By on August 5, 2010

Several industry commentators have chided the Obama Administration for its recent “Mission Accomplished” tour of the auto industry, arguing that we’re all still a long ways from knowing the bailout’s true effects, and that declaring victory is grotesquely premature. But by now the logic of bailout has so taken hold that the White House knows it need not even prove that the bailout was a success. The point that is made over and over again is that opposition to bailouts can be motivated only by nihilism. On each stop of his recent tour of auto factories, Obama has emphasized that he “refused to walk away” from the auto industry. He did something when no one else would. What tends to escape notice is how quickly the logic of “doing something” can make otherwise smart people stop questioning the actual impact of government intervention. And as two stories today illustrate, that’s a recipe for the worst kinds of waste.

Bloomberg reports that the town of Fenton, MO was given $2.1m as part of the effort led by Director of Recovery for Auto Communities and Workers Ed Montgomery, in order to

lift up the hardest-hit areas by using the unprecedented levels of funding in our Recovery Act and through the government to create new manufacturing jobs and new businesses where they’re needed most.

But with Montgomery leaving his position for a spot at Georgetown University, it seems that most of Fenton’s federal cash pile is still sitting unused… because Montgomery and the White House never explained how it should be spent. In the era of the pork-barrel earmark, it’s simply astounding to read the mayor of Fenton saying

We’re really struggling with what exactly we’re going to use that money for.

So far, Fenton has spent a small portion of the money trying to sell its abandoned Chrysler plant, and last month it commissioned a study to determine how it should spend the remaining money. Yes, really. All of which makes one wonder what exactly Montgomery’s $177k annual government salary was buying… other than the perception that something was being done.

The same could be said for today’s announcement of a $250m loan guarantee to help Ford export more vehicles. In his speech today at Ford’s Chicago assembly plant, Obama described the guarantee’s many benefits in glowing terms, saying

it’s going to help us reach the goal that I set in my State of the Union address, which is we are going to double America’s exports of goods and services over the next five years.  We’re tired of just buying from everybody else — we want to start selling to other people, because we know we can compete.

That’s how we’re going to grow our economy.  That’s how we’re going to support millions of good jobs for American workers to do what they’ve always done:  build great products and sell them around the world.  Our workers can compete with anybody — and America is going to compete aggressively for every job out there and every industry out there and every market out there.

But the loan isn’t supposed to be used to export to Europe or China, but Canada and Mexico. Because apparently boosting inter-NAFTA exports are the key to a revitalized export base. This despite the fact that auto-sector production and employment has been dropping in both the Mexican and Canadian markets as well, raising the likelihood of retaliatory measures from the Mexican and Canadian governments. And inter-NAFTA competitive issues aside, Ford’s sales have been reasonably healthy in both Canada and Mexico. Besides, the link between stimulating exports and increasing manufacturing jobs is hardly well-proven.

As with Ed Montgomery’s Fenton, MO debacle, the lesson seems to be that spending money regardless of the marginal benefit is more politically palatable than being seen as a passive steward of the American economy. As long as that remains the dominant paradigm, we can expect more and more money to be wasted on these Potemkin bailouts. Instead of trying to legitimize last year’s bailout by simply spending more money, the Obama Administration should be careful to make sure any further money spent on the auto industry is well-justified. Because when Obama says things like

And to all those naysayers in Washington, what we call the “just say no” crowd who said that investing in you would guarantee failure; who said we should just walk away from this industry; who said that standing by America’s automakers was “the worst investment you could make”; who tried to block us at every turn — I wish they were standing here today and saw what I see.  I wish they could see the pride you take in building these great cars, American-made cars.

he doesn’t realize that pride can’t be bought with public money. The industry has been saved, but if it wants to inspire real pride in America’s citizens, it needs to stand on its own two feet.

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25 Comments on “Bailout Logic Bubbles Over In Chicago...”

  • avatar

    A politician taking credit for an initiative before we know its true effects, while conveniently forgetting that his despised predecessor got the ball rolling in the first place.

