It can be tough to prepare for a substantive diavlog (you know, something more than just “let's talk about the headlines”) every week, so Kerry and I, together with the BHTV authorities, have decided to more or less split weekly Free Will duties. Kerry's first unresponsibly unheralded Free Will was two weeks ago with MIT philosopher Sally Haslanger. This week she's up with Kenan Malik, author of Strange Fruit: Why Both Sides Are Wrong in the Race Debate talking about racial categorization, multiculturalism, and the desirability of cultural preservation. For my part, next week I will appear talk with Columbia's Andrew Gelman about trends in American voting.
I missed this excellent Lynne Kiesling post in my roundup. Lynne, who has forgotten more about regulation than I will ever learn, cites these “extremely disturbing facts” from David Yermack's excellent WSJ piece:
- GM and Ford are two companies that made the most money-losing investments in the 1980s; between them they “destroyed $110 billion in capital” in the decade, according to an analysis from the careful and renowned economist Michael Jensen.
- Over the most recent decade, “the capital destruction by GM has been breathtaking,” $182 billion, and Yermack estimates that the aggregate capital investment in GM and Ford since 1980 has let to a net reduction in capital of $465 billion.
- This is what I find particularly disturbing: with that $465 billion, “GM and Ford could have closed their own facilities and acquired all of the shares of Honda, Toyota, Nissan, and Volkswagen.”
- “When a company makes money-losing investments, the cost falls upon all of society.” This observation means that we have already reduced our future economic well-being by $465 billion by his calculations, due to the persistence of these firms and their poor business decisions.
This is what I'm talking about. There is a reason firms like this need to go out of business: human welfare.
What about Felix Salmon's argument that in the current credit environment, regular bankruptcy won't work out, and so the government should put up some money to help finance the reallocation of GM's assets? Sure. The important thing to me isn't that the government does nothing, but that it doesn't unustly and irrationally throw fresh wads of taxpayer money at the world champions of “capital destruction.” Felix links approvingly to Ryan Avent's suggestion:
If Congress can pass a special, tailor-made rescue bill for the automakers, then certainly it can also pass a special, tailor-made bankruptcy bill for them.
This, too, would be a carnival for egregious favor-seeking, but if existing bankruptcy law is insufficient in the current climate (and I don't feel like I know that, but it's certainly plausible), then this may make the most sense. The important thing to me is that capital and productive assets find their way to their most productive uses, and in a way that sustains a general structure of institutions that facilitates efficiency and welfare improvements in a stable way over the long run.
Over at Obsidian Wings, Hilzoy has posted a long and, to my mind, rather muddled meditation on my last post about the Detroit bailout.
The charge is that is that I'm arguing against a “let's regulate everything” position no intellectually serious person now holds. Not to say we're all Friedmanites now. Recognizing various “market failures” — negative externalities, collective action problems, agency problems, etc. — serious people see the need for regulation. But now we take it on a more case-by-case basis. That said, “I find myself arguing in favor of more regulation more often than not,” Hilzoy admits. She goes on:
Now, however, the pro-regulation camp has more or less vanished, leaving mostly people (like me) who think these questions should be decided on a case-by-case basis, and that there is no general reason for favoring regulation over its absence, arguing against free market fundamentalists who often write as though all regulation were presumptively bad.
So, I take it that the position is that there is no “pro-regulation camp,” since to be in that camp would be an intellectual embarrassment, given the strides in the social sciences. Instead of a pro-regulation camp, what we have are people who happen to find themselves “arguing in favor of more regulation more often than not,” when they take it on a “case-by-case basis.” I'm afraid I find this distinction… subtle.
But there is a distinction, the core of which appears to be an aversion to appealing to principles or useful generalization. “Pragmatism” rings of openminded practicality, but it is also a convenient hideout for anti-theorists and denialists. There is nothing about the spillover effects and coordination problems Hilzoy mentions that ought to make one hesitate to argue from principle. As I emphasized in a debate about the minimum wage several years ago, economic laws — like the laws of all the “soft” sciences — hold other things equal. If you think other things are not equal, and the generalization does not hold, then it is incumbent upon you to cite the principle of exception (e.g., this market is a monopoly, monopsony, transactions costs are too high, etc.) and provide evidence that it applies to the case at hand.
But there is no special complexity in this case. You do not learn superspecial exceptions in upper-level graduate economics courses to the otherwise reliable generalization that it hurts people a lot more than it helps them to direct ever greater economic resources to those who are especially good at wasting them. And it's not even clear what it has to do with “regulation” in the usual sense. The Detroit bailout is exactly what it looks like: a huge subsidy to several remarkably inefficient but politically well-protected firms. As a matter of economic theory, there is no reason the U.S. needs to make cars at all. As it happens, the U.S has an incredibly skilled labor force good at making complex things like cars, and it makes a hell of a lot of them very well and very efficiently. It's just that the companies mostly responsible for this are not headquartered in Detroit. If Hilzoy doesn't think this enormous piece of corporate welfare for the makers of a few classic and once-beloved American brands is “presumptively bad,” then I'd really like to know what she thinks is. Despite the alleged demise of the “pro-regulation camp,” way too many people seem, if not reflexively pro-regulation, then a bit too arbitrarily skeptical of things that are very, very well-known.
