Unwittingly Enabling Crony Capitalism

by Don Boudreaux on May 9, 2011

in Crony Capitalism, Myths and Fallacies, Other People's Money, Seen and Unseen

Here’s a letter to the editor of the Washington Post:

You’re right that high-school graduates should know more economics (“Va. high school grads should be economically literate,” May 9).  But so, too, should newspaper columnists such as E.J. Dionne who today writes “Far too little attention has been paid to the success of the government’s rescue of the Detroit-based auto companies, and almost no attention has been paid to how completely and utterly wrong bailout opponents were when they insisted it was doomed to failure” (“Rescuing Detroit: No news about government’s good news“).

Mr. Dionne misses two fundamental economic insights: first, nothing is free, and, second, that which is unseen is as real as that which even the most myopic pundits manage to spy.

Economically literate opponents of the Detroit bailout never denied that pumping hundreds of millions of taxpayer dollars into Detroit automakers would restore those companies to health.  Instead, they argued, first, that bailing out Detroit takes resources from other valuable uses.  Because he doesn’t even recognize that other valuable uses were sacrificed by this bailout, Mr. Dionne offers no reason to think that the value of saving Detroit automakers exceeds the value of what was sacrificed to do so.  No legitimate declaration that the bailout is successful is possible, however, without evidence that the value of what was saved exceeds the value of what was sacrificed.

Economically literate bailout opponents argued also that it sets a bad precedent.  By signaling to big corporations that government stands ready to pay the tab for the consequences of their poor decisions, big corporations will more likely make poor decisions in the future.  It’s far too early for Mr. Dionne to conclude that this prediction is mistaken.

Sincerely,
Donald J. Boudreaux

(I thank Harrison Colter for inspiring the title of this post.)

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{ 92 comments }

Nick May 9, 2011 at 11:15 am

Or put even more succinctly,

“Every government interference in the economy consists of giving an unearned benefit, extorted by force, to some men at the expense of others.”

– Ayn Rand

tms May 9, 2011 at 11:25 am

I never cease to be astounded by how many otherwise intelligent people completely ignore the unseen effects of these policies. The least they could do is acknowledge that they exist and then try to make the case that they are not significant.

Justin P May 9, 2011 at 1:27 pm

E.J. Dionne is a smart man, but since he is also highly partisan, he will overlook things that don’t align with his world view. He and Krugman are almost exactly alike in that regard. They will omit things that contradict what they are saying. They are smart enough to put in some vague language (usually) to give themselves some wiggle room if they are called on something.

Nick Heath May 9, 2011 at 11:35 am

Strangely those who support bailouts of private auto firms are usually the first to oppose bailouts of other private companies – banks for instance.

kyle8 May 9, 2011 at 12:59 pm

LOL or how about oil companies? I didn’t see many democrat oriented economists or politicians saying we ought to bailout the oil companies back in the late 1980′s when there was a huge contraction in the industry.

Country Thinker May 9, 2011 at 12:27 pm

I remember other auto makers supported the bailouts, and they argued that their supply chains were so intertwined that they would suffer as well. My guess is they were lobbying in favor of rescuing their competitors in case they themselves would need a bailout some day to avoid getting Schumpetered.

Justin P May 9, 2011 at 1:27 pm

Didn’t Ford walk away from getting money, once they realized how much the government would take over?

Chucklehead May 9, 2011 at 12:55 pm

Hundreds of millions? I think that after you add the money invested, along with the pension obligations assumed (Delphi) , the loss carry forward through bankruptcy, ass well as loss of taxes from bondholders wiped out to give unions equity, you are close to a hundred billion. And as they say on Mastercard commercials, the cost of the moral hazard in your last paragraph, “Priceless.”

Methinks1776 May 9, 2011 at 1:27 pm

You probably think that “ass” is a typo. I think it’s Freudian slip :)

Joshua May 9, 2011 at 9:13 pm

Pull a number out of the air why don’t you. Thats like saying government unfunded liabilities are infinity given enough time.

Methinks1776 May 9, 2011 at 9:17 pm

Listen, Joshua, with your brief commenting history, I would think twice about calling anyone else out on pulling anything out of the air, if I were you. Especially since you don’t seem to understand the comment.

kyle8 May 9, 2011 at 12:57 pm

There is also that silly little thing called the constitution which no where gives the congress authority to steal the money of its citizens and bestow it on a private company. Of course I know it is declasse’ to point out these little niggling details.

muirgeo May 9, 2011 at 1:02 pm

The constitution also doesn’t mention corporations.

Sandre May 9, 2011 at 1:07 pm

any power that is not explicitly granted to the federal government is a matter belonging at the state level you douchebag.

Harold Cockerill May 10, 2011 at 7:19 pm

Please, give up all that “state” crap. There’s only one government now. It owns everything and you better get used to it.

Harold Cockerill May 10, 2011 at 7:21 pm

But you can stick with the “douchebag” part. Completely appropriate.

Sam Grove May 9, 2011 at 1:16 pm

To add to Sandre’s point regarding the leftist’s bogeyman, corporations are chartered by state governments, not the federal government.

