Tuesday, December 2, 2008

Subsidizing Failure

Bailing out the Big Three is subsidizing failure.

And you only subsidize something

when you want more of it.

--Grant Bosse at NH Watchdog



Anonymous said...

We'll get more American cars?

Anonymous said...

We have an 'anonymous' interloper. I'm the original 'anonymous' and I don't want any other 'anonymous' usurping the profits of my labor.

I agree in principle with the aversion to bailing out car companies, banks, and don't look now, but I'm betting that credit card companies are next. (They have been securitizing their receivables and I'll bet the CDOs based on them have been insured via credit default swaps.... Just like MBOs) However, what about the 3 million, or so, people who will lose their jobs and their families? Additionally, the bailout is actually supposed to be a bridge loan, which carries with it rights to assets (usually) in case of bankruptcy, as well as interest payments. We can debate the propriety of the government lending (I don't really like it, but it may be better than the alternative), but the big question is the value of the investment.

I haven't bought American since the oil embargo, but if they would make something I want I would.

-Nobody in particular

Darin said...

I would like to respond to the 'anonymous' responder by providing just one quick point. If the government bails out the American car industry, you have just bought an American car against your will. You mention 3 million jobs; should, if there were ever such a need, the government bail out Wal-Mart (who employees more than 3 million)? Additionally, we wouldn't just bail out the car industry in this case but also the UAW. Therefore, it can be stated that the UAW has the entire U.S. economy at their command. Where would you draw the line?


Darin said...

Correction to my previous post. Wal-Mart employs close to 2 million.

Anonymous said...

Darin, you make a good point. However, while the number of jobs is similar, I don't think the economic position of Wal-Mart is equal to that of the US car industry. Can you make the case that bankruptcy of Wal-Mart and the US auto industry would have similar economic impact? Additionally, as I understand it, GM is a significant supplier to NASA and perhaps defense agencies. So, while I don't know the extent, it appears that the auto industry has some component of strategic defense importance.

The real question is what would be the economic impact of bankruptcy for the auto industry? If it really would send us headlong into a severe depression from which we may not recover for years or decades, I think a bailout is appropriate, by whatever means. If, on the other hand, private equity or other market players can come in and buy the assets and the effect on the economy would not be so damaging, then, by all means, we should go that route. The same applies to Wal-Mart.

As for purchasing a car against your will. You would not. That sort of statement is just incendiary melodrama. A loan to a company is a totally different thing. Moreover, we can borrow at a few percent and lend at a spread of a few percent, making a few percent on $34 billion, just like Wall Street does. If the deal is structured to put the tax payers in the most senior position, we would probably come out fine whether the industry survives or not.

Darin said...

"As for purchasing a car against your will. You would not. That sort of statement is just incendiary melodrama. A loan to a company is a totally different thing. Moreover, we can borrow at a few percent and lend at a spread of a few percent, making a few percent on $34 billion, just like Wall Street does. If the deal is structured to put the tax payers in the most senior position, we would probably come out fine whether the industry survives or not."

You seem to be under the impression that the government has their own resources. Borrow who's money? The government can only take from one to give to another, thus we are not better off. Moreover, a bailout of the American auto industry is a bailout of the UAW. The longer we keep the UAW in place, the longer the American auto industry will continue to be a failure. To steal a quote from the political world (and change the emphasis a bit)....It's the unions, stupid.

The point of this blog is that to reward failure is to support more of it - failure. The idea that any firm/industry is just too big to fail "just ain't so"

You claim that you don't buy American cars, well if the bailout goes through (which I fear that it will because too many people are protectionist and ignorant toward econmic freedom) you have just supported - via your tax money - the purchase of an American automobile. Legalized plunder does not make us better off.


Anonymous said...

Ah, there's the crux of the issue. You're anti-labor. Unions are not the problem. If you read Adam Smith you will find that he recognized that while guilds (unions) presented a barrier to entry, workers collectives did level the playing field. He observed that it is easier for the owners of capital to communicate with one another and act together than it is for workers to do so. Unions rectified this situation. And they gave all of us the 40 hour week, weekends, benefits, etc. Perhaps if our business model was similar to that of the foreign companies with which we compete, we could do so a little better. But many people call those business models 'socialism.' I do admit, however, that any bailout of the big three, banks, etc., should come with a pink slip and no bonus for those who led their companies into this mess.

