As someone who argued strongly in favor of a bailout for the financial sector earlier this fall, I am absolutely flabbergasted that a bailout for America’s car makers is under serious consideration. In short, this is a terrible idea, and there are no legitimate parallels to bailing out (recapitalizing?) the financial sector. The financial sector is essentially like the economy’s plumbing: if the pipes aren’t working, nothing works. By contrast, the auto industry is a bit like an old, poorly-functioning toilet: if it doesn’t work, it’s best to just get rid of it rather than paying exorbitant sums to refurbish it.Spurious analogy? Perhaps. But this is truly bad policy. You can go to any number of sources for an explanation why: I particularly liked Megan McArdle’s posts and Dave’s at IPE-J. In short, Congress is proposing to devote a good chunk of finite resources* to struggling, out-dated firms with high fixed costs, no track record of innovation, no proven capability of making a product people actually want to buy, and no systemic connection to the greater economy. The halcyon days of “As GM goes, so goes America” are long gone, if they ever even existed. In fact, the only halfway decent argument that I can find to justify such a handout is to avoid a possible crisis of confidence: if the auto industry were to fail, would it cause consumer confidence (and spending) to collapse? It’s a novel interpretation, but one that I don’t find entirely convincing.
Nonetheless, it is looking increasingly likely that a bailout for the auto industry will happen possibly as early as this coming week during the lame duck session of Congress. I am particularly interested in what this says about our President-elect, who has come out forcefully on the side of intervention. Frankly, I can’t help but feel slightly nervous about the implications. This isn’t change. This is old-school, interventionist Democratic policy, which didn’t work very well on the first go-round. In my view, this bailout is in no small part about the demands of the United Auto Workers, who campaigned strongly for Mr. Obama’s election. I sympathize with their desire to preserve a high standard of living for union members, but unfortunately that way of life no longer seems sustainable. (Please read this post in its entirety before you feed me to the lions over that last statement.)
My point is this: in order to deliver on the massive change that Mr. Obama has promised in policy areas such as education and health care, he will need to do battle with powerful entrenched interest groups. It will be a long fight, but this is a poor showing in the first round.
* I don’t care if we've been spending like money grows on trees: it all has to come from somewhere, and if we borrow it, then sooner or later we have to pay the bill. I for one don’t want tax rates in the 40 – 50% range when I’m in my 40s because of terrible fiscal policy now.
2 comments:
What would you say to this counterview? I think he makes some good points: http://www.nytimes.com/2008/11/15/opinion/15herbert.html?hp
I have a lot of respect for Bob Herbert, and I do agree that he makes some good points. But I'm unconvinced by his main argument that the auto makers are "too big to fail"; i.e. too many industries depend on their business to survive. This is simply untrue, and he is misrepresenting the centrality of auto making to the American economy (and making a specious comparison to the public debt of New York City, which is at best irrelevant). Bankruptcies, particularly of large firms, are never a good thing in the short run. There will be some potentially large disruptions as businesses shift resources away from servicing auto makers to other industries (Mr. Herbert makes it seem that trucks, ships, and railways are inherently useless except to transport automobiles!) This is part of our economic system: creative destruction is necessary to efficiently use our scarce resources.
As mentioned, I think that Mr. Herbert is guilty of insinuating that manufacturing is a core component of the economy. It is not: the United States, like most advanced industrialized economies, is primarily a service economy. Manufacturing is only small part (roughly 12% of GDP). Auto making is a fraction of this fraction.
Finally, my heart goes out to people who will lose their jobs because these companies go bankrupt. The human level is heart-wrenching. But unfortunately we have to view this from a macroeconomics level. In that light, it does not seem fair to take money from everyone else (taxes) and transfer it to a tiny sliver of the population to propagate their way of life. This is a completely different argument than being for or against broad-based social programs such as health care, education, and social security, which I tend to support funding robustly.
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