Simmer May 9, 2011 at 1:00 pm

Not only does corporate bailouts signal that bad decision will be bailed out, it signals that their efforts need to be put toward lobbying and cronyism instead of making better cars and a better business model.

Ryan Vann May 9, 2011 at 1:13 pm

I feel compelled to applaud Don’s lost cause of trying to hold media portrayals up to scrutiny. I’m often torn between hysterical laughter and crippling despair when reading or listening to infotainment.

Jim May 9, 2011 at 1:17 pm

A very good response to an extremely angry sounding and naive article by E.J. Dionne. Like you said Don, the part of his argument that is most disingenuous is that he doesn’t consider the alternatives and the unseen. His article felt like a reactionary piece to having conversed with someone who made him mad. It was not professional and occasionally he tried to use big words to make himself sound professional. I am really surprised that the Washington Post even allowed that piece to represent their name.

“In the case of the car industry, allowing the market to operate without any intervention by government would have wiped out a large part of the business that is based in Midwestern states. This irreversible decision would have damaged the economy, many communities and tens of thousands of families.” That statement is very assuming and myopic. It’s very black and white: if the government did not bail GM and Chrysler out, many people would lose their jobs, forever. They’d be left to fend for themselves and communities would forever be lost to a history of once being great. Therefore, the market couldn’t possibly adapt in this situation because it is full of a bunch of cold and greedy people. /sarcasm

It’s a dangerous precedent to bail anything out on the premise that, unless the government acts, some disastrous result will occur; not if, but when. I certainly hope nobody takes Dionne seriously, that would be the largest tragedy of them all.

Justin P May 9, 2011 at 1:29 pm

The only ones that take E.J. Dionne seriously are the people are the ones that already think like him. They probably see him as more evidence that they are right, it’s typical groupthink.

Joshua May 9, 2011 at 9:14 pm

cafe hayek is typical groupthink

Methinks1776 May 9, 2011 at 9:20 pm

Better a group that thinks than a group that doesn’t.

Mao_Dung May 9, 2011 at 1:28 pm

Both you and Dionne are likely wrong about “bailouts.” The fact that most of the companies become profitable after the financial assistance seems to suggest a method to the madness. It is one thing for a mom and pop store to fold, and another for GM to collapse. The ripple effect of the second is more like a radioactive tsunami. The crippling of the banking system during the Great Depression should have been prevented. Ask Milton Friedman about that. Failure shouldn’t be reward either, so there need to be a balancing act, as well as strings attached to taxpayer bailouts. Much more can be said about all this, but to simply say “let’em fail,” is a simplistic indication of muddled economic thinking.

Methinks1776 May 9, 2011 at 1:41 pm

There are strings attached to taxpayer bailouts, Chinese Crap. The The government attaches more strings and other things to taxpayers with each bailout.

Ken May 9, 2011 at 1:44 pm

Dung,

I guess you didn’t see the statement “that which is unseen is as real as that which even the most myopic pundits manage to spy.

Economically literate opponents of the Detroit bailout never denied that pumping hundreds of millions of taxpayer dollars into Detroit automakers would restore those companies to health. Instead, they argued, first, that bailing out Detroit takes resources from other valuable uses. Because he doesn’t even recognize that other valuable uses were sacrificed by this bailout”.

You know, the heart of the post. The point is that restoring a failing business to health has unseen consequences, like new inventions are NOT created, new opportunities are NOT created, etc. In other words, you ignore that there is sacrifice else where in the economy because you can see the profits of something like GM. Ignoring those sacrifices means that you are not serious about economic analysis. Without considering what is lost due to the forced reallocation of resources, you cannot say whether or not it was a good thing to bailout GM or the banks.

To simply say “become profitable after the financial assistance” “is a simplistic indication of muddled economic thinking.”

Regards,
Ken

tms May 9, 2011 at 3:20 pm

“It is one thing for a mom and pop store to fold, and another for GM to collapse.”

Bankruptcy = collapse? I am picturing a scenario where bankruptcy is declared and immediately all of GM’s resources – plants, dealerships, inventory, human resources, brands – disintegrate into thin air and are rendered completely useless for all time.

I thought it meant that creditors may have to accept something less than 100 cents on the dollar. Creditors — you know, the people that voluntarily entered into contracts with the failing institution.

Feel free to send your own money to any failing institution. Leave my children out of it.

Harold Cockerill May 10, 2011 at 7:27 pm

They couldn’t allow bankruptcy as it would’ve let the automakers off the hook for all the healthcare insurance of the UAW retirees. I don’t recall the name of the gentleman but I believe he had taken over at Chrysler, he said (I paraphrase) “I thought I had been hired to run a car company and find myself managing an insurance company”.

crossofcrimson May 10, 2011 at 1:16 pm

“It is one thing for a mom and pop store to fold, and another for GM to collapse.”

Leave it to this_guy to give props to corporatism. Unbelievable.

Peter May 9, 2011 at 1:40 pm
Joshua May 9, 2011 at 5:20 pm

Your article says the taxpayer is out 11 Billion dollars. In a 15 trillion dollar economy.

How much tax do all the employees of the big 3 pay?

