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November 11, 2008
No More Bailouts
Don Boudreaux
Over in The Wonk Room, Pat Garofalo argues that "If It Happens, The Auto Industry Bailout Needs To Be Done Right." While it's true that some
ways of bailing out this industry would be less harmful than other
ways, there is absolutely no "right" way to do it. To advise
government to do the auto industry bailout "right" makes as much sense
as advising a burglar to burgle the neighborhood houses "right."
And, unfortunately, Garofalo himself advocates a condition of the bailout that would make it worse than it would be if Uncle Sam simply gave $50 billion to GM, Ford, and Chrysler. He wants the money to come along with a government mandate:
More importantly though - as Pelosi and Reid said - “federal aid should come with ’strong conditions,’ such as requirements that car makers build more fuel-efficient vehicles.” Bill Scher at OurFuture writes, “With the auto industry in dire straits, we taxpayers have maximum leverage to demand the cars necessary to help lower energy costs, cut carbon emissions and reduce our dependency on foreign oil.”
Producers should serve consumers who express their demands in the market -- consumers spending their own money in settings in which each individual's choice is decisive. Danger lurks in policies mandating that producers serve politically voguish ideas masquerading as taxpayers' interests.
I'm no fan of carbon taxes or of the inherently vague notion of "energy independence," but if Uncle Sam is so terribly worried about carbon emissions from automobiles and Americans' purchase of oil from other countries, then the best way he can deal with those concerns is to raise gasoline taxes. Auto producers and consumers would then experiment and respond with different ways and find those ways (note the plural) that best suit as many consumers as possible. Mandating greater fuel-efficiency sounds progressive, but it's dumb and dangerous.
Posted by Don Boudreaux in Complexity and Emergence, Myths and Fallacies, Regulation | Permalink
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Comments
Why don't these control freaks just buy the GM stock now it is so cheap. Then they can build the cars they so necessarily want by installing new management. That's maximum leverage right there for you.
Posted by: kurt | Nov 11, 2008 6:58:01 AM
"With the auto industry in dire straits, we taxpayers have maximum leverage to demand the cars necessary to help lower energy costs, cut carbon emissions and reduce our dependency on foreign oil.”
If GM produces cars the taxpayers demand, and Toyota produces cars consumers demand, where to the GM cars go after production?
Posted by: Doug | Nov 11, 2008 8:19:11 AM
Of course, the next step is to limit the import of foreign cars, in order to prop up the sale of American garbage so consumers have no choice. It's the other part of Keynesian economics that the politicians never tell you about, right until the do it.
In the consumers favor is the fact that properly maintained Japanese vehicles (and even the better American and German ones) run forever if maintained properly. We don't need new cars every 2-3 years.
Posted by: Don Mynack | Nov 11, 2008 9:30:32 AM
Consumers have been demanding fuel efficient cars for at least 5 years now. It is because GM has profoundly failed to meet market demands that they are such poor shape.
I certainly don't expect any government funding or mandate to improve the situation. I'm hard pressed to understand why the board of directors hasn't fired the top three layers of management and started over. As for executive compensation, it would be nice if they were getting paid proportionally to the job their doing!
Posted by: Andy | Nov 11, 2008 9:35:28 AM
Even if the car companies could build the cars the government wants, who is to say they will be the cars consumers want at a price consumers will pay? Somehow I doubt we will find any business geniuses in D.C.
Even with government money, the big 3 will still have the onerous cost disadvantage to the imports. And there is no way Pelosi and company will remain silent while GM and Ford try to reduce their labor costs at the UAW's expense.
The car companies need to bite the bullet and go the bankruptcy route and reorganize their costs structure. That is why we have bankruptcy laws and if the union and management have to take a hit, so be it.
Posted by: MU789 | Nov 11, 2008 9:53:30 AM
I don't understand. Gas taxes and fuel economy standards have nearly identical long-term economic effects. Maybe I'm just being obtuse, but I don't see why there should be an ideological resistance to one form of market signals and praise for another.
Posted by: Brad Johnson | Nov 11, 2008 9:58:18 AM
government mandate or no mandate, the bailout will do more harm in the long run than good for America. Financed by more debt, it will contribute to future tax hikes, meaning future consumers will have less disposable income. I agree with Andy that GM's failure to meet the demands of American consumers is the source of its current weakness, combined with decades of protectionism propping up the country's uncompetitive industries. Downsizing the US auto industry, while painful to its workers and shareholders today, will prevent the inevitable decline of this dying sector and the immeasurable pain it will cause taxpayers tomorrow.