If I'm not accused of being callous for pointing out that a smaller amount of preventable suffering is better than a larger amount, I am accused of being a market fundamentalist who is too blithely dogmatic to become curious about the special particularities of this case. Yet nothing principled or particular is offered in return other than some riffing from a health policy specialist (who no doubt also often finds himself arguing for regulation more often than not) and a report from a Michigan-based think tank called the Center for Automotive Research. Hilzoy grants she has no special competence to assess these claims. But, at the same time, one is left with the distinct sense that she is inclined to grant them as much weight as is necessary to continue believing that throwing money in bonfires while wishing for ponies is a public policy stance everyone but blinkered market fundamentalists should at least consider seriously.
Jim Manzi tells the story in numbers in response to Cohn's story from the GM public relations department:
A dollar invested in a diversified basket of S&P 500 stocks twenty years ago would today have a face value of about $3, while a dollar invested at the same time in GM shares would today have a face value of about 7 cents (though to get true comparability you would have to calculate Total Shareholder Return, including dividends). There is no five year period that I could find in the last thirty years for which GM’s stock price outperformed the S&P 500. The market capitalization of GM is now under $2 billion, which is substantially less than that of such icons of our economy as Cognizant Technology Solutions, DaVita, Inc., Freeport-McMoRan Copper & Gold, and the Potash Corporation of Saskatchewan. GM is in danger of becoming a small-cap. Investors apparently don’t buy (literally) Cohn’s thesis.
In the face of all this evidence, Cohn wants us to believe that this time it’s different – that in spite of the forecast of the stock market, in spite of the judgment of consumers voting with their own money, and of in spite of the actual financial results, we can put tens of billions of dollars of taxpayer money at risk based on the opinion of some academics and interested parties that really, things are about to turn around.
If GM fails – or even GM and Ford both fail – we are not facing the loss of the U.S. auto industry. There are plenty of profitable operations, particularly those operating outside of Michigan. In 2008, the Big Three accounts for roughly 55% of light vehicle production and 50% of sales. To speak of the U.S. automobile industry these days, one must include Honda, Toyota, Nissan, Kia, Hyundai, BMW – and other foreign nameplate producers who manufacture vehicles in the U.S.
Those producers are the other half of the U.S. auto industry. They employ American workers, pay U.S. taxes, support other U.S. businesses, contribute to local charities, have genuine stakes in their local communities and face the same contracting demand for automobiles as does the Big Three. The difference is that these companies have a better track record of making products Americans want to consume and are not seeking federal assistance.
If taxpayers are forced to subsidize automobile producers, they should at least be able to subsidize the successful ones.
If one or two of the Big Three went into bankruptcy and liquidated, people would lose their jobs. But the sky would not fall. In fact, that outcome would ultimately improve prospects for the firms and workers that remain in the industry. That is precisely what happened with the U.S. steel industry, which responded to waning fortunes and dozens of bankruptcies earlier in the decade by finally allowing unproductive, inefficient mills to shut down.
In 2001, 12 firms accounted for 75% of U.S. hot-rolled steel production. In 2007, three firms accounted for more than 80% of hot-rolled steel production. The consolidation has afforded the steel industry an alternative to requesting bailouts in the face of declining demand.
Following the steel industry's lead to an auto industry reckoning makes more sense – to the taxpayers, to the country, and ultimately to the auto industry – than another bailout.
Uiversity of Chicago economist Casey Mulligan notes the whole thing would be a massive upward transfer of wealth:
Workers at GM, Ford, and Chrysler are not among the poor by any definition: those workers' salary and benefits total more than $70 per hour!! Yes, I typed that correctly.Very few American workers earn that much per hour.GM, Ford, and Chrysler shareholders are not among the poor either: the poor own little if any stocks. So a GM bailout would benefit rich workers and rich shareholders. I guess the argument is that a GM bailout would trickle down to people who really are poor, or at least middle class.…
A rapid and decisive GM collapse would allow us to continue to hope that President-elect Obama represents genuine change: leading politicians of the Democratic party will no longer tax the average American to bail out the rich, regardless of whether those rich do business in Detroit or in New York City.
The issue isn't whether unemployment will surge. It will. Or whether recovery will occur. It will. The issue is whether a small portion of American workers will be able to maintain stupendous advantages over similar workers of similar skill and productivity. Louis Uchitelle in the NYT writes:
The elimination of many more workers, most of them union members and earning upwards of $20 an hour, would be devastating in Michigan, Ohio and Indiana, where the American automakers and many of their suppliers are concentrated. In fact, many of those jobs may disappear even if the companies win government assistance.
But other employers would take their place over time. As the foreign companies stepped up production to replace what would be lost by an American company’s collapse, the transplants would add to their existing work force of 78,000, replacing many of the lost jobs, although at lower wages, with fewer benefits and at nonunion factories in other parts of the country.