'The idea that any firm/industry is just too big to fail "just ain't so"'... OK, Darin, I'll accept your statement. Now convince me it's true. Flesh it out with a quantitative explanation of exactly what would happen, where it would happen, when it would happen, and to whom it would happen when the big three go under. In short, you'll need to give me the complete economic and social who, what, where, when, why and how, to convince me you know what you are talking about rather that just reciting an ideological position.

You'll need to give credible estimates of the impact on GDP, nationally and regionally, and tally up the effect on towns and cities in which the US auto industry has a high concentration. Finally, consider the trade-off between the $34 billion and lost taxes, increased unemployment payouts, and other losses and costs to government. And when you are done, the numbers should amount to the margin of error, or not much more, in the various measurements we have at our disposal for assessing the economy, and those numbers need also to substantiate a minimal impact on the individual lives deems sacred repeatedly on this blog.

Oh, and while you are at it, please tell me why your answer is so different from what is floating around on Capitol Hill.

I personally don't have time to compile all that data and analyze it, so I have to resort to trusting my elected officials and established agencies to make the best decisions based on all that data for me.

I'll look forward to seeing your answer.

Darin said...

Ah, I am so glad you took the time to respond to me, Anonymous one. I will attempt to answer each of your concerns in the same order you have asked them of me (although I will be brief, for the most part).

Am I anti-labor? No. I am anti-unions, however, I am very pro productivity - labor being a factor of production that firms must compete for in the open (labor) market....not a closed union control. That being said, unions, like governments, exist for one reason - to eliminate competition. Plain and simple. Competition lowers costs. Plain and simple. Lowering costs allow the consumers to win. Plain and simple (take a look at the Toyota and Honda's plants operating here in the U.S., as a primary example).

You mentioned Adam Smith; congratulations you read a book by a classical economist. As you may know, Smith was not correct nor able to figure everything out (including the value of labor)...refer to the diamond and water paradox, that the Austrian economist solved.

The second part of your first paragraph mentions your preference toward foreign industry business models (that couldn't be more vague). However, it appears to me you are referring to nationalization - which is a failed idea (China is an example; compare former red China to Hong Kong). In a profit and loss system you allow both success and potential failure (you must allow both or neither to occur).

If the bailout is such a good idea then why have we not seen equity firms (more like what we saw with Chrysler several years back) chomping at the bit to buys these organizations? Short answer; the unions and government regulations. If there were significant returns to be made, believe you me an equity firm would jump at the opportunity. Union choke-holds and stiff government regulation (i.e. 2007 CAFE standards) are the problem.

Your third paragraph; well I will just say that it must be a joke. Why do you think that Michigan has the worst economy in the Union? Plus, look at all the industries that have left what is now referred to as the "rust belt". Again, I will have you refer to Toyota and Honda for confirmation (since we are refering to the auto industry).

You seem, to me, to be merely an e-mail tough guy. You expect for me to provide you with all the answers and explanations (basically because you are not confident with your own) but yet you have provided nothing substantive of your own - merely euphuisms. For example, compile date; OK, that's not my profession. So, here is an economic lesson for you that you may not have picked up in your sophomoric Keynesian class. If the cost (my time) exceeds the benefit (proving you wrong), don't do the activity. This is referred to as marginal benefit to marginal cost. Rational people think at the margins.

One last point to leave you with. In economic thought and reasoning, we must always consider the long-term consequences of our (especially government's) actions. Bailing out an industry now will only lead to further bail out requests (as we have seen already).


Anonymous said...

I think I'm detecting a pattern here. If I ask you to substantiate your position, you get snotty, quote something from the Internet and attack me personally. Very clever!