Posted by: Jason | Nov 11, 2008 10:09:34 AM
I always find the leftish notion that, without the help of Congress, consumers have no leverage with producers to be hilarious. Ask Circuit City execs about that.
The failure of GM can very easily be portrayed as the result of consumers exercising their leverage, and in fact it is Congress that, with a bailout, would be interrupting this process.
Posted by: coyote | Nov 11, 2008 11:08:47 AM
Gas taxes and fuel economy standards have nearly identical long-term economic effects.
I wouldn't say that, Brad Johnson. You could say that, given setting both of them to the correct levels, they can be made to reduce oil consumption by the same amount. But their long-term economic effects are quite different.
Different drivers have different needs. Some drivers, such as those who perform work with their vehicle, will need extra horsepower that lowers fuel efficiency. Others will have a strong desire for larger vehicles because of, e.g., their number of kids. Still others will prefer extra horsepower or larger vehicles, all things being equal, but it will be somewhat of a luxury for them and they would give it up fairly easily.
A gas tax differentiates among these people. By straightforwardly increasing the price of gas, people for whom the extra engine power and car size is a luxury will switch cars, whereas people for whom it is a necessity will pay the higher cost, since the marginal benefits will still be greater.
CAFE standards work differently. Perhaps they treat everyone the same; in that case, people who have a strong need for extra horsepower will be forced to go without, despite willing to pay a lot for it, whereas people for whom it is a luxury will not increase their efficiency as much as they would with a tax. Perhaps the law will make exceptions for people who need these vehicles for work; this leads to the light truck/SUV loophole.
We see that the two methods lead to different results; with a gas tax, people who can most easily move to a more efficient car do so, and people who cannot pay the tax. With CAFE, everyone is forced to move to the same type of car type, regardless of whether this is an easy burden or a very heavy one that they would rather pay a lot of money to avoid-- or alternately, some people are allowed through favoritism to avoid its effects entirely rather than pay a tax.
In political reality, a gas tax sufficient high to have a strong effect will be unpopular. OTOH, so are CAFE standards strong enough to have a real effect, even though more of the costs are hidden.
In addition, all things being equal, a gas tax will result in a higher marginal price of gas and in a higher marginal cost of driving than higher CAFE standards. This means that we can predict when a gas tax and higher fuel efficiency standards save the same amount of gas, a gas tax will have slightly lower fleet fuel economy but less driving, whereas CAFE standards will have higher fleet fuel economy but more driving. (All things being equal, if you give someone a more fuel efficient car they'll drive somewhat more, since driving becomes cheaper.) Another way of putting it is that when a gas tax and CAFE standards achieve the same fuel economy, the gas tax will result in less driving and less oil used.
Posted by: John Thacker | Nov 11, 2008 11:52:41 AM
Coyote,
Who claims that consumers lack a kind of veto power over producers?
Do you have a robust proof that such veto power is sufficient to assure that producers will get a clear signal from consumers about what consumers want? I think you do not.
Posted by: T L Holaday | Nov 11, 2008 12:05:57 PM
Kurt - Great question, assuming you're asking why the control freaks don't use their private funds, rather than public funds, to buy the stock and make unprofitable choices.
And, the answer may be the same answer that came out of the charitable giving stats about a year ago. These control freaks in particular love to force others to fund their priorities, but don't have enough conviction to do it themselves.
Anybody know of a goodword (other than socialist or communist) to distinguish this type of control freak from the control freak that puts their money where their mouth is?
Posted by: Seth | Nov 11, 2008 12:50:07 PM
Consumers have spoken. GM ought to go bankrupt.
Bankruptcy of GM is not the end of the world. there will still be GM branded cars sold world wide. It will still be number 2 auto maker. It will be under new management. Current shareholders will be wiped out. Pensions are unfortunately anyway guaranteed by Pension Benefit Guarantee Corporation aka Tax Payers. Some employees will lose jobs, other employees will have to accept a payscale commensurate with rest of the manufacturing industry.
Posted by: Oil Shock | Nov 11, 2008 1:00:57 PM
I have read a lot of comments from people who simply have no historical perspective regarding the auto industry, to wit:
"Consumers have been demanding fuel efficient cars for at least 5 years now. It is because GM has profoundly failed to meet market demands that they are such poor shape."
Not true. The Japanese manufacturers 5 years ago were scrambling to produce larger trucks and SUVs to meet the demand for those products. Consumer demand changed 2 years ago when gasoline prices began to skyrocket. Ford couldn't give away the Focus for years; suddenly it became a best seller. This was a discontinuity, not a gradual shift.
