Yesterday I implored the country not to save Detroit. Today Daniel Gross argues that Detroit's Big Three Are a National Disgrace: But we still need to save them. This is the only part which I think is on point:
But General Motors wouldn't be a typical bankruptcy. GM's management argues that the very act of filing for bankruptcy eliminates the possibility of recovery since people would be reluctant to purchase expensive, long-lived assets (cars and trucks) from a bankrupt entity. And because of GM's size and the place it occupies in the supply chain, the company's failure would likely trigger the bankruptcy of hundreds of suppliers and other companies that rely upon it.
Suppliers would eventually shift to other car companies if the demand is still there, but it might take a lot of "creative destruction" along the way. The rest of the stuff again seems totally irrelevant, people outside of the Industrial Midwest have to look to their own needs (Florida & California real estate collapse anyone?). And while I think there's no shame in a nation not having a car company, in a world of multinationals those arguments are specious anyhow.
Related: An evil libertarian, Why are we bailing out Detroit? In the comments, PalMD of Denialism says:
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.
It is entirely rational that people in Michigan, no matter their "principle," should support a bail out. It is their only hope, even if it isn't a good hope. Michigan will take a hit in terms of taxation, but, the risk of the loan will be distribution across all 50 states. That's a big "win" for Michigan. But what's in it for those of us outside of Michigan? Auto industry think tanks put the number of rippling job losses on the order of millions. But there are already millions of unemployed and underemployed people throughout this country. Think about the construction industry in California, Nevada and Florida which is in meltdown. People working in construction make good money as blue-collar work requiring minimal skills goes, but they don't make auto-worker money. Nor do they have benefits usually. Who is helping them now that they're out on their ass? Truthfully, they lost a lot less than auto-workers would, but is that a rationale for why we should be giving money to corporations which employ auto-workers?
I don't begrudge Michiganders for making the case for the bail out. You do what you have to do to have a hope of keeping your house, sending your kids to a good college, maximizing the amount of healthcare that you have access to. Rather, the focus here should be on those outside of the industrial Midwest. Wouldn't $50-200 billion extra dollars go a long way across many states in terms of building up infrastructure? Pennies add up to dollars, and dollars add up to tens of dollars, which add up to thousands of dollars. If you are a social democrat the auto industry bail out will continue to prop up the mini-corporatist social democracies of GM, Chrysler and Ford. But what about the hundreds of millions of other Americans who don't have the privilege of being a member of the UWA? For redistribution of wealth to be a sellable proposition it has to be grounded in some sort of conception of fairness and just desserts. If them, why not everyone? If Michigan, why not Iowa, why not Florida, why not Mississippi? Because the family farm or condo construction business isn't culturally iconic?
More: Leverage:
3 -- A lot of this talk has an air of socialistic hubris about it. If this line of thinking were correct and the primary impediment to the production of technological miracles was a lack of government leverage, then state-owned enterprises would have been a smashing success. In reality, outside of a relatively narrow range of utility-type activities, they've been flops. If the negative externalities associated with carbon emissions were correctly priced, I'm quite sure that would lead people in various places to develop lower emissions cars. But is just sort of pointing at GM's engineers and telling them "make low-emissions cars!" really going to lead to the intended result?
Yes. Magical thinking is back! What's a few hundred billions to assuage our bleeding hearts? I understand why Michiganders are going magical; magic is their hope. But other people don't need to put their faith in magic, it never did anything for us for thousands of years, why now?
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If GM cannot keep itself afloat, how will throwing money at it help the little companies that exist in symbiosis with it?
If there's no viable market, there's no viable market. Their niche has closed, whether we pump some money into the system or not. If they can adapt, let them adapt. If they've become too specialized to exist without their host, let them die.
The problem is that we might be heading into a depression-style downward spiral. You say let them collapse - ok so they collapse and our unemployment rate rises even higher and consumer confidence further erodes. This leads to less people buying stuff putting other companies in trouble, who we also let collapse. Who then fire their workers completing a vicious cycle.
