Chrysler exec makes a visit from Bizarro World
December 4, 2008 – 6:18 pm by JohnChrysler Vice Chairman Jim Press said something that was unintentionally hilarious, in a dark way. “If we have a catastrophic failure of one of these car companies, in this tender environment for the economy, it’s a huge blow. It could trigger a depression.” He is exactly wrong. Malinvestment in automobiles and houses and hundreds of other economic interventions have already pushed us into a depression, and further distortions of the market that keep capital and money invested in unprofitable, unwanted, unproductive ventures will both prolong the depression and thereby make it worse in the end.
A recession is referred to by knowledgeable, non-Statist economists as a correction, by which they mean people, money, land, and machines ceasing to produce what they used to and switching to more desired, profitable lines of production. The Imperial Federal Government and various state governments have intervened dozens or hundreds of times in the real estate market, the automobile manufacturing industry, and the banking and finance industry, and these interventions have prevented the market from regulating itself, by keeping money and capital flowing to unprofitable and unwise ventures and keeping firms in business that should have been bankrupt long ago.
Bankruptcy is a correction of a company that frees up resources to be put to better uses. In a free market, while unemployment is miserable in the short-term, it is better in the long term for most everyone who worked for the bankrupt company and for the economy at large. First, the workers at the failed business will, if they are willing and worthy of employment, find better jobs at better firms (almost by definition, since their previous job obviously wasn’t being put to a valued end), and they will usually be better off in monetary terms in the long run because they are usually no longer working for companies that will soon be unable to pay them. Second, everyone else in the economy is better off because the labor, the intellect, and the physical means of production of bankrupt businesses will be used to produce something that the rest of the economy wants more than it wanted the stuff the bankrupt company offered.
The problem with real estate foreclosures, automaker bankruptcies, or failed banks is not insufficient regulation, it is too much intervention, some of which is regulation, which hinders the market’s regulation of itself. The main form in which free markets self-regulate is by bad companies losing money and other companies increasing their profits, forcing failing businesses to provide something that others want at prices they want to pay or else go bankrupt and free up their money and other capital to be put to more desired ends.
The American economy and therefore the world economy would be better off if GM, Ford, and Chrysler filed for bankruptcy or underwent reforms similar to a bankruptcy, so that they would stop doing things that are unprofitable and stop draining money from the Imperial Federal Government (the public—the rest of us!). If you wonder why not only the Big Three automakers but so many other companies are losing money and cutting jobs, it is because economic perturbations like low-interest government loans, barriers to entry, high cost of regulatory compliance, special tax breaks, land-use regulations, minimum wage laws, the Fed’s currency monopoly, the Fed’s rampant inflation, and who knows what else keep some big companies in business and insulated from upstart competition for an artificially long period of time; but, eventually, when a breaking point is reached, it isn’t simply a matter of adjusting to a new competitor or market condition, it is near-bankruptcy and emergency job-slashing. It is a desperate and all-at-once correction for years of malinvestment and unwise decisions. State interference can keep companies afloat and insulated from profit-stealing, talent-stealing competitors for a few years or even decades, but when enough money has been wasted and enough consumers have been impoverished by thousands upon thousands of governmental perturbations, their businesses will no longer be profitable and the solution is to let them lose the money that they never should have earned in the first place and stop offering goods and services that never should have been profitable in the first place.
In summary, artificial State interventions (i.e., coercion) to keep GM, Ford, and Chrysler from going bankrupt will worsen and prolong the current recession because such measures amount to throwing good money after bad, keeping unprofitable and undesired businesses afloat when they don’t deserve it. The correction, as painful as it may be, would be to let them lose the money, let them go bankrupt, let them be taken over by someone else, and open up opportunities for the managers, the engineers, the blue-collar workers, and the factories to design and produce something else, something that isn’t an overpriced and unwanted, something other than consumer products for Americans. The Big Three have been barely staying afloat for decades, and they’ve been in similar predicaments before. It will happen again. Each coercive rescue will impoverish Americans further and further. The more money and the more workers and the more materials that are diverted from useful ends and into automobile manufacturing will create another recession and/or a continuation of the current recession, at least in that industry. Jim Press says a rescue is needed to prevent a depression; a rescue is exactly the market perturbation that will prolong and worsen the depression, by keeping capital locked up in unprofitable ventures.
2 Responses to “Chrysler exec makes a visit from Bizarro World”
“A recession is referred to by knowledgeable, non-Statist economists as a correction, by which they mean people, money, land, and machines ceasing to produce what they used to and switching to more desired, profitable lines of production.”
This isn’t a “correction.” The investments, even the malinvestments, are already heavly underinvested due to direct and indirect state taxation (assume it’s 80%).
Suppose if the central bank uses low interest rates to benefit the automotive industry. Suppose this gives them a benefit of 200% at the expense of other industries. However, the already taxes every industry with a 80% tax. This privileges the automotive industry 3 times but 5 times losses due to 80% tax, which still only gives it only 3/5 the allocation of a free market. So the “malinvestments” are actually underinvested and underallocated because the net taxation of the automotive industry exceeds the privileges granted to the automotive industry by the central banks.
In other words, suppose in an anarchic society, individuals would be 5 times more wealthy because the absense of a 80% tax. This would make individuals buy more cars which would expand the automotive industry, even more than the current automotive industry which is heavily privileged by the state.
By anarcho-mercantilist on Dec 5, 2008
But taxation of capital and income hasn’t changed drastically in the last few years, or even decades, I think. Statism has been constant for a long time. Everyone knows this. No one was operating under the assumptions of freedom. Given the criminal level of taxes levied by our governments, they were malinvestments.
By John on Dec 5, 2008