Privatizing Profits And Socializing Losses

DEFINITION of 'Privatizing Profits And Socializing Losses '

Privatizing profits and socializing losses refers to the practice of treating firms' earnings as the rightful property of their shareholders, while treating losses as a responsibility that society as a whole must shoulder, for example through taxpayer-funded subsidies or bailouts.

BREAKING DOWN 'Privatizing Profits And Socializing Losses '

The phrase 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-ed about New York State's decision to buy two half-finished power plants from the struggling electric utility Consolidated Edison Co. for $500 million.

The most-cited recent example of privatizing losses 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 Treasury to spend $700 billion of taxpayer money (though only $426.4 billion was actually used) to rescue these firms, many of which had contributed to the crisis through reckless—and for a while, enormously profitable—investments in risky mortgage-backed derivatives. (See also, The 2007-08 Financial Crisis in Review.)

Some of the failing firms' employees were awarded multimillion-dollar bonuses despite accepting money from TARP and the Federal Reserve. By contrast, 861,664 families lost their homes to foreclosure in 2008. The media and public widely perceived this contrast as exemplifying the support rich people receive from the government at the expense of ordinary citizens.

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": allowing them to collapse would cause economic downturns and have much more dire effects on working and middle class people than rescues do.