    In other shocking news, the sun rose in the east this morning in Pennsylvania, and will set in the west this evening…

  • avatar

    Ah! gangterism is alive and well in good old Chicago!

  • avatar

    The car makers don’t need loan guarantees to help them export to other countries. They need reciprocal trade agreements that eliminate prohibitive tariffs on US built autos. Why does Ford build the Fusion and Fiesta in Mexico? It’s not the cheap labor, it’s the South American import tariffs on US built vehicles.

    • 0 avatar

      Which exist because we tax the hell out of Brazilian Sugar cane and ethanol to protect our precious small corn “farmers” aka the Archer Daniels Midland Company. Building in Mexico means the Fusion can be sold in the US and Brazil with no tariffs.

    • 0 avatar

      Perhaps true what you say, but Ford builds these in Mexico for an other reason too: Low-Cost-Country-Labor-Costs.

    • 0 avatar

      “They need reciprocal trade agreements that eliminate prohibitive tariffs on US built autos.”

      Unfortunately, the UAW is the biggest opponent of this.

      The very current and relevant example is that that Obama and his UAW supporters are blocking KOR-US FTA (US-Sourth Korean Free Trade Agreement) that was agreed on 2007; which would see one of the most protectionist countries (S Korea) open to US manufacturing imports. The biggest free-trade agreement since NAFTA, and one that is more beneficial to the US since it also includes agricultural agreements.

      What the UAW opposes is that US-made Hyundai/Kias will be the major import to S. Korea instead of UAW made cars. The US tariffs S. Korean made cars is 2.5%, and the S. Koreans tariff US made cars 8% for cars; the US also tariffs 25% for S. Korean-made light trucks- this will completely be eliminated in this FTA agreement. The UAW wants to keep the 25% light truck tariff against S. Korean imports.

      The reality is that Americans are the biggest opponents of American-made cars. Honda already makes more cars in the US then they do Japan their home country. Ford’s best-selling F150 only uses 55% American-made parts, compared to 85% of American-made parts in a Toyota Camry (even the Tundra uses more American-made parts then the F150).

      What has become important, especially with this administration, is not that Americans make cars, or American jobs are created, but rather UNION jobs are created.

      This is the fallacy…

  • avatar

    This bailout thing reminds me of the whole Y2K scam. People predicted a meltdown of the economy. Unless you bought their services to comb through your software and change all the year references.

    Turned out when the year 2000 came there was no economic meltdown. Yes, there were a few problems here and there. But nothing major. And those who “prepared” were no better or worse off than those who didn’t.

    Even so, some people still claim that we avoided economic meltdown only because many people did take precautionary measures. In spite of the fact that there is no evidence that the measures helped.

    We see the same thing with the bailouts. People predicted economic chaos. So we spent billions (money we did not have) to prevent it. Turns out the economic chaos never came.

    Why didn’t the economy collapse? Was it the bailouts? Or something else?

    There is no evidence that the bailouts helped. (Unless you believe in “post hoc, ergo propter hoc.”) So I think not.

    But we will never know. That is why scam artists, and politicians, will always be with us.

    • 0 avatar

      Talk about Apples and Oranges.
      If these companies did fail. Thousands of people would be without jobs instantly, the trickle down effect would have been massive.
      As much as I hated the bank bailout it certainly did avoid complete destruction of the world financial system.
      Same can be said about the auto bailout, except instead of one industry being helped, it was the American economy as a whole. To dismiss that it was all a sham is admitting absolute knowledge of how the economy works. I know that I don’t know it all, pretty sure you don’t either. To think otherwise is naive at best.
      Hindsight is 20-20, but I sure as well wouldn’t want to hedge my bets that it WASNT the stimulus.

    • 0 avatar

      That’s like saying a hurricane was a scam because everyone boarded up their windows before it hit. Everything was identified, tested and repaired before 2000 hit. Only a few systems that were never properly checked failed. Sure plenty would probably been fine, but you don’t know until you check (and fix if needed).

