Wednesday, December 10, 2008

What are some unintended consequences of the auto bailout?

Okay, I'll let the deep philosophical discussions (or lack thereof) on the new altruistic American business model rest for a second to discuss the bailout for the automotive industry (which will no doubt change in the coming days/weeks).

I thought the comment below, from the Cato Institute, provides a nice context for discussion.

"Surprise! President Bush is willing to spend taxpayers money and inject the federal government into the economy – yet again. The financial bailout might have been justified on the grounds that finance is the lifeblood of the entire economy, and a frozen credit system brings every industry to a halt. But a bailout for a specific manufacturing industry has all the hallmarks of lemon socialism. It puts the federal government in the business of picking winners and losers, reduces the incentive of other industries to avoid excessive risk, creates a lobbying frenzy, and brings the inefficiency of the government sector to the normally more efficient private sector, which under free enterprise must stay in the black or go out of business. But I want to focus on a particularly scary part of this bailout bill.

The bill provides that if the government gives companies money, the government will make some of their decisions: limit executive compensation, ban dividends, review large contracts, get rid of their executive jets (certainly a reduction in corporate efficiency, where the time of their top executives is the most valuable resource), make “green” cars rather than the cars consumers want, and so on. But it adds a new twist: The bill currently bars the car companies from pursuing lawsuits against California and other states trying to implement tougher tailpipe emissions standards. Jonathan Cohn of the New Republic suggests taking that concept further and requiring General Motors to fire a vice chairman who has expressed skepticism about the catastrophic effects of global warming.

This ought to scare any genuine liberal. Congress is going to use our money to censor political dissent? Usually libertarians warn that if you take government money, you’ll eventually find yourself subject to government restrictions on your freedoms. In this case, there’s no phase-in, no “eventually.” Congress wants to tell private companies, private individuals, that once they take government money, they will shut up and toe the government’s line.

If economics isn’t a good enough reason to oppose this bailout, preserving independent thought ought to be."

I think the author's point regarding political expression is valid, while at the same time recognizing this also creates a material disincentive to take government money, which I think should be the point. Make no mistakes, the deal will be very good for government, but can you also say the deal will then be good for taxpayers? Hmm. I get a little uncomfortable when I see media sources interviewing GM or Chrysler workers/suppliers who talk about how much they hope the government goes through with the bailout so they can keep their jobs. Does anyone see fallacious logic here? Whether or not the government grants the support, the big three will still have to drastically reduce excess and change business models, which means layoffs, plant closings, and breached contracts. Although staying in business is better, I think it might create a false sense of security for workers and suppliers.

Then there's this little gem of a comment I read in the NY Times:

"Basically what we have here is the corporate equivalent of AA meetings. “My name is General Motors and I’m a financaholic.” (Applause please!) His long suffering mother, aka the United States government, attends Alanon meetings where she justifies giving junior a large enough allowance so he needn’t work enabling him to stay drunk 24/7."

Where will the government draw the line? How many industries will/can we bail out? Is this the last one? Or are we just being taken for a ride (pun intended)?


Alisa said...

"Jonathan Cohn of the New Republic suggests taking that concept further and requiring General Motors to fire a vice chairman who has expressed skepticism about the catastrophic effects of global warming.

"This ought to scare any genuine liberal. Congress is going to use our money to censor political dissent?"

Is it congress who is together wanting to fire the vice chair for political dissent, or Jonathan Cohn of the New Republic who wants to do the firing? I guess I hadn't heard that congress was on board with this as well. If so, that would be frightening.

Mberenis said...
This comment has been removed by a blog administrator.
KVB said...

This link leads to an article from 12-05 about the contemplation of the GM bankruptcy. It actually is a good analysis of what would happen to each party under chapter 11. Its worth checking out. Also with a bankruptcy, all of the spending becomes public information, so corporate spending will already be disclosed. As for job loss, GM will be forced to lay off a ton of people anyway, and in turn, suppliers will too. I also think that the suppliers may end up needing help either way bailout or bankruptcy. Bankruptcy might help them out too.

As for the discussion on the 'charitable' business models... Maybe Nate will remember the case name, but there is a case about Ford and how he wanted to benefit the people because they were making so much money, but the court found that the business had a duty to the shareholders. They might be able to make a business plan that targets 'friendly' products to get around that as long as the voting majority of shareholders is on board.

Jenga said...

Kevin, the link got cut off, can you try and re-post? At any rate, I'm afraid mass layoffs are unavoidable at this stage.

Still checking on Alisa's comment regarding political censorship for participating companies.

KVB said...

KVB said...

Well, I just posted it again, but it still got cut off. In any case if you google search for businessweek gm bankrupcy you will find it. It should be the first choice, and will be titled What if GM did go bankrupt.

Sorry about the link.

Jenga said...

Regarding political dissenting, the author is suggesting that the language in the Bill is a form of political censorship. In particular the part that reads the auto manufacturers can't sue California for increasing MPG limits (which, in the authors mind, is a form of political censorship). Taken to the extreme then, the author quotes Jonathan Cohn who asserts that they should simply just fire people that disagree.

Obviously congress won't be THAT blatant, but I would be surprised if we didn't see them imposing some political impairment. In the words of Governor Blagojevich, "This thing is a @#$%!# gold-mine."

Jenga said...

Sorry, I meant KURT.

Nate said...

There's an argument to be made that the President can't even bailout the auto industry under TARP since TARP is reserved for "financial institutions" only and the auto industry doesn't qualify.

This is why the porn industry wants to . . . get some of that.

Jenga said...

You're right, the money for the auto manufacturers is coming from already pre-approved money to make greener cars. They won't be using TARP money.