How about you lay off the snottiness and just provide the data on which you based your position, if indeed there is anything other than ideology. If you have analyzed the problem and used data to reach your opinion it should be short work to present the information here. If, on the other hand, asking you for substantiation is too tough for you, I can understand why you argue the way you do.

In response to your perception that I am just an email tough guy: it is not productive to speculate about motives or make disparaging remarks about someone's source of learning. For example, I perceive you to be a home schooled child (15 to 17 years old) who has been inculcated with 'selfishness is good' but not taught history. You apparently have done some book learning but lack life experience. However, observing this probably does not make you feel too great and it does not help me understand your position as much as knowing the reasoning (not ideology) that led you to the conclusion you have apparently reached. So, why don't we just leave the petulant, snotty jabs out of it, and address the facts and attempt to educate one another about our positions?

Darin said...

Thank you, Anonymous, for pointing out my flaws while at the same time showing your own ignorance. I wish that I were fifteen and in home schooling. The truth, albeit irrelevant to knowledge, is that I am an adult who works full-time and who is about to receive their degree in financial management.

As for my quoting directly from the Internet, I'm not exactly sure what gives you that assumption other than the fact that I am not the only person (imagine that) to hold these views. You have certainly not provided a NEW opinion of your own (check the news and polls).

My point is simple; the UAW - and government regulation - has caused much of the problems with the American auto industry (so how do we solve this by doing the same). Thus, I am against the bail out. During hard times, organizations must be allowed to reorganize / restructure, become lean in order to again become competitive and profitable. A bail out will not achieve this necessary adjustment. Additionally, sir, you seem to feel that providing a firm (GM, for example) with a bridge loan will solve all of their problems, but yet you refuse to acknowledge the impact this wealth confiscation will have in the long-term (whether it be through increased taxes, Fed loans, and or borrowing). Why is it that Toyota is not having the same problems? Unions have handicapped our auto industry and a bail out will simply continue this failing tradition. History, alone, has substantiated this (by the examples I have provided in my previous post).

The free market shows us what the consumers value and want. When gas prices where low, consumers wanted big vehicles (the American auto industry serviced this need). However, when prices rose dramatically consumers shifted but GM (for example) couldn’t shift as quickly along with demand in part because of the UAW’s choke-hold (lean manufacturing is a necessary adjustment process to reduce costs and reorganize – re-tool and alter investments in plants and equipment). Taxes disrupt necessary capital investment and savings.

I see no reason to provide a macro model when history is already providing us with the empirical evidence.

You brought in Smith; Smith was wrong - according to the economic school of thought that I follow (Austrian school) - on value of labor (thus my mention of the diamond water paradox).

By the way, I love the jab of selfishness. I suppose you feel that aultruism is best? It appears to me that you are not very learned in free market economics and therefore have summed my position as merely selfishness. To steal a quote from you; Very clever!

If you wish to attempt to prove me wrong with your own ideas than by all means go right ahead.

Beth said...

A request to commenters: Please stick to the issues and move away from personal comments.
Thank you.

Anonymous said...

No kidding!

Anonymous said...

Darin, congratulations on working full time and getting a degree in financial management. Been there, done that.

Why do you refuse to address the issue here? I agree with your position regarding the state of the US auto industry, although I believe your comparison to Toyota is incorrect. Toyota, as far as I know, benefits from government subsidized health care and pension plans. This sort of arrangement is often referred to as socialism, and apparently it is working.

But all that is irrelevant. The point I'm asking you to address is what would be the cost of letting the banks and auto industry go under versus the cost of bailing them out. The names of the industries or companies is beside the point. If failure to act sends our economy into a severe depression with, say, 30% or 40% unemployment, which lasts for decades, don't you think the cost in human misery might be worth spending $50 billion, or even $100 billion (the cost of ten months in Iraq) to avert it? I don't know all the facts here; I'm taking it on faith that, with all the testimony from car companies, the Treasury, BEA, BLS and other agencies that collect and analyze economic information, Capitol Hill is making their decisions on the best possible information.

