Saturday, September 15, 2012

Henny Youngman And The Now-Popular Auto Bailouts

The past week had more than its share of bad news, with lost American lives, attacks on our embassies, and serial Obama Administration apologies for the First Amendment.

Yet for all that, I think there was one bit of news which, if not worse, was at least more shocking and perhaps more ominous. Rasmussen reported that 53% of Americans now view the auto industry bailouts positively. Only 36% of Americans now view the bailouts as bad.

Whiskey. Tango. Foxtrot.

This new popularity presumably reflects the impact of the DNC, at which all and sundry sought to perpetuate the fiction that said bailouts "saved" one million or more jobs.

Any attempt at gauging the merit of the GM and Chrysler bailouts calls to mind the old Henny Youngman gag:

"How's your wife?"

"Compared to what?"

We don't get to run a separate control economy against which we can isolate and measure the effects of discrete policy choices, so we can only make comparisons with hypothetical alternative outcomes which, by definition, didn't happen. Which affords politicians ample opportunity to let their imagination run free.

Compared to the barren economic Hellscape from which Obama would like to convince Americans he saved them, a million saved jobs might be a conservative estimate.

Compared to anything that might plausibly have actually happened in the absence of what was in reality a bailout of the UAW's untenable contracts, however, the bailout is more likely in the long run to cost jobs.

In arguing that the bailout saved one million or more jobs, the Obama administration and its supporters are implicitly arguing that the most plausible alternative to the bailout was a world in which the U.S. auto industry simply ceases to exist, equipment is scrapped, and plant sites eventually return to nature, with no activity save for the grazing of buffalo herds that happen by. Bankruptcy by neutron bomb.

In fairness, people on both sides of the aisle like to make similar I prevented the world from ending arguments whenever it suits them. Indeed, the Bush/Paulson/Geithner cabal, along with every member of Congress who voted for TARP, routinely make that claim, including Paul Ryan.

If I didn't vote for TARP, mighty Apollo would have grown angry and ceased to ride his chariot across the sky. It was only through my courageous vote for TARP that we brought back the Sun.

But TARP and other financial bailouts are more complicated, and a topic for other posts. The auto bailout was a far simpler affair with far less justification.

And off the top of my head I can think of at least three options that would have been less damaging to the long term prosperity of both the auto industry and the nation than the Obama auto bailout:

1) Let nature take its course: Given the lack of available debtor-in-possession financing during the crisis, a bankruptcy without government interference would likely have resulted in the liquidation of GM and Chrysler. Liquidation may sound scary but it just means selling off the companies' assets to the highest bidder. The plants, equipment, and intellectual property don't cease to exist, they just get sold off to someone prepared to deploy them on an economically sustainable basis. And come to that, it works that way for suppliers of liquidated manufacturers as well. Amid the conditions of 2009, such assets might have fetched a low price, inflicting great pain on GM creditors. But that's the risk they signed up for, and in any case their loss is some buyer's gain, whether it might have been Ford, or Fiat, or Tata, or anyone else inclined to take a risk.

2) Encourage the private sector provision of DIP financing: If the government really found it intolerable to let GM and Chrysler live by the same laws as the rest of us, it still could have minimized its involvement by acting as an agent in securing private sector DIP financing. While Citigroup and Bank of America were (and in fact remain) basket cases, JP Morgan Chase, Wells Fargo and other large institutions remained not just solvent but fairly healthy throughout the crisis. The financial capacity existed. And while it is better for all involved if government does not actively use its power in this way, the reality is that bankers will ultimately do just about anything their regulators want them to do, including extending financing to customers whom they would prefer to avoid. This would have kept GM and Chrysler operating, while ultimately leaving them much more competitive than they are today by allowing them to more aggressively shed labor costs and inefficient work rules.

3) Guarantee or directly provide DIP financing: Let's say the CEOs of healthy banks ultimately said to Treasury Secretary Geithner, "Look, Tim, you can put me on the rack and torture me if it makes you feel better, but there's just no way I can reconcile the provision of DIP financing to GM with my fiduciary obligation to my shareholders." Even then, the government could have simply offered to guarantee some or all of the required loans, and left the financing terms to the private sector and the adjudication of bankruptcy to the courts and private parties. Or it could have directly provided DIP financing and still left the adjudication to the courts and private parties. This, too, would have produced more competitive auto manufacturers than exist today.

Compared to any of these alternatives, the Obama auto bailout can only claim to have "saved" a small number of jobs, all of which by definition represent a misallocation of scarce resources, at an exorbitant cost.

And that's only in the short run; in the long run, the destruction of potential economic value from that misallocation of resources likely leads to a net loss of jobs. Every dollar the UAW extracts in wage premia is a dollar that can't be invested in product development. Every dollar lost to inefficient union work rules is a dollar that can't contribute incremental value to customers. Over time, this makes all the difference in a competitive market.

One expects politicians and partisans to lie, especially in campaigns. And many of President Obama's followers aren't even lying, strictly speaking; many are merely ignorant of economics, or just irredeemably stupid, neither of which is a moral failing.

Still, the idea that a majority of Americans would think the auto bailout a good thing - that we all sacrifice in order to sustain the lifestyle to which UAW members have become accustomed - is staggering. One hopes this is merely the residue of the DNC, and as transient as the Obama bounce with which it coincides. The alternative is just too horrible in its implications to contemplate.

1 comment:

  1. "This new popularity presumably reflects the impact of the DNC, at which all and sundry sought to perpetuate the fiction that said bailouts "saved" one million or more jobs."

    Any God-damned politician can "create or save jobs" by forcibly taking the wealth of the many, who are unorganized and not politically connected or favored and giving it the the few who are organized and politically connected or favored. But, such "jobs" do not generate wealth, and, in act, they generally destroy wealth, making us all poorer.

    Why don't we just set up a Federal Department of Jobs -- which will "hire" everyone in the country, at a wage of $100,000 per year, and assign us all our "jobs" ... half of us will dig holes all day and the other half will fill them in all day? Think of all the social problems thereby solved!