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Debate: The state should never support failing businesses

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This House believes that the state should never support failing businesses

Background and Context of Debate:

At the time of the current financial crisis there are many companies who are unable to survive without state support. One can argue that crises are generally beneficial, because they allow for creative destruction (wiping out insolvent companies), but on the other hand the state needs to keep the economy afloat.

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Moral hazard: Do bail-outs create moral hazard? Does it matter?

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Pro

  • State support creates moral hazard. If insolvent companies have a guarantee that the state will always bail them out regardless of their (not very) sound fiscal policies, they have no incentives to change their risky behavior. Thus they are more prone to future collapses, and therefore such financial support is just short-sighted and ineffective.
  • Countries shouldn't subsidize their private businesses. When a country subsidizes their private businesses, they act like a monopoly in creating an unfair competition. Then that country can drive all the businesses that do the same thing, in other countries, out of business. This might sound like it is good, but then the other countries respond. An economic war can be almost as bad as a real war. What countries need is stability. Any subsidy of a private business distorts the market and makes it less efficient. Like the predatory pricing prohibited under our antitrust laws, when countries underprice products it lead to an undesirable and inefficient elimination of competing businesses, with serious long-term consequences


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Con

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Economics: Are bail-outs necessary to keep the economy afloat?

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Pro

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Con

  • Recessions allow for creative destruction. Slow and inefficient firms should not be subsidised/rewarded for their reckless behaviour. Bankruptcies contribute to restructuring both the firms and the economy in the long term.
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Fairness: Are bail-outs fair? Does it matter?

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Pro

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Con

  • Bail-outs are unfair to small companies. Given that only "too big to fail" companies are being bailed-out, this clearly shows worse conditions for smaller firms who have to deal with exactly the same crisis, but with no support.

See also

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