TTAC Commentator H82w8 On Obama's Auto Industry Intervention

The U.S. government (ostensibly representing “the taxpayers”) is right to insist on conditions to the second round of federal loans to Chrysler and GM. As always, the devil is in the details. As always, the government has put politically motivated strings onto every moving appendage in this latest example of federal largess. The fundamental question here is not whether or not these strings– from a shotgun marriage between Chrysler and Fiat to a GM bondholder haircut– will rescue either company from liquidation. It’s whether or not the federal government should be involved in bailing out any company in any industry. Period. Though others may disagree, I believe that only companies absolutely essential for national defense/security might qualify for direct taxpayer support. Might. Otherwise, NFW.

This is not a left/right debate. When President Bush approved $17.4b worth of bailout bucks for GM and Chrysler– against the wishes of Congress– the Republican administration lost any credible claim that they were friends of the free market. This brazen betrayal of stated principles paved the way for the Obama administration to go whole-hog into national industrial policy. Although the sitting president is selling his latest plans for Chrysler and GM on a rational economic bases, his intercession is, in fact, a purely political maneuver. Bailout II is not designed to “save” the American auto industry. It’s tailored to favor, through political policy, certain groups at the expense of others.

In this case, the second round of bailouts is meant to ensure that the United Auto Workers (UAW) survives intact and unscathed from a debacle that is, in part, a product of their own intransigence and short-sighted greed. (Although the union’s democratic support is a given, Obama didn’t ascend to the highest office in the land without remembering to secure and nurture his base.) As a secondary goal, the still undisclosed amount of federal money headed towards Chrysler and GM is aimed at “encouraging” Detroit to produce “green” cars. High mileage machines that conform to president Obama’s and the Democrat’s political priorities– the free market be damned.

Economics (the free market variety, anyway) is all about creating wealth and expanding “the pie.” Politics is about dividing wealth up in a zero sum game: someone wins, someone loses. This is why socialism ultimately fails every time it’s tried: it subordinates economics to politics; wealth making to wealth sharing. Profit incentives to create and expand are sacrificed to punitive political incentives to conform and obey. Ultimately, there is little wealth left to share. The same endgame applies whether you’re talking about an entire economy, or a single industry.

On Sunday, U.S. Treasury Secretary Geithner refused to be drawn out on a simple question: is GM too big too fail? Geithner claimed he didn’t want to preempt the president’s announcement. In truth, he didn’t want to even admit the possibility that doing nothing, simply letting GM and Chrysler fail, was a viable alternative. But if GM and Chrysler had been refused new funding, what would happen in the long run– aside from the inevitable short-term pain the companies, their employees and shareholders (and bondholders) would have to suffer? The same thing that happens when any business or industry goes bust. New opportunities arise.

Opportunity eventually finds its way to create new businesses and industries out of failed ones. Over time, sales lost by either company would have been absorbed by other automakers, helping to maintain their “viability.” To a certain extent, other auto companies would have picked-up the jobs lost by either Chrysler or GM. Other industries would eventually absorb “excess” jobs. Over time, Ford, Honda, Nissan, Hyundai, Toyota and others would assume GM’s and Chrysler’s “lost” production, at least to the extent the market demanded it. The concomitant industry supply chain would cater to the new source–and level– of demand.

In other words, if market forces for punishing failure were allowed to actually work in this case, far from being the end of the world, the auto industry would eventually emerge HEALTHIER, with far less excess capacity and more productivity. The result would be a much better, more profitable business overall. This would in turn actually ATTRACT capital into the auto industry, and set the stage for long-term growth.

But no, we can’t stomach losing jobs in the short run– especially union jobs. So instead of letting nature take its course, the federal government spare us the pain that comes from producing goods or services that the market doesn’t want. And in doing so, president Obama and bailout suporters guarantee the laws of unintended consequences will have their day. The Brits learned this lesson the hard way back in the ’70s. So why are we bent on repeating the British Leyland epic failure here? Are we really that weak, cowardly and naive?