    • 0 avatar

      “That’s like saying a hurricane was a scam because everyone boarded up their windows before it hit.”

      I beg to differ. I’m a computer scientist turned lawyer, and I was head of the legal department of a major software company in 1999. It was ridiculous.

      First, the companies that looked at the software found few problems.

      Second, even if there were lots of problems with the software, it would not have led to the collapse of society.

      Third, those companies and countries who did nothing in advance had no more problems than those who spent billions to prepare for Y2K.

      As a case of risk management, there was way too much management of a minor risk. Billions of dollars were wasted. Some economists think that the Y2K fever was the main case of the tech stock meltdown that followed.

      I’m afraid bailouts and stimuluses are the same as Y2K. People get all excited about hyped risks and take measures that do more harm than the supposedly avoided risks.

      Look at Barack Obama. He said that the stimulus would keep unemployment under 10%. It did not. So now he says at least the stimulus kept things from getting worse. But does he have any evidence of that? No. He has none.

      That’s laughable. Con men say things like that. Rarely do you have a situation like Y2K where the con men are exposed. (A similar situation is, however, Paul Ehrlich and his scam predictions of global famine and mass deaths.)

      Even then, many people still say, like you, that the measures taken were indeed effective. It’s depressing.

    • 0 avatar

      Differ all you like. I worked as a consultant doing Y2K reviews at the same time. In most cases there were no problems, but in a few there were. In the late 90s a few companies were still using applications created as early as the 70s and even if Y2K wouldn’t have been the dramatic meltdown of society some fixes saved a lot of money and problems (which I guess also counts as money; too many people try to quantify everything in terms of money) before the new year.

      First if you found few problems in your systems it was well built from the start. Congratulations.

      Second, collapse of society is more than a bit dramatic when talking about Y2K. But then I suppose we talk the same way about the bailouts.

      Third, is that a general consensus of all businesses or your own experience?

      As a case of risk management the question still is what would the cost of ignoring a problem have been? Compare the expense of a fix to the cost of prevention and most businesses will prefer prevention. And when you do don’t use hindsight; consider the viewpoint of the mid 90s when plenty of companies were still using legacy applications. I suspect the economists that think Y2K caused the tech bust weren’t paying attention to the unsustainable boom that became pretty obvious after Netscape’s IPO.

      Just about every post here that’s not a simple bash of the President says you can’t just assume the bailout’s a failure because you don’t know how things would have been if you let things go. To assume we’d be any better off now is to treat your particular economic interpretation as gospel at best, or a matter of fact at worst. And of course, we’re not even at a point where there’s the benefit of hindsight you use to justify your Y2K argument.

    • 0 avatar

      Interesting to read your views. They are certainly well thought out — just as much as, or more so than, mine.

      But where we differ is this: I think George Bush and Barack Obama should not have spent over $1.5 trillion that the government does not have (and that is over and above already record deficits) on a bailout and stimulus. There was, and is, no evidence that a bailout and stimulus would, or did, do anything helpful.

      A better analogy than Y2K might be the Iraq war. We invaded Iraq to stop it from using weapons of mass destruction. We had no evidence to show that Iraq had such weapons. In fact, it did not. Yet we invaded and still occupy another sovereign nation.

      This idea that something terrible might occur, and therefore we should do drastic things to prevent it, is not a valid principle of risk management. We need to evaluate the risk, and respond accordingly. Sure, many times risks are hard to evaluate. But that needs to be the focus.

      Too many times people inflate the risk to justify measures they want to take for other reasons. I think history shows that happened with Y2K, and with the Iraq war. Although less clear, I think that also happened with the bailouts and stimuluses.

      On all of these, though, we will never really know.

  • avatar
    Telegraph Road

    “Besides, the link between stimulating exports and increasing manufacturing jobs is hardly well-proven [LINK].”