"Of course, the next step is to limit the import of foreign cars, in order to prop up the sale of American garbage so consumers have no choice. It's the other part of Keynesian economics that the politicians never tell you about, right until the do it."
Actually, this is exactly what has been done for decades in Japan and now in Korea. It enables the manufacturers in those countries to have a distinct advantage of a protected home base for defraying development costs while then being able to be highly profitable with incremental production volume elsewhere. We choose to be "subsidized" by consumers in those countries and question the management of our auto companies in this country. Simply compare the percentage of vehicle sales from foreign manufacturers in Japan to that percentage in the U.S. to see the relative degree of "protectionism".
http://hallofrecord.blogspot.com/2008/11/aid-to-us-automobile-manufacturers.html
Posted by: Bruce Hall | Nov 11, 2008 1:28:29 PM
... Pension Benefit Guarantee Corporation aka Tax Payers ...
In theory, taxpayers don't back the PBGC, but GM alone might swamp the agency.
In case you haven't heard, Bloomberg is suing the Fed to discover the "assets" used as "collateral" in the $1.5 trillion in bank loans that the Fed recently has made to banks through the discount window and other channels.
The Fed refuses to reveal these "assets", so the public may not know how much, if any, of the losses on these loans the "collateral" ultimately defrays. Meanwhile, the Treasury doesn't purchase the "assets" at all, despite the con game before passage of the bailout. It only buys preferred shares in the banks, half of which the banks will pass right through to share holders as dividend payments, thus lifting share prices and rescuing the stock options of bank officers.
Did you even know that the Fed's bailout, "secured" by the banks' promissory notes of dubious value, is twice as large as the much ballyhooed Treasury bailout?
Posted by: Martin Brock | Nov 11, 2008 1:39:11 PM
Doug said:
"If GM produces cars the taxpayers demand, and Toyota produces cars consumers demand, where [do] the GM cars go after production?"
That may be the best question ever asked!
Posted by: ps | Nov 11, 2008 2:15:07 PM
In theory, taxpayers don't back the PBGC, but GM alone might swamp the agency.
There is a huge difference between theory and reality. In reality, burden of the whole world is on Tax Payers shoulders.
Posted by: Oil Shock | Nov 11, 2008 2:51:35 PM
T. L. Holaday
"Do you have a robust proof that such veto power is sufficient to assure that producers will get a clear signal from consumers about what consumers want? I think you do not.
Posted by: T L Holaday | Nov 11, 2008 12:05:57 PM"
Perhaps coyote does not, but I certainly do.
TLH, how many 33 1/3 music platters have you played lately? Eh, how many cassette tapes have you played lately?
The consumer spoke and the producers responded.
The platters and the cassettes are not totally gone, some are still around for the sentimentalist among us, but they are a fringe industry now, and remain because again consumers spoke in sufficient numbers to make that profitable for some one to produce even in the face of the mass defection of music lovers to CDs.
Posted by: vidyohs | Nov 11, 2008 2:53:50 PM
The collateral for every FRN printed, regardless of to whom it goes, remains the same. You and I are the collateral. The fact that we get up each day and go out to make a profit on our labors every day is that collateral. The government is allowed to assume that it is to help itself to a share (maybe as high as 50%) of that wealth you produce.
When the U.S.A. was taken off the gold standard, you became its collateral. The assumption is that you will continue to do so, your children are enculturated to do so, and it is the same in our world across the board.
The only way those who take FRNs as payments can lose on the deal is for the American people to revolt and competely throw the bums out, reorgainze our government and repudiate that debt.
That is something that not even our founding fathers did, in spite of everything they went through to win independence from Britain they still recognized debt, and wrote the repayment into the constitution.
But, anyway, welcome to the real world, slave.
I wonder if Mr. Bloomberg would pay me a healthy finders fee for discovering and revealing the "collateral" to him?
((Of course I understand Bloomberg's act is just a charade.)
Posted by: vidyohs | Nov 11, 2008 3:04:35 PM
I am still not sure how the bailout will "save" any auto maker. I only see a bailout delaying the inevitable bankruptcy, or two, or three. The only way a bailout works is if the companies are dramatically restructured (including union contracts), and they get lucky at figuring out how to make cars that people can afford and want.
Otherwise, it is throwing good money after bad.
Posted by: mcwop | Nov 11, 2008 4:16:43 PM
I have not seen much mentioned about the UAW's role in the potential bankruptcy of GM. Ultimately it is GM's CBA that will be their demise and no bailout or protectionist action by our new "Ruler" will give them enough time to correct their business fallacies. It is amazing to me that the UAW has such an ego that they can not step back and recognize that they are about to officially chew off one of the hands that feed them.
