What Is Privatizing Profits and Socializing Losses?
Privatizing profits and socializing losses refers to the practice of treating company earnings as the rightful property of shareholders and company losses as a responsibility that society must shoulder. In other words, the profitability of corporations is strictly for the benefit of their shareholders. But when the companies fail, the fallout—the losses and recovery—is the responsibility of the general public.
Key Takeaways
- Privatizing profits and socializing losses is the consequence of allowing shareholders to benefit from company earnings while making society responsible for their losses.
- Loss socialization generally refers to some type of government intervention either through bailouts or subsidies.
- The phrase privatizing profits and socializing losses has a number of synonyms, including socialism for the rich, capitalism for the poor, and lemon socialism.
- Defenders of the concept of privatizing profits and socializing losses justify this practice by stating that some companies are too big to fail.
Understanding Privatizing Profits and Socializing Losses
The basis of this concept is that profits and losses are treated differently. When companies, even those that are publicly traded, are profitable, it's the shareholders who reap the rewards. Therefore, only a certain group of people benefit. But when the losses these companies experience are steep, taxpayers must bear the brunt.
The idea of privatizing profits and socializing losses generally comes in the form of some type of intervention from governments. This may be through bailouts or any number of subsidies.
Large corporations, their executives, and their shareholders are able to benefit from government subsidies and rescues in large part because of their ability to cultivate or buy influence through lobbyists. At the same time, defenders of controversial subsidies and bailouts contend that some firms are too big to fail.
This rationale is based on the assumption that allowing them to collapse would cause economic downturns and have much more dire effects on the working and middle-class population than rescues do. This was the basis for the bailouts given to the big banks and automakers following the economic crisis of 2007.
The people who defend controversial subsidies and bailouts contend that some firms are too big to fail and require losses to be socialized.
The phrase privatizing profits and socializing losses has a number of synonyms, including socialism for the rich, capitalism for the poor, and lemon socialism. The latter was coined in a 1974 New York Times op-edabout New York State's decision to buy two half-finished power plants from the struggling electric utility ConEd for $500 million.
Example of Privatizing Profits and Socializing Losses: TARP
One of the most recent examples of privatizing profits and socializing losses is the post-financial crisis bailout of banks, insurers, and auto manufacturers.
The Troubled Asset Relief Program (TARP) of 2008 authorized the United States Treasury under President Barack Obama's administration to spend $700 billion of taxpayer money to rescue these firms, many of which contributed to the crisis through reckless—and for a while, enormously profitable—investments in risky mortgage-backed derivatives. In reality, though, only $426.4 billion was actually used.
Some of the failing firms' employees were awarded multi-million dollar bonuses, despite accepting money from TARP and the Federal Reserve (Fed). By contrast,861,664 families lost their homes to foreclosure in 2008. The media and public widely perceived this contrast as exemplifyingthe support rich people receive from the government at the expense of ordinary citizens.
By Oct. 31, 2016, cumulative collections under TARP, together with Treasury's additional proceeds from the sale of non-TARP shares of AIG, exceed total disbursem*nts by more than $7.9 billion.
