13 November, 2008

Obama's Economic Policy pt. 3

On to some more substantive questions. Should we bail out GM (and Ford and Chrysler)? It appears that the future Obama administration is poised to do exactly that.

The first argument always made in favor of an auto industry bailout is: "We bailed out the banks, why not the car manufacturers?" Car manufacturers are an order of magnitude less important to the overall economy than banks. It's important to nearly every business that credit can easily be obtained. It's important to nearly every person that they be able to borrow to finance a car or a home, education, or other large purchases and investments. But if GM disappeared today, the country's transportation system would not collapse. There would still be a plentiful supply of automobiles and trucks from abroad. Some industries are just more important than others.

But no one's talking about making GM disappear. When GM can't meet its obligations, they will enter bankruptcy. (How many times have airlines gone into bankruptcy and continued flying, even during Chapter 11 itself?) Stockholders would lose their investments and bondholders would be given newly-minted stock in exchange for their bonds. GM would be given a chance to restructure (i.e. not pay) some or all of their debt--mostly the massive pensions and health-care plans they mistakenly promised their employees in perpetuity--and then would start anew. Released from the burden of huge pension and interest payments, GM could refocus on making good cars and innovating again.

What happens to the workers and pensioners? They would take a hit. Pensions would be reduced, workers would be paid less, and many would be laid off. But if we really want to help GM's workers (and I think we should), the best way to do it would be to help them directly with cash transfers and retraining. Giving GM the money just helps GM's stockholders. Let's give that money (or a portion of it) directly to the workers who are affected by GM's failure.

Why not help stockholders? They've made a bad decision to invest in a company with a crappy business model. If we bail out every big company that fails because it has a bad business model, firms will line up outside of the Treasury department for their bailout check. It provides a disincentive for businesses to change paths when they're pursuing a failing strategy. It encourages them to invest in unproductive lobbyists who can get Washington to bail them out when the time comes. And if we're making something that some other country can make much more cheaply, we should stop making it!(1)

Let's not bail out the auto industry. Instead, let's give the $25 billion directly to the affected workers, conditional on having worked for GM for, say, five years or more. Workers who've worked there less than five years can be provided with vouchers for retraining and relocation if they so desire.

(1) Note: There are arguments for nurturing "infant industries" by providing them with protection from foreign competitors and subsidies. But these arguments do not apply to industries that have been around a long time and just aren't working any more. This is for the same reason that import-substitution industrialization tends to work very well in the first decade or two and then becomes a massive burden beyond that point.

No comments: