Bail Out Detroit? – Now??

posted by Nima

December 17, 2008 · Posted in Interventionism 

An obviously delusional and disturbingly confused Ben Stein once again contributes to dumbing down the masses by writing what appears to be an attempt to an article: Bailout Detroit – Now:

Usually this column is about finance. It usually is an attempt to help the reader make money and have a more comfortable life. I am well aware that I have made a lot of mistakes and that in the short run many of my suggestions have turned out badly. Believe me, I am sorry. I still believe that in the long run the investment ideas will do well, but I am terribly sad that people’s hopes have been disappointed in the short run.

That’s fine Ben. If people are stupid enough to listen to you they deserve to lose money. Another lesson learned means smarter decisions in the future. He who wants to understand finance and economics should seek advice with someone who does understand finance and economics, not with someone who has absolutely no idea what he is talking about.

My best guess is that we are in a panic of sellers and market manipulators and that we will recover within a few years, but I base this on history. We may have moved into a new phase where history is irrelevant. I would be surprised if that were so, since it’s never been true before, but one never knows.

I highly recommend you end the guessing and try some specific thinking. Otherwise, how are we to believe you actually switched the brain on as you continued writing. For beginners like you: We have seen an excessive credit expansion from 1990-2007 which has diverted goods from occupations where the majority of the consumers demanded them and are now in the inevitable and soothing correction which our government is turning into a depression by not allowing it to happen. Those who are in panic mode are you and all the bailout fanatics and government officials. Had we let it occur cleanly it could have been over by now and we’d be ready to get back to useful work. Now we’re in for a decade of agony.

However, today, let’s talk about the American auto companies. They need a bailout from us taxpayers, and they have to get it yesterday. Here’s why

First, we are on thin ice economically. To allow our largest heavy industrial component to fail at this delicate moment is suicidal. To put a couple of million more Americans into unemployment is just not sensible. Mr. Barack Obama is talking about public works projects to employ hundreds of thousands of Americans -bridge building, school building, airport building. These projects take time to start, disrupt local community life, and are famously wasteful.

And that’s why we should do neither of the two. Bailing out Detroit will, from the consumers’ point of view, continue to keep resources from being employed in more useful lines of production, and force the taxpayer, the common man, to cut down on his consumption in order to be able to keep the failed operation going. Our car industry will continue its miserable decline into inefficiency and irrelevance and be back quickly for new bailouts once the money is squandered. How I know that? Oh right, maybe it’s because Chrysler got a bailout years ago and is now back asking for another one!!! You claim to be a financial adviser. Did you ever take a look at GM’s financials? The company is worth minus $60 billion. In a time like this you are asking taxpayers to sacrifice their hard earned dollars and throw them at a business that is worth LESS THAN NOTHING. Shame on you, Mr. Stein! You are one lousy adviser.

I will not again go into details as to why public works projects are going to accomplish nothing but the same. All I needed to say on this I already wrote in detail in The Trouble with Bureaucracy.

Why not be smart about it and NOT LET AMERICANS GET UNEMPLOYED IN THE FIRST PLACE? (Please pardon the shouting.) There are millions of Americans already hard at work making great American made cars and trucks. Why not keep them on the job? Wouldn’t that be smarter than allowing the whole upper Midwest to fall into oblivion and then rescue it over a fifty year period?

BECAUSE OTHER AMERICANS ARE ASKING THAT THEY BE EMPLOYED IN USEFUL OPERATIONS AND NOT IN THEIR CURRENT ONES. (Please pardon my shouting back.) You should really familiarize yourself with the simple economics 101 on entrepreneurial profit and loss. That should help you understand why factors of production should not be kept in operations that generate a loss. You are not the only person in the world, Mr. Stein. There are other Americans who, in their purchasing decisions, express their willingness for a change in Detroit.

Second, I get sick when I hear about how this or that professor says we cannot have bailouts in a free market. Really? How about the bailouts the professors get because gifts to colleges are tax free? How about the bailout they get because if they have to teach six hours a week they feel overwhelmed, while the guy on the line in Dearborn works a grueling forty and doesn’t whine about it?

Ben, if you want to make gifts to the auto companies, please, go ahead and do it. No one is holding you back. And take a lot of people with you when you go. Nothing wrong with that. And if you would like to lobby for a law that makes voluntary gifts for auto companies tax free, go ahead, you’d have my support. Until then, please spare your readers pathetic and irrelevant comparisons.

Somehow, we can give bailouts to investment banks where the top dogs make hundreds of millions a year for running the company into the ditch and wrecking the whole credit picture in America. Somehow we can have bailouts for Fannie Mae and Freddie Mac, whose bosses were trading on the credit of the taxpayers to make themselves rich while pumping up a serious housing bubble.

