risk of failure, banks and individuals take too many risks and individuals are less inclined to take care of their own needs, increasing the need for heavy taxation. We already tax the poor heavily through monopoly gambling rights for the government and sin taxes on cigarettes and alcohol. The only way to raise taxes is thus on the less poor, by taxing the rich until their income is at a very modest level.

Many things stop happening at such a level. Potential medical students decide to not pursue degrees in medicine. Entrepreneurs decide not to create new, innovative businesses. Pharmaceutical firms decide against researching expensive new drugs. In short, the advance of civilization slows. Everybody focuses, instead, on hiding their income from the taxman and maximizing their government benefits. How many of our decisions are already driven by their tax or benefits implications?

Finally, when innovation has slowed, and new companies are scarce, the government becomes fearful of large existing firms going bankrupt, as new firms will not rise to replace them. They they provide subsidies to the weak companies and tax the successful companies until they also become unprofitable. If the companies no longer face the risk of failure due to taxpayer bailouts, then it is understandable that we then spurn profitability and bonuses.

The only solution is to harald a return of the right to fail. Eliminate chapter 11 and other corporate bailouts. Eliminate all government subsidies and regulation of retirement, health and unemployment. Encourage entrepreneurs to take risks, but allow them to bear the full loss or success of those risks. Inasmuch as we reduce the freedom to fail, we reduce the freedom to succeed.

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