Now whether the government needs to step in and save these particular jobs, or provide more government jobs, or save other companies is an open question and I don't know the answer. But just letting everything fail and unemployment rise is going to lead to much more damage.
Seems to me that temporarily propping them up to counter the cycle could well be a good idea, although they should be allowed to fail later unless they've actually changed.
Ahh... Except for a specific few areas the "industrial Midwest" won't be killed by GM. They already outsourced and hurt these economies. There would be some areas, but where do you think the "rust belt" name came from? abandoned factories in the auto supply chain mostly.
Are we paying the price for the gains made by labor unions in the second half of the twentieth century here?
Von
Coriolis - if there is a "later".
I say fuck it, let's just nationalize the car companies and put them to work making small, fuel efficient cars and public transit. We should also change the Constitution to allow Hugo Chavez to run on Obama's 2012 reelection ticket.
But just letting everything fail and unemployment rise is going to lead to much more damage.
how much will it rise compared to the current rate? do you have any idea? just curious what your back of the envelope is.
Seems to me that temporarily propping them up to counter the cycle could well be a good idea, although they should be allowed to fail later unless they've actually changed.
again, two words: opportunity cost. if you want to pump up spending in this manner, why the auto industry? why not spend it in areas where we actually a chance of being competitive as a nation? everyone, even those who want a bail out, agree that the structural problem with the pensioners that the big three support is just not going to go away, and that's the precipitating cause. here's an idea: just increase federal spending on infrastructure and subsidize college for talented students. those are investments which will appreciate and employ people or pull them out of the labor market (students). why is the auto bail out more efficient an allocation of funds? (from non-michigan perspective)?
many of these sorts of arguments suffer the same problems as the retarded discussions around intervention in iraq: a total extraction from the overall context and neglect of unintended consequences. things are interconnected. there are many other people hurting in the economy right now. why is detroit so important? i've heard some economists make the argument that you can't just mix & match the labor & capital inputs which are syngergistically in concert right now to produce autos. IOW, the frictional costs from transitioning the workers, capital and equipment in their current firms are going to be real high. that's an argument, whether you believe it or not. the position that there are just sssooo many jobs in michigan is totally unpersuasive because the economy is already bleeding jobs all across america.
Detroit is already dead, it's time to go rifling through the pockets for loose change.
I nearly died at the age of seven because I hid a scratch on my left leg from my mom. Yes, people will be hurt. The choice is not between people being hurt or not being hurt, the choice lies in how many get hurt and for how long. As the man said when a mountain fell on his head, "At this moment in time an umbrella is going to do fuck all to help me."
Rome didn't start recovering from collapse of the Western Empire until she died in the 8th century. For years the city was abandoned, empty. Nobody lived there, it held no trade. The eternal city was just a spot in the road that held nothing, promised nothing.
Then people started moving in in dribs and drabs. Vagabonds and vagrants, refugees from troubles and catastrophes. They came because they had heard there were places you could stay; so long as you were willing to work hard to make it livable and defend it from those who would take it from you. In time Rome began to prosper and thrive. But not the imperial Rome of old, the ancient capital of an ancient empire. This was a new Rome, a new city inhabited by a new people. In time this Rome would become identified with the Rome of old, the seat of a major religion, and after a thousand years capital of a nation. But she would never again be the Rome of the Caesars.
That's what we have here, before a new Detroit can arise the old Detroit must die, and the sooner we let it die the sooner a new automobile industry can arise to take its place.
While there may be hardly any shareholder equity left among the big 2.5 (GM, Ford, Chysler), there is a large industrial base, and major teams of engineers, and industrial designers. Not to mention the fact that they would have to abandon their houses if they had to move elsewhere. Whatever is done with them (the other two are at best months behind GM in circling the drain). Clearly this industry is to big to fail, so something has to be done, that preserves as much of the economic assets as possible.