    The three economists who wrote the linked article actually argue “that increased US exports are unlikely to lead to dramatic manufacturing employment gains, but employment in related services sectors may improve…[T]he promotion of US exports is likely to generate more indirect jobs in wholesaling, transport, and professional services than direct jobs in manufacturing.”

    So stimulating exports indeed increases jobs, but most of those created jobs will be in related services–not in manufacturing.

  • avatar

    Get this self-absorbed idiot out of there already!

    The dems want nothing but to soak the rich and the corporations (large and small), decimating the middle class and creating a massive under-class of government dependent voters. Laffable (misspelling intended).

  • avatar

    Obama, like his predecessor, has as much understanding of this situation as I do of nuclear physics. Just throwing more vagaries and meaningless platitudes out there for the press to munch on and repeat and deflecting any legitimate criticism as naysayers. Does any of this sound just slightly familiar to Bush?

    You’re doing a heck of a job, Obama.

  • avatar

    Yes, he is doing a heck of a job. And the middle class is already decimated, and like our current plight it started with Reagan.
    His war on the middle class commencing with PATCO…like it or not, unions built the middle class for 40 years prior. Reagan and his utterly irresponsible tax cuts, deficit spending, deregulation, and “laffable” trickle down theories have brought us to where we are. Remember when tax rates were more realistic and only one parent had to work?
    We almost revisted that utopia under Clinton. But Repubs took it away under W’s leadership. (start wars and cut taxes!)
    Obama had nothing to do with it. He is merely trying to right the wrongs done before him. And hilariously what is the oppositions solution? More Tax cuts. Supply side theory is dead. At last.

    • 0 avatar

      If you can get past your hatred of the author, you should read this. You CAN read?

    • 0 avatar

      Sometimes things are so obvious they get overlooked. The US did a very thorough job of wiping out manufacturing capacity in the 1942-1945 period. Following the end of hostilities, most of the world had enough of an internal challenge just surviving, let alone mounting a challenge to the Arsenal of Democracy. In that arena, business could succeed even with significant dead weight loss. Those days are over. Unionism can still succeed, but not if the primary plan is to pine for salad days that were achieved following the death of 50mil humans.

  • avatar

    A classic repub tactic; attack personally rather then address the content the argument. It’s the specialty of the house at Faux.
    The only thing I got our of the criminal Rove’s essay was people voted for change in ’08 and God bless ’em they will vote for change again!
    Btw, I’ll raise you two Krugman columns per week. Not so difficult finding someone who shares your pov. Mine happens to be a Princeton prof and Nobel winner. Yours is a…douchebag with Daddy issues.

    • 0 avatar

      As I suspected. :)

    • 0 avatar

      Way to keep it above the fray caljn.

    • 0 avatar

      I stand by my post that consisted of specific charges and cause for our current economic condition. By contrast, yours and your comrades were vague and speculative. (self absorbed idiot?…huh?)
      Please enlighten me. What should the President have done with the inherited mess? Do you really believe we would have been better off today and long term had he let the car companies fail?
      I truly do not understand where the anti-Obama anger comes from.
      It can’t be deficit related because W added to it far more then Obama. What is it?

  • avatar

    The true effect of the bailout will never be known. You would need a crystal ball to know what would have happened if GM or Chrysler or both went under. So, can they declare success, no. But failure would also be hard to know. If they make it another 10 or 15 years and then go under, it still may have been a positive thing to do.

  • avatar

    While I can understand the administration’s desire to cater to the industry that it ‘saved’, increasing micromanagement is a dangerous trend. At some point, it should be hands off – excessive manipulation of the free-market economy by government can only end badly.

    • 0 avatar

      “At some point, it should be hands off – excessive manipulation of the free-market economy by government can only end badly.”

      Economic education really lacks the notion that Smith was theorist and only so. The flavor of capitalism he imagined has never actually existed in reality.
      If you think that we have been living in a “free market” EVER…. I have a bridge to sell you in Brooklyn.

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