More thoughts on the auto bailout
December 3, 2008 – 1:05 pm by JohnAll I hear about in the news segments of morning radio here in Michigan is how “we” desperately need a government bailout of the Big Three automakers, and how letting them go bankrupt will be a disaster for many industries other than Detroit automakers, and how it isn’t fair for the Imperial Federal Government to bail out investment banks but not manufacturing companies, and how anyone who opposes it must have selfish ulterior motives (e.g., Alabama Senator Richard Shelby), and how, irrespective of all that, it isn’t a “bailout,” it’s a LOAN!
I suppose I get one benefit out of hearing this selfish and economically ignorant talk early in the morning: it riles me up so that I am no longer sleepy and I feel like rolling out of bed sooner than I usually do. I have two objections to the certain and imminent bailouts that I want to vent in this post.
First: how is this “loan” going to be any different from the failed non-bailout “loan” that Chrysler received in 1980? How is it going to improve anything in the long run?
Chrysler did not pay back its loans in full, the cost to Americans was not zero, and the loans OBVIOUSLY didn’t help Chrysler in the long run. Within 20 years of paying back part of the loan and reforming itself similar to a bankruptcy restructuring, Chrysler was once again an inefficient behemoth unworthy of and incapable of making a profit.
James L. Gattuso and Nicolas Loris explain that the proposed bailouts will turn out to be just that—bailouts, subsidies, grants, not loans.
But, say the automakers, the loans are not a subsidy, since the manufacturers would be expected to pay the money back. This is nonsense: Such loans come at a cost to taxpayers, both explicitly and implicitly, to cover the risk of default. The auto industry’s claim to the contrary, in fact, is disturbingly similar to claims long made by Fannie Mae and Freddie Mac that their implicit federal guarantee did not impose costs on the federal treasury. That implicit guarantee is now costing taxpayers billions in very explicit dollars.
The proposed deal for taxpayers, in fact, is in one sense worse than that shouldered by the taxpayers 25 years ago when the federal government bailed out the Chrysler Corporation. At that time, the federal government assumed ownership of Chrysler shares, providing them with a benefit if the firm did well. This time around, there is no upside potential for gain for taxpayers but only a downside risk of loss.
General Motors and Ford are also apparently pretty terrible businesses that are not a boon but a drain on our economy, and which would benefit themselves and the rest of the world economy by shrinking and restructuring. Their costs are too high and their revenue too low because they offer products that Americans don’t want at prices they don’t want to pay, and their medical/retirement benefits are too costly. This is largely the fault of poor management, diseconomies of scale, protections against failure and bankruptcy that they receive from the Imperial Federal Government (many low-interest loans, perhaps other legislation that protects them from competition), and destructive union policies. In order to truly benefit the entire economy and not just the automotive subset of it, automotive factories and workers should stop building cars and move to another area of production, one that is capable of sustaining a profit. By keeping these factories, machines, factory workers, engineers, managers, and other non-factory workers devoted to inefficient and undesired production, the State would be distorting the market such that people and capital don’t move to more beneficial jobs, i.e., producing things that consumers or companies both want and can afford to buy, and which don’t cost more money to produce than they bring in.
In other words, any loan to GM, Ford, or Chrysler is throwing good money after bad. There is no plausible scenario that will make this untrue. All three companies, especially General Motors, are simply hemorrhaging cash, and after they receive their next low-interest loan, they will continue to lose money until the next government intervention or, hopefully, bankruptcy.
Lest you doubt my assertion, above, that automakers have received government money before and will receive it again: GM, Ford, and Chrysler have ALREADY been guaranteed $25 BILLION in low-interest loans to help their factories retool for more fuel-efficient cars. It was authorized by Congress in September 2008! Here’s another article, from Bloomberg, about this. I think these loans haven’t taken effect yet. I am like 90% sure that I read or heard that GM, Ford, and/or Chrysler have received other multi-billion-dollar loans in the recent past as well. It’s just that with those, they weren’t considered “bridge loans” to save a dying company but rather subsidies to help them achieve a specific end, like making “greener” cars or something else. I’ve spent a lot of time on Google and news websites searching for articles or blag posts about previous automotive loans, but the interwebs are so inundated with news and commentary about the imminent Big Three bailout that it’s hard to find anything older. Also, they weren’t newsworthy for some reason, so there wasn’t much coverage of them. (If, that is, I’m right about the other recent loans.)
My second train of thought in this post: If “it’s just a loan” and the Big Three aren’t asking for a bailout, and they’ll pay it back once they get back on their feet, why don’t they try to get the loan from a private creditor? The answer is not that the credit markets are frozen (though, to the extent that credit is frozen, which is not much, it is the government’s fault and only letting the recession take its course would unfreeze it). The answer is that the Detroit automakers are uncreditworthy losers whom no one would willingly lend money to. Under no realistic scenario could they ever even come close to paying it back. This is a guarantee. You heard it from me, though you probably heard many others say it before.
If I understand monetary theory and macroeconomics correctly, which is a big if, then regardless of whether the Big Three pay back the loans in full and regardless of when they do, the effects of inflation will be irreversible. The Federal Reserve will simply create, say, $25 billion, and even if the government gets, say, $26 billion back 10 years from now, the money doesn’t disappear. It was still added to and is still a part of the world economy. If I am wrong and the effects of that inflation are theoretically reversible, I am much more confident in saying that the inflation is not realistically reversible. The Federal Reserve isn’t going to deflate a certain amount to correspond to the loan payments it receives from GM, Ford, and Chrysler.
They are poorly run companies with costs that are too high and revenues that will not cover their costs any time soon, and the gigantic costliness of inventing and building “greener” cars will cripple them further, meaning only government subsidies can keep them afloat and meaning the people who will pay for these subsidies—American citizens and other Federal Reserve note users—would be better off if the companies and their employees switched from making automobiles to making something else.