I agreed (reluctantly) with the need to bailout banks because they constitute a special case in the financial system -- the overall health of banks is linked to the overall health of the economy. I am not against bailouts per se, but the devil is in the details. There are a lot of ways that they can make recessions worse by putting inefficient companies on life support. This view of recessions is explained well on Economist Democracy in America blog:
A dialectic model of the business cycle suggests that in prosperity, inefficiencies are allowed to build up alongside innovations until the expansion becomes overburdened. Then a recession attacks both the productive and unproductive, until inefficient firms are eliminated and the resources they once wasted turn up in the hands of smarter competitors. In other words, the recovery begins when companies like GM stop wasting metal and labour.
Any stimulus programme might moderate some of the pain of the recession in the short term. But where the programme interferes with the reorganisation of private labour and capital, it will more likely extend the recession needlessly. The programme Barack Obama endorsed to speed up infrastructure construction and repair could do more good than harm. The proposal to lend money to American auto manufacturers, on the other hand, seems likely to prolong current problems.
Viewed through the lens of what actually causes recessions -- disconnects between what firms are producing and what consumers actually want -- why on Earth are we even considering bailing out Detroit? More precisely, why on Earth are we considering bailing out Detroit for at least the tenth time in my lifetime? Because as the Free Exchange blog aptly points out, we having been having identical conversations with Detroit automakers since the late 70s. Each time, Detroit automakers come hat in hand to Washington predicting global economic collapse if we let one of them fail, and we -- like some push-over girlfriend or boyfriend -- fall for their line and believe that "this time they will reform." BS. Bailing out Detroit yet again will only guarantee that we will be bailing out Detroit time yet again plus one in 5 or 6 years.
(Every time I see one of these jokers on television, the Saddam's "I Can Change" song in the South Park movie flashes into my head.)
The proximate reason Detroit wants money this time may seem legitimate. We are in the midst of a severe economic downturn. We need Detroit to make more fuel-efficient cars to battle climate change. Such retrofits take time and money. One lobbyist for the auto industry I heard on the radio even had the gall to compare helping the auto companies to funding pure science. But the proximate reasons given to justify a bailout always seem legitimate. Economic downturns always seem everlasting. The historical reality is that that eventually they end, but we make them longer if we prevent bad companies from failing. And it is bad use of incentives -- to say the least -- to bride Detroit to innovate now given their abject failure to do so over the last 20 years.
The most distressing part of this whole business is that there is a viable alternative -- albeit one for which there is no political will. What we should do is buy out the pensions of all the workers of one of the auto companies, and send those workers to young for pensions out with a severance and money for retraining. Let's close one of the Big 3 entirely. The US auto industry (as the Big 3 are framed...which is nonsense because lots of foreign companies build cars profitably in the US) has expanded beyond its market, and one of these companies needs to close. Buying out all concerned will be a hell of a lot cheaper over the long run than trying to keep these purveyors of buggy whips and failed technology going.
Sadly, instead it looks like we are going to do the opposite and hand them money for their incompetence yet again. The only upside would be if this money has strings attached that demands them to innovate and bring their cars more in line with consumer demands. I never thought that I would say this, but if we give them this money the Big 3 should become the most regulated industry in America. If President-elect Obama indeed considers the automakers the "backbone of American manufacturing," let's see what his administration does to make them behave when he owns them. I don't think that any administration will be able to regulate them into good behavior, but regulation is a preferable outcome to giving them the money outright.
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Ever heard of British Leyland? Third biggest producer of cars in the world in the 60s. Started to produce badly-made cars that nobody wanted to buy. Nationalised by the British government in the mid 70s, the company survived at great cost for a few years, which at least softened the blow (1 million jobs were lost over 30 years, rather than in one go).
All that remains of BL is companies like Jaguar, Land Rover, etc - these now belong to other companies.
No one knows what to do with Detroit. Even some of my most conservative friends around here support an auto bailout. For folks who don't live around here, it's hard to imagine just how much every person in SE Mich relies on the auto industry. 30,000 lost auto jobs, which is likely to happen in the next few months, will ripple violently through michigan's economy. Associated industries, corner stores, hospitals, you name it, everyone is affected.
That isn't to say that tossing money at GM is the only option, as you stated, but from here it feels like no one is thinking right. What we probably need is some sort of auto summit to help figure out how to keep michigan from going deeper into the crapper.
Pal,
Alberta goes through economic cycles where the province starts to fail financially and the rest of Canada (OK Ontario) points and laughs and pundits say Alberta needs to diversify their economy. They diversified from being agriculture based to natural gas based, to oil based and is trying to move into bio/high tech. In the 25 years I've lived here, the economy has slowed by not stalled to the point where the province gets equalization payments. Sounds like diversifying is what Michigan has to do. If the auto industry keeps getting bailed out, there's less incentive.
The only upside would be if this money has strings attached that demands them to innovate and bring their cars more in line with consumer demands.
According to a NYTimes article today, Obama intends the money to have strings attached exactly along the lines you're thinking. 'bout damn time.
Pal,
I think the point about Michigan is that they wouldn't be so dependent on Detroit if the government hadn't been so eager, several times already, to bail Detroit out when it screws up. Casz makes a good point - by sending the signal that Detroit can never fail, individual Michiganders don't have much incentive to plan for alternate futures. Michigan needs to diversify, and it can't do that while the government all but ensures that these giant inefficient companies will continue to dominate its economy. I think it's finally time to let GM fail. Perhaps the government could step in to help ensure that the supply chains aren't disrupted when it does, that the other two of the "Big Three" are able to smoothly assume some of GM's market share. And beyond that, obviously some sort of special unemployment insurance provision will need to be put in place. But honestly, I think at this point all discussions about government bailouts should start with the assumption that one or possibly two of the "Big Three" are going under and should be directed toward the transition period. They should NOT be discussions about how to save a dying industry.
the only good argument I see is that in the current environment a chapter 11 reorganization may be impossible, as debtor-in-possession financing at the scale needed is not to be had. Liquidiating GM's assets would be a nightmare. The gov intervention could in theory play this role, along with wiping out the current equity junior debt and converting the existing senior into new equity. Unfortunately I doubt the gov will do this and will instead wind up bailing out the current stock and bond holders.