Exactly right, we shouldn’t have done that either. And I have consistently argued against it. You have not. Now you do. Yet, in the same article you support bailouts to car companies where the top dogs make tens of millions a year for running the company into the ditch and wrecking the whole auto picture in America. Somehow we can have bailouts for GM, Ford and Chrysler, whose bosses were making and reselling auto loans on the credit of the taxpayers to make themselves rich while pumping up a serious consumer credit bubble. It is in the realm of possibilities that you are being a hypocrite?

Amazingly, we can have whole fleets of C-130’s fly to remote areas of Iraq and Afghanistan with pallets of hundred dollar bills piled from floor to ceiling. Then we can pass them out to warlords who make tea for our soldiers one hour and blow their guts out the next. We can send CIA operatives into Somalia and give millions, maybe hundreds of millions, to warlords to fight other killers.

Ben, if you want to argue in favor of the auto bailout, it might make sense to actually talk about the auto bailout. The US foreign policy you describe above it indeed a bad one. But this does not in the slightest make the auto bailouts a good one.

But we cannot find it in our hearts to save our fellow Americans in Ohio and Michigan and Indiana who make the cars and trucks that about half of us buy? We can send billions to Germany and Japan to bail them out after they bombed us and killed our POWs and killed six million Jews. But we cannot help the children and grandchildren of the men and women who fought our war and made us the arsenal of democracy?

Something is very wrong here.

Sure we can help them. We can release them from their current inefficient occupations and enable them to be integrated into a productive modern economy. We need to do this sooner rather than later. The auto companies will fail either way. We can either prolong the agony and then leave the workers without any viable experience in modern, profitable operations, or we can let the companies restructure quickly and efficiently. The longer you want to keep them where they currently are, the worse will the situation be for the very people you are trying to help.

And please don’t tell me how GM and Ford and Chrysler have made bad cars that people don’t want. I drive only American cars, only GM cars actually, and they are the best, coolest cars I have ever driven: my 1962 Red Corvette, my mighty Cadillacs whose potent engines and super brakes have saved my life many times on the freeway. Yes, the cool people in DC and New York don’t drive American cars. But a lot of other good people do and we love them. And my Cadillac dealer down here in the desert, Jessup Motors, gives me a lot better service than my Mercedes, Porsche, BMW, Jaguar, or Acura dealers ever did. I would trust my life to Detroit iron any time.

That is good for you. I have no problem with your desire to buy GM cars. Nor do I have a problem with other people having the same desire. I do have a problem when you want to send IRS agents after me to take my money to subsidize your car. I don’t ask you to give me money to pay for my next ski trip either. A simple solution: Why don’t you and all other GM lovers, out of patriotism, simply pay 4 times the price you currently pay for your car. This way GM might actually break even next year.

And why are we so angry at the car companies’ executives? They get miserable pay by Wall Street standards and have much harder jobs.

I’m not sure what your high and mighty standards are that you call $14,000,000 a miserable pay. Still, I’m not angry at them. In fact, I don’t care about them. They’ll do just fine. I’m not asking more of them than a bakery owner asks of his manager: Be profitable so we can pay our bills and have some money left at the end of the day.

Why are we so angry at the unions? They negotiated their deals in good faith. It’s not their fault that roller coaster gasoline prices messed up their world.

What makes you think that bailout opponents are angry at the unions. I’m not. If they want to close deals that bankrupt their business, it’s their free decision. Just don’t come knocking on my door afterwards to help you continue make bad decisions. Make better ones next time.

They are our brothers and sisters. They fight our wars. They maintain our middle class lives. Maybe they get paid a lot, but they have been giving back for years. When will it ever be enough?

Ben, are you suggesting that GM workers are the only ones who are our brothers and sisters and fight our wars? I hope not. What do you mean by “they maintain out middle class lives”. You mean their middle class lives? Did you know that there are a lot of people who earn less than the average UAW worker? Did it ever cross your mind that there are people who are suffering quite a bit more than the GM auto worker who makes $150,000 a year? Why do you want to milk these people for tax money when they are already struggling? Have you no compassion for them?

And what about the retirees? They get the benefits they were promised. If those can be taken away, then whose benefits are safe? And do you think it will be cheaper if the government takes on those costs directly?

And what about the retirees whose pension money will be worth close to nothing once the inevitable result of this bailout mania unleashes the inevitable hyperinflation upon us? What about the taxpayers whose money can apparently be taken away without a qualm from your end.

