Frenetic Fiddling

by Russ Roberts on March 30, 2009

in Frenetic Fiddling, Man of System

The White House, stung by the backlash of giving AIG money and then seeing it spent in the way that Washington and Main Street doesn't like, seems intent on not making the same mistake with the automakers. The NYT reports:

The White House on Sunday pushed out the chairman of General Motors and instructed Chrysler to form a partnership with the Italian automaker Fiat within 30 days as conditions for receiving another much-needed round of government aid.

The decision to ask G.M.’s chairman and chief executive, Rick Wagoner,
to resign caught Detroit and Washington by surprise, and it underscored
the Obama administration’s determination to keep a tight rein on the
companies it is bailing out — a level of government involvement in
business perhaps not seen since the Great Depression.

Instead, the President has decided to make a different mistake. He is presuming his experts can run the auto industry better than the people whose name and reputation and job are on the line. He is ignoring the signals this sends to the rest of the economy–taking money from the government is a game for suckers. This changes the rules of the game at every bank that has taken TARP money and anyone who thinks their industry is on the edge of problems that might be solved by Washington.

Tell your children what is happening. When we look back on the New Deal—some see a benevolent attempt to save the economy that made things better while others see a desperate attempt to try anything that might work and that ultimately made things worse.

We are living through a similar time. An activist President is desperate to show he cares and is on top of things, working tirelessly to save the country. We will se what the results are, but tell your children what is going on and how it affects incentives. How does this affect the decision to buy a GM car? Invest in GM? Buy their bonds? It's hard to say but certainly a new level of uncertainty has arrived. Uncertainty is not good for thouse considering making long-term investments as customers or investors.

In general, I have dismissed the argument that Obama is a socialist. But these decisions sure are a step in that direction. Very scary.

Finally, these decisions highlight a fundamental misunderstanding about the implications of a bailout. People often argue that when "we" give companies money, "we" have the right to tell them what to do. Sure we have the moral right whatever it means to say "we" in those sentences. But is it smart and good for "us" to have GM and Chrysler run out of Washington. I think "we" would be wise to forego the moral right to tell them what to do. Government should either give the money with no strings attached or not give the money. This hybrid of implicit nationalization is the worst option.


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