Posted by: Fincher | Nov 11, 2008 6:42:37 PM
No More We are not a socialist country ...Yet!
This bailout will be used to pay off union pension plans. Nuts to that! My 401k plan is in the tank and the last bailout isn't going to help that. So why should the taxpayers fork more money so these workers can have there pension plan in place. Let them suffer like the rest of us. Its time to kick the UAW out of Detroit. We can't compete in a global market with this kind of waste. $2000 per car goes toward paying retired UAW...
Posted by: Kirk | Nov 11, 2008 6:50:43 PM
Perhaps the government ought to funnel money into the company making these cars: http://www.autoblog.com/2007/06/01/worlds-first-air-powered-car-introduced/
Oh, wait...government regulations meant to protect us are preventing the car from being introduced into the US and potentially revolutionizing the entire US and global energy requirements...
Posted by: Justin Bowen | Nov 11, 2008 7:24:22 PM
Kurt is on the money. Based on today's stock market closing quotes, both GM and Ford together now have a market cap of less than six billion dollars! Five hundred thousand auto workers consisting of UAW membership and the allied services auto workers could buy every share of both Ford and GM outright for less than twelve thousand dollars per worker.
If you were in their shoes, wouldn't you borrow or invest $12,000 for the long-term protection of your good auto industry job? Well, that is, unless you could count on your neighbor being forced to do it for you...
Posted by: persiflage | Nov 11, 2008 8:54:42 PM
One thing overlooked here is how government regulations hamper the auto makers. For example regulations against diesel. Better mileage, and less maintenance, but most have been banned in places like CA and the Northeast.
http://www.businessweek.com/magazine/content/08_37/b4099060491065.htm?chan=rss_topStories_ssi_5
Then we have the US crash standards which are higher than Europe's with no additional benefits that I can find. That is why no chevy Beat for the US, and it is a cool little car:
http://www.autoblog.com/2008/07/15/lutz-no-beat-for-the-u-s-smaller-cuvs-on-the-way-insignia-st/
So there you have it. GM and Ford make cool, gas sipping cars in Europe, but in the US the Government makes that harder to do. Congrats Muirgeo, your government is really doing a great job.
http://www.autoblog.com/2008/07/31/autoline-on-autoblog-with-john-mcelroy/
Posted by: Mcwop | Nov 11, 2008 10:58:11 PM
Recently, I had the opportunity to talk with some product development managers at Ford about the issue that Mcwop raised.
He is correct that the ongoing turf war between Washington and European bureaucrats prevent commonization of vehicles within the U.S. and Europe. The cost to "Americanize" a European vehicle... especially the small, low-priced vehicles... makes them prohibitively expensive unless there is a clear opportunity for high volumes of sales. Additionally, the pay-back period for a European diesel that has been modified to meet American standards is excessively long.
Ford has chosen to start producing twin-turbocharged engines that have the performance and durability characteristics of larger engines while delivering significantly better gas mileage. For example, the consumer's payback on these engines may be 1-2 years versus 5-8 years for a hybrid versus up to 20 years for a diesel... depending on the price of fuels.
The problem will be one of MARKETING. Consumer like big numbers such as 40 mpg, not 33 mpg... even if the lower mileage makes economic sense for them. They are not economists who look at the big picture in a rational way. They are more like politicians who need a slogan.
Right now hybrids have a popular, positive view by consumers. Wait until used car buyers find out that they may have a considerable expense in a few years to replace the battery packs. And what will environmentalists start saying?
Posted by: Bruce Hall | Nov 12, 2008 12:58:09 PM
Doug said:
"If GM produces cars the taxpayers demand, and Toyota produces cars consumers demand, where [do] the GM cars go after production?"
That may be the best question ever asked!
Posted by: ps | Nov 11, 2008 2:15:07 PM
SHOULD read:
If GM produces cars the taxSPENDERS demand, and Toyota produces cars consumers demand...
taxSPENDERS == Congrefs
maybe should be taxWRITERS ... i dunno
tom
Posted by: tomw | Nov 15, 2008 1:14:59 PM
If the money absolutely HAS TO be given out, why not give it to the consumers/tax payers as car vouchers and let them determine how much money each of the big three gets? If they get cars by other manufacturers, so be it. At least the people would have had the chance to speak.
And actual cars would have been bought.
Posted by: Donavon | Nov 16, 2008 9:13:15 PM
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