I don't know what the proper approach is -probably some form of nationalization. But I figure the internet discussions are helpful, perhaps some of the real decision makers are monitoring the internet for ideas.
"Clearly this industry is to big to fail, so something has to be done, that preserves as much of the economic assets as possible."
The phrase "too big to fail" baffles me, whenever I hear it I can only think of how alternate assumptions can completely invert the sentiment. Why not "too cumbersome to succeed"?
In any case I think government intervention is obviously necessary but has to be correctly targeted. I don't support a bailout of the car companies since it's unwise to throw good money after bad, especially since massive layoffs are pretty much inevitable anyway. I propose helping the unemployed via relief work programs and infrastructure development, we could use better public transit in this country anyway.
the theory is the gov. has to intervene or act in areas where market failure has occurred (or always occurs). right? the problem with the decline of detroit is that frankly it isn't market failure IMO. remember the quotas on japanese imports? it isn't like we haven't tried to tilt the playing field in detroit's favor from on high. if there is prejudice against detroit, it is from many american consumers! no, this isn't market failure, this is the market at work, asphyxiating a beast which has gotten too big and can't slim down fast enough to increase its balance of oxygen above the threshold of meltdown. right now the big albatross are the retired workers. keeping the big 3 alive longer won't address these structural problems.
If your economy is founded on such a subjective thing as 'confidence', it deserves to collapse.
In the name of "ensuring consumer confidence", we've encouraged delusion for decades. Now reality is coming to collect its due, and our delusions of confidence are falling apart like a house of cards in a hurricane.
I doubt our society will bring itself to look reality in the face quickly enough to prevent a wholesale collapse. My only regret is that there's no equivalent of Galt's Gulch in the real world.
"If your economy is founded on such a subjective thing as 'confidence', it deserves to collapse."
Give me a break. This is not about who "deserves" what, but the effects of government actions, I don't give a shit about whether it's nice or not. If people are convinced that the sky is falling and stop buying that can contract the economy and hurt everyone. People are sadly not machines and their motivations and confidence is what makes economics so much harder then physics to calculate right. Which is why I'm a physicists and not an economist.
And Razib, I think I stated pretty clearly that I have no idea if this is the right government intervention - building infrastructure, providing services (healthcare) or tax cuts may be better. The only thing that appears pretty clear right now is that the government sitting around and not doing shit is going to result in a depression. And there there doesn't appear to be much of a chance of us getting a nice 3rd world war to force the government to provide a serious stimulus to the economy like we had before.
In any case I hope that the people who will have to deal with this mess will not be bound by some naive notion of fairness or ideology and do whatever is necessary. We'll see.
Lending some cash to a large company facing exceptional circumstances, to get them through a liquidity crisis, is a reasonable policy. The moral hazard is low, the cost is nil (since you get your money back, with a profit), and the consequences of not acting are dire (mass unemployment in a given area has this hysteresis effect: once it happens, going back to normal is damn hard). The textbook example is what the French government did with Alstom recently.
OTOH, throwing more and more money at a company that is just structurally uncompetitive, and won't ever return your cash anyway, obviously makes no sense.
What's the situation with US carmakers? It would be nice to have some real data, seeing as there seems to be a lot of stereotypes and cliches being thrown around.
Case in point:
Are we paying the price for the gains made by labor unions in the second half of the twentieth century here?
Only if you believe that there's no labor unions at Toyota, BMW or Renault.
Let's put it this way: if the economy is structured in such a way so that it is dependent on the constant purchasing of mass goods, people are going to be hurt when the economy finally collapses.
Maybe they'll be hurt today, maybe tomorrow, maybe a year from now. But they'll be hurt.
Now: would you prefer that they be hurt in the process of developing a healthier economic base out of the ashes of the previous one, or that they be hurt in a collapse that leads to nothing better?
Economies are bottom-up processes. There is not much top-down intervention can do to help them; there is a great deal such intervention can do to hurt them. Concern for short-term consequences while ignoring the long-term is disastrous, and that's precisely what advocating government intervention is.