Let’s stop the Depression before it starts. Let’s show some fairness and good faith to our own. Let’s bail out the Big Three, help them slim down, shape up, and keep making great cars and trucks. The Big Three are us and if we cannot help ourselves, who can we help?

Correct, let’s not cause another Great Depression. Let’s not again prolong the agony of a necessary correction by trying to keep prices up and failing businesses going, like we did in 1929 and 1930. Let’s help the big 3 become efficient by allowing the consumers to decide what is to happen. Let their owners go through Chapter 11 if necessary. Let the good pieces be turned into efficient and successful businesses and the useless parts be released for more useful occupations so the American car industry can once again be a force in the world rather than a caboose. The Big Three are NOT us. They are GM, Ford, and Chrysler. If they can’t help themselves, then who should?

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Comments

9 Responses to “Bail Out Detroit? – Now??”

  1. Shauna Kaner on December 17th, 2008 2:34 am

    Wow!!! How pathetic is that :-)

    Nima, now that I read through all your articles and familiarized myself with your theories, it all makes more sense to me.

    I feel like I just opened my eyes.

    Thank you.

  2. pastafiend on December 17th, 2008 2:50 am

    Awesome article. Yes, we are preventing the invisible hand from doing its magic. Bailing out failing companies will create a moral hazard – encouraging/rewarding risky and foolish behavior. Bookmarked.

  3. Nima on December 17th, 2008 3:02 am

    @Shauna: Thanks much. I am impressed by your eagerness to read up on the theories and your ability to rethink issues. Out of curiosity: What in particular was it that enabled you to make more sense of it? Any particular article or concept?

  4. Nima on December 17th, 2008 3:09 am

    @pastafiend: Yes, we did indeed chop off Adam Smith’s invisible hand. Thanks for bookmarking.

    By the way, here is another take down of another nonsense article from Ben: http://www.economicsjunkie.com/reflate-the-economy-now/

  5. Koichi on December 18th, 2008 11:14 pm

    Nima,

    First and foremost, a very well-written article. I cannot agree with you more on the auto bailout issue. However, I do want to make one comment about what the government’s role should be in the current market. If you are a proponent of a sheer laissez-faire policy, then I would have to (politely) disagree. In my opinion, the government should step in to try to expedite the economic recovery process. As you clearly pointed out, it is ill-advised for the government to bailout inefficient players. However, it is imperative for them to put money to work aggressively in areas with high job growth potential (i.e. perhaps the green industry). Not only the current market needs correction but also, it needs a new catalyst. As every industry goes through a cycle, it is crucial for the government to make a far-sighted investment in the “next big” industry. Of course, the invisible hand can virtually do all these things but it would take a monumental time. That is why we need the government to interfere and speed up the transition process. This inevitably involves taking money out of people’s pocket and spending it on businesses that can provide long-term benefits.

    I look forward to hearing your thoughts.

  6. Nima on December 19th, 2008 12:15 am

    Koichi,

    thanks much for your feedback. As it is do often with economic problems, I agree with you on the objective, but not on the means to attain it. Let me disect your comment as follows:

    First and foremost, a very well-written article. I cannot agree with you more on the auto bailout issue. However, I do want to make one comment about what the government’s role should be in the current market. If you are a proponent of a sheer laissez-faire policy, then I would have to (politely) disagree.

    NM: In order to avoid ambiguities, I would prefer to use what specifically we should do, rather than use the term laissez-faire. My objective is to do whatever we can to produce what the people demand vs. things that people don’t demand.

    In my opinion, the government should step in to try to expedite the economic recovery process. As you clearly pointed out, it is ill-advised for the government to bailout inefficient players. However, it is imperative for them to put money to work aggressively in areas with high job growth potential (i.e. perhaps the green industry).

    NM: You are stating two things in one sentence as if it goes without saying that both are inextrincably linked. “the government should … expedite the recovery process”. If, by recovery process we understand a reallocation of resources into lines of production where people demand them to be, the government will be unable to attain this objective. Putting money into areas with high job growth in itself is not an objective, it is an outcome. First and foremost workers need to be employed in lines of production where they produce demanded goods so as to improve the well being of the consumers and ensure they have a sustainable occupation. But what is demanded by the consumers can only be answered by the consumers in their purchasing decisions on the market. Entrepreneurs will ensure that the resources will be employed in the most profitable lines of production so they satisfy the most ample and urgent needs first. But entrepreneurs can only do this because they can calculate profit and loss. Without this ability they would be completely lost and would have to resort to guesswork.