And there's the issue. This chart by University of Michigan, Flint economist Mark Perry sums it up:
Should U.S. taxpayers really be providing billions of dollars to bailout companies (GM, Ford and Chrysler) that compensate their workers 52.5% more than the market (assuming Toyota wages and benefits are market), 54% more than management and professional workers, 132% more than the average manufacturing wage, and 157% more than the average compensation of all American workers?
Maybe the country would be better off in the long run if we let the Big Three fail, and in the process break the UAW labor monopoly, and then let Toyota, Honda and Volkswagen take over the U.S. auto industry, and restore realistic, competitive, market wages to the industry. It might be the best long-run solution.
It really might be!
Matt thinks it would be wonderful if Jonathan Cohn and Clay Risen were to get their ponies, but nevertheless refuses to replace sound principles of political economy with ponyology:
I hope I’m wrong about this. But I’m pessimistic. The mere fact that it would be desirableto do something to keep everyone who depends on the car industry for a living that simultaneously restores the domestic car firms’ economic viability and serves environmental policy goals doesn’t make it possible. Generally the reason we try not to have the government running businesses is that promoting public goals and maximizing profits require you to do different things. We normally try to advance policy goals by establishing a framework of taxes and regulations so that firms pursuing their interests will be compatible with the public interest. But if GM is going to be a welfare agency, it’s hard to also expect it to be a viable company that will rapidly get off the federal teat.
From Thoreau at Unqualified Offerings:
I share the confidence of everyone here in predicting that Obama will successfully resist the rising chorus of rhetoric from across the spectrum, including people on his own side, and renounce the Washington consensus in favor of protection of civil liberties and basic American principles. I mean, if you can’t trust a guy who rose rapidly through the political game and raised massive amounts of money from all sorts of places in order to acquire the most powerful office in the world, whom can you trust?
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.
Megan McArdle has been righteous on the Detroit bailout. The argument from justice is most hard-hitting in this post. Lots of companies fail. Lots of cities, built around those companies, decline. If employees of the Big Three deserve to have taxpayers pay part of their relatively lavish salaries, then employees at thousands of failing businesses deserved the same. They had no chance of getting it, though, simply because they don't have the right history with Washington. There is no other reason.
There is nothing that helps people more than high rates of economic growth, compounding, compounding. But everyone is not helped equally. Economic growth requires dynamism, requires “creative destruction,” and some people get trapped in the wreckage, become wreckage. Not everyone is hurt equally. That irks. We should do what we can to limit downside risk consistent with the goal of producing broad prosperity. And we should feel a pang for those whose expectations are disappointed, whose lives turn out harder than they'd hoped. But the impulse to freeze the system, to try to tape all the cracks and staple all the cleavages, to ensure that nobody has to explain to their kid why Christmas this year is going to be a lousy Christmas, that is one of our greatest dangers. Our sympathy, untutored by a grasp of the larger scheme, can perversely make itself ever more necessary. When we feel compelled to act on our uncoached fellow-feeling, next year's Christmas is likely to turn a bit worse for everybody. And then somebody has to explain to the kids that they can't find a job at all. Businesses that would get started don't get started, wealth that would be created isn't. And in just a few decades, the prevailing standard of living is much, much lower than it could have been had our sympathy been more far-seeing. There is no justice, and great harm, in diminishing the whole array of future opportunity to save a few people now from a regrettable fate.
Large-scale market dislocation is not the worst possible thing, but it does put me in mind of a passage from my favorite tragic memoir, Joan Didion's masterful The Year of Magical Thinking, about the aftermath of her beloved husband's sudden death:
After a few years of failing to find meaning in the more commonly recommended venues I learned that I could find it in geology, so I did. This in turn enabled me to find meaning in the Episcopal litany, most acutely in the words as it was in the beggining, is now and ever shall be, world without end, which I interpreted as a literal description of the constant changing of the earth, the unending erosion of the shores and mountains, the inexorable shifting of the geological structures that could throw up mountains and islands and could just as reliably take them away. I found earthquakes, even when I was in them, deeply satisfying, abruptly revealed evidence of the scheme in action. That the scheme could destroy the works of man might be a personal regret but remained, in the larger picture I had come to recognize, a matter of abiding indifference. No eye was on the sparrow. No one was watching me. As it was in the beginning, is now and ever shall be, world without end.
Unlike slipping tectonic plates, adjustments in the market, even violent ones, tend to make the human world more hospitable over time. The principles that govern the earth as it works out its tensions are indifferent to our welfare. The principles that govern a well-ordered economy favor it. No eye is on the sparrow. No one is watching you. Your job and your dreams may suddenly evaporate. But mostly we find that, as if guided by an invisible hand, the scheme has made available opportunities to work, has made available opportunities to buy the things that make life comfortable, interesting, and long. We can stop the hand from pushing the mountain into the sea, but then we will never enjoy the abundance of the future island we've erased. We can put an eye on the sparrow, but more sparrows will fall if we try to save every rotting tree.
… when Tim Carney can tell you how Rahm Emanuel, Obama's new right-hand man, made over $16 million in 2 1/2 years? Change we can believe in, people.
By the way, I wouldn't be so keen on hammering on Obama if there weren't so many people out there who seem to believe that the man is something other than a successful politician. It's better to get the disappointment out of the way.