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Hostess and the GM Bailout: Why the Chevy Volt Shouldn't Exist but Twinkies Still Will


Our free market system works beautifully -- when it's allowed to.

Twinkie drought solved, new company created, old industrial economy hangover cured. The economy streamlines, Twinkie-per-worker output will doubtless soar (I'm sure there were a pile of ridiculous work rules that governed who could press the "on" button of the Twinkie-lator), and the new investors will make a pile of dough, so to speak.

Because that's how capitalism works. When something in demand has a lousy, expensive process or management team wrapped around it, the company can go bankrupt but the product can live on. It's happened thousands of times in our system before -- if you wear Converse (NYSE:NKE) sneakers or Hugo Boss (PINK:BSHI) shirts, ride a Schwinn (PINK:DIIBF) bicycle, or stick Ray-o-Vac (NYSE:SPB) batteries in your flashlight, to name just a few -- thank the buyer who bought the assets or backed the company out of bankruptcy. They kept what was right and shed what was wrong.

The result? A vibrant new product line and a vibrant new company. A more efficient economy and happier consumers. That's the way the American system works -- except when the government intervenes.

In the case of General Motors, the Obama Administration determined that it was more important to save United Auto Workers jobs than it was to have the painful but ultimately highly beneficial process of free market restructuring go forward. If GM had been "allowed" to have a normal bankruptcy process, just as in the case of Interstate Bakeries, private equity and strategic industry buyers would have been lined up ten-deep to get a crack at making a major play for the valuable brands and technology assets, distribution networks, and manufacturing plants where the cars were made.

What they wouldn't have wanted or kept were the wildly-overpaid UAW workers and their sleeping-in-the-back-room work rules. They wouldn't have wanted electric car projects like the Chevy Volt that pandered to "green" politicians while losing immense amounts of money on every vehicle made and sold, so they'd have left that "asset" behind, unloved and unbought.

They'd have slimmed down, modernized, and de-calcified an industry that found itself so fundamentally screwed-up and upside down that it managed to take down its entire home city with it. They'd have invested in new, labor-saving and quality-improving technologies, and rather than a perpetually ailing "Sick Man" of the auto industry, we'd have a more focused, more efficient, and more innovative industry powerhouse on our hands. The new company's suppliers would likely mirror that investment, too, with new plants and new jobs to fuel a resurgent American auto industry.

That, in turn, would have benefited our entire national economy, helping it prepare for an ever more competitive future, and ultimately throwing off greater income and wealth for its workers, investors, and suppliers. In short, it would have helped contribute to the prosperity of every American.

Giving them money to buy more Twinkies. The system works brilliantly, if it's allowed to.

See also: 'Hostess Twinkie' Investors Involved in Other Iconic American Brands
No positions in stocks mentioned.
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