    The government, however, knows no profit/loss. It violently takes the money from the consumers, taking it from where they would have preferred to employ it, and then allocates to withdraw factors of production from other lines of production or from the availability for other lines of production. But the government has not idea whether or not it employs the resources in more useful lines that those it barrs them from.

    In your comment you say “i.e. perhaps the green industry”. Exactly, PERHAPS.This says it all. Because how do we know this is the best employment? You don’t and I don’t. Neither does the government. The consumers do. They tell the entrepreneurs, via their simple decisions to buy or not to buy. The entrepreneur can innovate and speculate what they might demand. He can employ resources to produce the goods he is speculating on. But only once he enters the market will he know whether the goods are really what the consumers wanted. Most likely they will not be, at least not exactly. Thus he will have to go through trial and error adjustments in order to find the perfect concoction. He needs the price mechanism. The government has no way of doing any of this. Humans are not perfect or omniscient. (See my full post on this issue in http://www.economicsjunkie.com/the-trouble-with-bureaucracy/)

    Not only the current market needs correction but also, it needs a new catalyst. As every industry goes through a cycle, it is crucial for the government to make a far-sighted investment in the “next big” industry.

    NM: But again, the government does not know what industry this is. How could it? It doesn’t sell things at voluntarily determined prices. It knows no profit or loss. All it does it take money from the people by violent means and then go on a spending spree.

    Of course, the invisible hand can virtually do all these things but it would take a monumental time. That is why we need the government to interfere and speed up the transition process. This inevitably involves taking money out of people’s pocket and spending it on businesses that can provide long-term benefits.

    NM: Not only will the government not expedite the process. As a matter of fact it will slow it down. It keeps resources from being occupied where the consumers would like them to be and instead employs them where the bureaucrat sees fit. Thus nothing could be farther from reality than to say that the government could ever expedite a recovery, meaning a relocation of resources from useless to useful occupations. What example has there ever been in history where a laissez-fare policy caused a recovery to take monumental time? How many more examples do we need where government intervention precipitates precisely this undesirable outcome, most notably the Great Depression.

  7. JB on December 21st, 2008 3:46 pm

    I went to college, earned a BS is in electrical engineering and work in the auto industry. I made 90k this year, a respectable amount. I’m not rich by any standard. I have a modest home, modest savings, very little debt and a dwindling 401k. If the auto industry dies, I’ll be competing with 10’s of thousands of engineers for a job and probably lose my home (which has already lost 40% of it’s value) in the process. I didn’t create this mess. I work hard to help create products that I think people will enjoy and find value in. I don’t have an answer to this mess, but I think I know what the fate of my family would be if my industry doesn’t get help AND change our ways.

    The auto industry has a proud tradition of giving back to the US and global communities. Now, we are asking for help, not a handout.

  8. Koichi on December 21st, 2008 8:37 pm

    Nima,

    Thanks for your thoughts. Here is my response:

    Regarding your comment “But what is demanded by the consumers can only be answered by the consumers in their purchasing decisions on the market….In your comment you say ‘i.e. perhaps the green industry’. Exactly, PERHAPS.This says it all. Because how do we know this is the best employment? You don’t and I don’t. Neither does the government. The consumers do. They tell the entrepreneurs, via their simple decisions to buy or not to buy.”

    Yes, it’s true that the government has no crystal ball. That is, it has no way of knowing in advance what the consumers will want next. But I am arguing that it is the government’s job to prognosticate accurately the future economic demand pattern, and drive the reallocation process accordingly. You draw out a scenario where an administration incompetently fails at doing so and consequently keeps resources from being employed in more useful lines of production. (i.e. Bush administration’s massive military spending which brought largely no desirable outcome.) However, my point is that a capable administration would succeed at expediting the reallocation process based on the accurate prediction of future economic demand. If you look back in history, the fiscal spending in “arrays of transforming investments and technologies (i.e. the interstate highway system, widespread air travel and the expansion of electronics) spurred growth during the postwar period” (Larry Summers), and jolted the economy out of the Great Depression. Now, what were the chances that the private sector or enterpreneurs then would have put money into something astronomically expensive and time-consuming like the highway system? Probably slim to none. These type of public projects are necessary for the economy and can only be pursued on the back of government financing. You and I can both agree that without highways and airports, the U.S. economy today would be much less productive and competitive.

    To summarize my point, I do agree with your point of view that a fiscal policy, if implemented wrongfully, can prolong economic agony for the very reasons you laid out above. However, it is an indispensable tool if used correctly–it can foster economic growth/recovery faster than the invisible hand alone.

