Yglesias On Detroit

by Will Wilkinson on November 15, 2008

As a rule, I think when Matt and I agree on economic policy, there’s a pretty good chance it’s due to non-ideological overlap in our understanding of how economies work. Except fot the “socialistic hubris” in thinking there is an accurate and effective way for the government to estimate and price carbon externalities, I agree with every word of this:

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?

… Let me further add that the risk here, as I see it, isn’t that we’re going to waste too much money on a Detroit bailout. Rather, the risk is that we’re going to slide into a situation where big swathes of the economy are dominated by zombie firms. If firms with unviable business models are prevented from failing, then other more successful firms can’t arise or expand to fill the niche and the whole sector goes dysfunctional employing tons of labor and resources but not creating real value.

And then you have other sectors that are being productive but that are burdened with taxes that are being used to prop up sectors that aren’t creating value. Then, even if we manage to halt the slide into recession we’ll have created a situation in which it’s difficult to return again to growth. By contrast, even the total liquidation (as opposed to reorganization under chapter 11) of one or more of the “big three” wouldn’t cause all the resources as the liquidated firm to vanish. Rather, if GM vanished from the earth that would be an opportunity for the other car companies and whichever of them is best-situated to expand to fill the market share void left by GM could profitably some of the capital and labor currently in use. But if a dead firm is kept on life support, that weakens all its competitors’ positions without offering any promise of resurrection.

This is basic economic literacy. Some people seem to think it’s callous to note that people will be made even worse off by trying to prop up failing firms. But if you actually care about people, if you’re actually not callous, you’ll bother to find out how things work. This is not an ideological issue. My friend at the Center for American Progress is simply correct about the facts.

  • If they want to save the world they should make cheap low emission cars. That will make people buy that car and not use their old cars.
  • i think its useless to help zombie company cause they dont really care about on how to save the world
  • Bram
    Zombie companies using resources that could otherwise be put to more effective use - great points that I will use when talking with friends and colleagues.
  • ArtD0dger
    Yglesias' post is indeed spot-on, and it couldn't contrast more with the swam of comments to you last post lobbing insults at your supposed "market as god" economics.

    I wonder how long young Matthew will be able to maintain even a patina of leftism on his political worldview.
  • webgrrl
    Who WW, I'm talking about a market price. Why are you talking about taxes? Of course the government cannot calculate the price. That's why we open the national carbon market. It will certainly beat the 3 regional markets that are open or set to open now. Different carbon markets across the country will just be a nightmare.
  • Paul Zrimsek
    So when the national carbon market is set up, we can rest assured that the price for permission to emit a ton of carbon will equal the marginal cost of producing the permission to emit a ton of carbon? This warms the cockles of my libertarian heart.
  • webgrrl
    Paul, emissions markets have been proven to work; NOX and SOX are great. Acid rain really is no longer a problem because of emissions trading. Why would carbon be any different than NOX and SOX?

    As you may know, the carbon market in the Northeast US has already begun and the Western Climate Initiative, which includes many Western States, most of Canada, and with Florida and maybe some of Mexico joining. But regionalty won't work, since the carbon permits aren't currently fungible between them at this stage. The only way to sanity is 1 national market.

    But I'll go even farther - we also need a water market, and probably a fisheries market too.
  • Paul Zrimsek
    If the government doesn't know the cost of emissions, then a fortiori it doesn't know the correct number of permits to put on the market.
  • webgrrl
    "an accurate and effective way for the government to estimate and price carbon externalities"

    But there is WW. It's called carbon trading. We should have a national carbon market just as we do for NOX and SOX. It works. I mean, when was the last time you even heard the phrase "acid rain?"
  • I'm not skeptical about the fact that we can raise the cost of carbon emissions by taxing them. I'm skeptical of the ability to calculate the optimal tax, because I don't think anyone actually knows that the net externality is negative. I understand that's a minority view, but there it is.
  • Paul Zrimsek
    Just to be clear, you do realize that our presumed inability to calculate the optimal carbon tax applies just as much to a tax rate of zero as it does to any other tax rate... correct?
  • aphor
    Is it necessary for the tax to be optimal for it to be practical?
  • If we don't know whether the consequences are good or bad, we still know that the externality is negative -- on the reasonable assumption that we are risk-averse.
  • mk
    Not as totally clear as you might think. In particular, burning fuel "makes the economy go round" -- the ready access to cheap automobile transportation increases shopping trips, business trips to meet clients, employee access to a range of employment opportunities, etc. etc. The use of cheap coal increases business hours, reducing prices which increases consumer purchases, etc.

    Take a different example: when a new road is proposed, all kinds of externality calculations are made. These include many positive externalities from increasing commerce. Many of the same externalities hold for cheap energy usage, but sometimes these are not included in the externality calculations because there is only a focus on environmental externalities.

    Now, if there is a consensus that adds all these externalities up and gets a negative number, that invalidates what I just said. But from what I remember of the literature there is not such a consensus.
  • Jadagul
    MK: I think the point is that, if we really have no idea what the net externality is, then the _expected value_ of the externality is zero. However, since we're risk averse, we'd prefer a lower variance distribution over a given mean to a higher-variance one. So we tax carbon and reduce the variance.

    Not sure whether I believe the argument I've just sketched--would need to think about it more, and homework calls. But it's not prima facie false.
  • I would really like it if people would jettison statements like "this is simply true." Particularly philosophy majors.
  • Freddie, I learned that "this is simply true" from a bunch of economists, some of them with Nobel Prizes. Do you need me to gin up a petition?
  • propping of failing industries began in the 1970s, stopped when monetarism was en vogue, then started up again. its fairly obvious that this leads to inflation, falling profits and the 'zombie firms' as described above.

    the problem with allowing things to collapse, is, well, it hurts. are we as a society prepared to risk a broad collapse? it wont be limited to GM! it will be indiscriminate and encompassing!

    personally i think both solutions to crisis are stupid. there must be another reason why this keeps on happening, and there must be a better solution.
  • R Pointer
    Reading through the comments section over at Matt Y.'s blog was like taking a bath in a cesspool.

    I hate my compatriots sometimes.
  • mk
    Well, there's the rub, no? Similar to Tyler's recent comment on the financial bailout.

    The default bailout here is unemployment insurance for everyone who loses their jobs. It would be worth estimating the price of such a bailout. Then we could compare against the current proposed bailout (with the acknowledgement that this one might not be the last).

    We as a society have already decided that we won't tolerate mass economic dislocation. The question is whether the workers should get checks directly from government, or whether they should get it from GM on government life support.

    It might be worth considering a third way, e.g. a partial bailout to soften the landing, or keep the company going for 2 more years, on the condition that it liquidates in an orderly fashion.
  • mk
    To extend on this point, a quote from a recent Reuters story:

    General Motors Corp., seeking a federal bailout as its cash dwindles, would cost the government $200 billion should the biggest U.S. automaker be forced to liquidate, a forecasting firm estimated.
    A GM collapse would mean ``more aid to specific states like Michigan, Ohio, and Indiana, and more money into unemployment and extended benefits,'' Nariman Behravesh, chief economist at IHS Global Insight Inc. in Lexington, Massachusetts, said today in an interview.



    The key question is which bailout is best, not bailout or no bailout.
  • Paul O'Pinion
    Spot on and a nice companion piece to the David Yermack article in today's Wall Street Journal "Just Say No to Detroit". Yermack states: "If the government wants to spend $25 billion to protect auto workers, it would do better to transfer the money to them directly (perhaps by cutting each worker a check for $10,000) rather than by keeping their unproductive employer in business".
    The business has passed them by. Good riddance.
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