All I asked you to do is give an accounting of what the cost of doing nothing would be. I think that is reasonable, given that you are asserting that the prevailing wisdom on Capital Hill appears to be that the cost would be too great and damaging for the government to sit by idly. I'm assuming that you base your opinion of information Capitol Hill doesn't have, or an alternative interpretation of the information they do have. Apparently you take it personally and find it necessary to be nasty. If you don't have any information, just say so.

Your comments about the free market showing us what consumers want actually makes the case for the intervention of government. If we had taken the hint in 1974 and established and persevered with alternative energy programs and incentives, we may not at this juncture be sending $700 billion a year to foreign countries to satisfy our oil habit. And as I type this the Saudis are acutely aware of what oil prices can do to markets, and they are taking steps to manipulate the individual self interest of the American consumer so as to preserve their business. They are producing oil in excess of OPEC agreements so as to keep oil prices down to levels at which American consumers will be lulled into complacency and attenuate their interest in alternative energy. One of their oil ministers was quoted recently in Business Week as noting that consumer who switch to a hybrid vehicle aren't going back to an SUV. And they don't want that. Personally, I think letting the Saudis and the aggregate effect of individual self interest, manipulated by the Saudis, dictate the future of our country is foolish.

My comment regarding paraphrasing from the Internet is based on location of a site that would provide grounds for accusation of plagiarism. My apologies if the similarity was just coincidence. My comments regarding the perception of your age and schooling were supposed to illustrate the uselessness and unproductive nature being nasty. I'm sorry you didn't understand that and find it necessary to continue with unproductive childishness.

Darin said...

Agreed. To stick to the scope of this topic and the focus of my position; government can not create NET benefits (given that they can only rearrange / reallocate resources - take from one and give to another). As we should clearly see, through empirical evidence, the UAW and government regulation has severely handicapped the American auto industry. Therefore, to claim that a government bail out will solve this matter is ludicrous.

A similar matter is that of government attempting to create jobs. Again, they do not create a NET increase. We can also look at past GDP figures for correlation.


Darin said...

My comparison for Toyota is there operations here in the U.S. and the fact that they are not unionized. Even GM has in the past outsourced production because of cheaper cost do to un-unionized labor.

I am not refusing anything here other than to go off topic. I am not an accountant, therefore I would have a difficult time performing an accounting measure. Moreover, you do not need an accounting measure to show that bail outs won’t work (it hasn’t worked yet).

"Your comments about the free market showing us what consumers want actually makes the case for the intervention of government. If we had taken the hint in 1974 and established and persevered with alternative energy programs and incentives, we may not at this juncture be sending $700 billion a year to foreign countries to satisfy our oil habit."

Ah, Carter did do this and it was a complete failure. Additionally, the reason alternative energy programs do not work is that they are not economically viable (in a free market). Thus, subsidizing is the only way to put alternative energy programs in place. You might find the book, Energy The Master Resource, helpful here. I really do not understand where all the supposed "nastiness" is but don't care either.

Additionally, you may want to look into the works Mises, Hayek, and Rothbard (to mention a few) regarding government intervention. Not to mention the failure of the U.S.S.R - the socialism experiment.

Darin said...

One last comment for me on this thread. Anonymous, what capital budgeting technique would you use here to justify the bailout of the auto industry? It seems to me that to determine a NPV for this strategy would be extremely hard to do (not to mention that fact that this is not an investment, therefore determining a rate to discount cash flows would also be extremely difficult). Maybe because I am merely a layman but I would be interested if you would care to share.

Macro models and econometrics have proven to be less than sufficient, to say the least. We need to consider the long-term effects of these actions instead of focusing only on the short-term (myopic).

Anonymous said...

Darin, the first thing I apparently need to address is the force of the written word. Written remarks have more stringent standards and carry more weight than extemporaneous remarks because of the opportunity to edit them. So, when you make sarcastic remarks such as, “You mentioned Adam Smith; congratulations you read a book by a classical economist,” or insulting, condescending remarks such as characterizing ones apparent understanding of a topic as sophomoric as in, “So, here is an economic lesson for you that you may not have picked up in your sophomoric Keynesian class. If the cost (my time) exceeds the benefit (proving you wrong), don't do the activity,” they might be interpreted as nasty as opposed to congenial. On the other hand, disagreeing with someone and stating the basis for the disagreement, such as presenting facts or your perspective, is helpful in furthering discussion and points one or both parties in a direction that may increase understanding or, at least, knowledge. Sometimes, of course, we just have to disagree. Even so you might be talking to someone who might be considering hiring you someday, so it might be beneficial to be respectful.