  9. Nima on December 21st, 2008 10:37 pm

    Please see my comments below:

    Regarding your comment “But what is demanded by the consumers can only be answered by the consumers in their purchasing decisions on the market….In your comment you say ‘i.e. perhaps the green industry’. Exactly, PERHAPS.This says it all. Because how do we know this is the best employment? You don’t and I don’t. Neither does the government. The consumers do. They tell the entrepreneurs, via their simple decisions to buy or not to buy.”

    Yes, it’s true that the government has no crystal ball. That is, it has no way of knowing in advance what the consumers will want next.

    NM: Not only does the government not know it in advance, it also won’t know it after the fact due to the inability to calculate profit and loss. You are not addressing this fact in your comment.

    But I am arguing that it is the government’s job to prognosticate accurately the future economic demand pattern, and drive the reallocation process accordingly.

    NM: But we are not discussing what we think the government’s job it. The question is if the government is at all capable of driving this reallocation process. The theory of Bureaucracy irrefutably shows that this is not the case.

    You draw out a scenario where an administration incompetently fails at doing so and consequently keeps resources from being employed in more useful lines of production. (i.e. Bush administration’s massive military spending which brought largely no desirable outcome.)

    NM: No, I am not doing that. I am not in the slightest arguing that incompetence is the cause of the misallocation. In fact, my reasoning could be applied to the most capable and competent human beings on the planet. My argument is that the inability to calculate profit and loss inevitably leads to the misallocation. You did not address this fact.

    However, my point is that a capable administration would succeed at expediting the reallocation process based on the accurate prediction of future economic demand.

    NM: Not only can the government not predict the future demand, even entrepreneurs can’t do this with certainty. On top of that, due to the inability to calculate profit and loss it won’t even know after the fact whether or not it is directing resources from less important to more important uses.

    If you look back in history, the fiscal spending in “arrays of transforming investments and technologies (i.e. the interstate highway system, widespread air travel and the expansion of electronics) spurred growth during the postwar period” (Larry Summers), and jolted the economy out of the Great Depression.

    NM: The Great Depression was caused by too much government intervention and the US, after an agonizing decade got out of it in spite of all these interventions. But regardless of what one thinks about what happened in history, the points I raised in my post about bureaucracy would have to be refuted as such one by one. If one is unable to object to the impracticability of proper resource allocation due to the inability of profit calculation, one has lost the argument in favor of government intervention. There is no way around this truth.

    Now, what were the chances that the private sector or entrepreneurs then would have put money into something astronomically expensive and time-consuming like the highway system?

    NM: They have actually put money into much more expensive projects. Investment in the private sector is, still, higher than in the public sector. Who is to say that one single business would have to run the entire highway system? It is very easy to conceive of a privately funded and operated highway system. But even if this were to appear incomprehensible to someone, one could simply look at reality. There are numerous examples of private highways around the world. The fact that we have been brainwashed over the past 100 years that we need government for it, does not change this truth at all. The same arguments were advanced in favor of a state controlled church, a state controlled telecommunications system, a state postal service, etc… But as civilization progresses, all these false beliefs continue to be revisited and shattered by logic and reason.

    Probably slim to none. These type of public projects are necessary for the economy and can only be pursued on the back of government financing.

    NM: If you say probably slim to none, then you would need to point out what you are basing this assumption on. The assertion that these projects can only be pursued on the back of government financing falls flat immediately if one looks at real world examples. Just as an example, you can look at http://en.wikipedia.org/wiki/Private_highway

    You and I can both agree that without highways and airports, the U.S. economy today would be much less productive and competitive.

    NM: Absolutely. And I would never recommend that we don’t build highways. In fact, I want us to build much better highways. The most remarkable fact about the government sponsored highway system is that it has been a complete failure. The country is facing a disastrous infrastructure crisis that will turn much worse in the years to come. And now we are seriously considering to give the federal government an even bigger role in infrastructure development. This is sheer insanity. It will bankrupt the nation. Wait and see. I want the consumers to decide who should and who should not build and maintain them. For they are the ones using the highways. They are the ones who are most capable of rendering a judgment on quality.

    To summarize my point, I do agree with your point of view that a fiscal policy, if implemented wrongfully, can prolong economic agony for the very reasons you laid out above.

    NM: Yes, and a fiscal policy has to be deemed wrong if it aims at an expansion of governmental activity beyond defense against aggression. It will inevitably lower the standard of living of the broad majority due to the inability to calculate profit and loss.

    However, it is an indispensable tool if used correctly–it can foster economic growth/recovery faster than the invisible hand alone.

    NM: Yes absolutely. Any fiscal policy that aims at lowering the extent to which government intrudes the life, liberty, and property of its subjects will foster economic growth and recovery.

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