I tried to find information to determine the actual success of bailouts. I found a site (http://www.propublica.org/special/bailout-aftermaths#lockheed) that lists the public expense and the return or outcome. As I looked over the record, from Penn Central Railroad in the 1970s to the airlines in 2001, the financial record was mixed; we won some, we lost some. My earlier suggestion of a focus on NPV, to which you responded, was misguided. While NPV can support a bailout based on ROI, i.e. investment, grounds, a poor NPV cannot solely be used to argue against a bailout. The reason is that while NPV can be used by an individual corporation to make a decision about whether to enter a market or produce a given product, it leaves out the human element, which is the sole reason government exists—I think we both agree that the purpose of government is not to turn a profit. In contrast, there is extensive literature about the purpose of the corporation. Much of the literature supports the position that the sole purpose of the corporation is to produce a profit for the shareholders. Other arguments elevate the importance of shareholder interests (suppliers, distributors, customers, employees, communities, etc.). Governments answer to only one group: constituents. So, what it comes down to is the question ‘is it good for all or a majority of the people,’ at the federal level, or ‘is it good for my constituents,’ at the regional, state, or local level. Unfortunately, that is politics, whether we are talking about communism, socialism or capitalism. It’s like ‘benevolent self-interest’ on steroids.

Your comment about Michigan being in last place economically is puzzling, notwithstanding your comment about the third paragraph being a joke (unnecessary nastiness, but I think you should get the idea by now). The American Legislative Exchange Council has published an article by Arthur Laffer and Steve Moore that does indeed rank Michigan last in regard to employment and 49 of 50 regarding per capital income (http://www.alec.org/am/pdf/ALEC_Competitiveness_Index.pdf). However, the same site ranks Michigan 16 of 50 in regard to a sixteen-criteria measure of economic competitiveness. So, Michigan is doing extremely poorly or is near the top in economic competitiveness, depending on what your perspective is. More important Laffer and Moore never mention the unions or auto industry for the gyrations in economic success. They couch their argument in terms of taxes and policy (I’m suspicious of their conclusions, but that’s another story).

Regarding business models, I was not attempting to compare socialism to capitalism. I was simply pointing out that the comparison of Toyota and GM is not fair. I assumed you would understand what I was referencing, which I shouldn’t have done. The unfairness of the comparison of GM and Toyota is discussed at http://chinamatters.blogspot.com/2008/11/gm-toyota-japan-and-national-health.html which points out a key difference between the two companies. It boils down to nationalized healthcare--not unions. The bottom line is that if you want to hold up the success of Toyota as an example of what GM should be doing, you are implicitly making the case for nationalized healthcare.

Regarding your posting on Dec 5, we seem to be talking past one another. My point is that focusing doggedly on ideological positions and not looking at the long term effects of one’s actions may lead to an undesired result. You mentioned the future tax burden and other detriment to the government; I pointed out somewhere along the way, I think, that if the Big Three go down, and the countless small companies with them, the cost in terms of added unemployment, lost tax revenues, and length of time to recovery will dwarf the cost of the bridge loan (this information is the position of government and private economists promulgating their positions in the media). So, if what they say is true, the long term effect of doing nothing may be worse than bailing out the big three. I’m not saying that a bridge loan will solve all the problems; I don’t think it will. However, we can deal with that problem once we get the economy to a position in which letting the beg three go bankrupt won’t take the rest of us with them.

Two last comments: I may or may not be a ‘sir,’ and, yes, I do think altruism is preferable to selfishness, although as a practical matter a middle way is preferable to both.

That’s it for me. Have a nice Holiday.

slocums said...

Give the debating society a rest kiddies.