Chris May 9, 2011 at 8:25 pm

“How much tax do all the employees of the big 3 pay?”

What does that have to do with anything?

Surely you’re not suggesting that if they pay $11bn in taxes they “paid” for the loss. You aren’t counting all the other goods and services that the federal government consumes on their behalf. And remember that a company like Ford would be paying the same amount, as they made decisions that helped them avoid financial ruin.

Observer Guy1 May 9, 2011 at 1:40 pm

What exactly did Washington forego by bailing out Detroit? Nothing. I see no opportunity costs here; there may be future consequences to this decision, but other so-called valuable uses weren’t discarded.

You wrongly assume Washington is bound by scarcity, but I don’t think it is. We have bailed out, propped up, expanded here and expanded there with reckless abandon. Nothing valuable has gone unscathed.

whotrustedus May 9, 2011 at 2:43 pm

When Washington redirected $$ to bail out the automakers, those $$s were taken away other uses. They obtained those $$s either by taxation, borrowing or printing. In all cases, it is capital that is not available for other uses.

Don Boudreaux May 9, 2011 at 2:54 pm

Observer Guy1:
I can’t tell if you’re being facetious or serious. Even if the most naive of naive Keynesian ‘theories’ is correct and all the resources used to bail out Detroit autoworkers were idle and could not reasonably then, or within any reasonable span of time into the future, be employed by the private sector to produce additional outputs, the fact remains that GOVERNMENT could have used those resources in some ways other than bailing out Detroit automakers. Suppose Uncle Sam had transferred those (allegedly idle) resources instead to me. (I guarantee you that I’d have found some use for them, if only to increase my own utility by increasing my consumption. And what’s true of me is true, I’m sure, for about 310 million other Americans.) Or, a bit more realistically, suppose that Uncle Sam had instead used those resources to subsidize other industries – say, butchers, brewers, or bakers? How do we know that the value of a ‘saved’ auto industry in Detroit is greater than the value of the greater amounts of meat, beer, or bread that would have been produced had Uncle Sam directed these idle resources differently?

Marcus May 9, 2011 at 3:38 pm

I think they should have given everyone $100 gift cards for Wal-mart. After all, Keynes didn’t think it mattered much what the money was spent on. And gift cards for Wal-mart would have chapped the asses of the most number of stimulus advocates.

Just trying to maximize my stimulus pleasure.

Joshua May 9, 2011 at 4:27 pm

The stimulus was aimed at certain groups (of voters) unemployed blue collar men ( infrastructure ) and underwater homeowners ( TARP ).

Methinks1776 May 9, 2011 at 5:05 pm

So, basically, you’re telling us you have no idea what happened. Good to know.

Chucklehead May 9, 2011 at 4:01 pm

There are many who think the cost of more money is the cost of printing or the cost of typing numbers in the fed computer. Unseen opportunity cost, inflation and moral hazard are beyond their thought process, hence, the need for you and your colleagues. Your work is far from done.

Observer_Guy1 May 9, 2011 at 7:21 pm

Don: I was being a little of both.

Giving you unused resources from Uncle Sam was never an option – so those don’t count.

My point was that during the crisis, Washington took a long hard look across the economy and bailed out firms according to, not constraints of scarcity, but constraints of political expediency. Washington stopped bailing out not because they ran out of money, but because of adverse public opinion.

I understand that most private firms are, in fact, bound by scarcity, but depending on the makeup of Congress and the Administration, Washington may not be bound by those same constraints.

Chris May 9, 2011 at 8:30 pm

Do you think they will be able to take on unlimited debt?

Or that the cost of borrowing won’t increase?

Who will pay for these debts? Some magic pot of money that doesn’t experience scarcity? Or people, who have a finite (statically) amount of wealth.

Observer_Guy1 May 9, 2011 at 8:50 pm

We already have taken on unlimited debt, in the sense that it cannot be paid back. We owe over $14T. That will never be paid back. Our future liabilities are somewhere on the order of $44T as current law stands.

Borrowing couldn’t be cheaper right now.

Future taxpayers will pay, or the suckers who bought our debt will pay (visa via bankruptcy).

Joshua May 9, 2011 at 9:18 pm

again you could always say that unfunded liabilities = any number given enough time. Or the gap could be closed via increased revenues, or cuts in spending. This 44T number is meaningless.

Joshua May 9, 2011 at 4:29 pm

lender of last resort. very little lost opportunity cost.

Don Boudreaux May 9, 2011 at 4:32 pm

Really? So being a lender of last resort is basically an activity that one can engage in for free (or close to free)? Will you, then, offer to take over this activity from the government?

Joshua May 9, 2011 at 4:46 pm

If I had the ability to, I would probably be a bank. But then, if I were a bank, I would probably be tapped out, being caught up in the financial crisis and all.

Ken May 9, 2011 at 5:26 pm

Joshua,

Doesn’t this comment contradict the statement “lender of last resort. very little lost opportunity cost.”? If not why not? If it’s so hard to be a bank as you claim your latest comment “being caught up in the financial crisis and all”, much less the bank of last resort, then the opportunity costs are by definition NOT “very little”.

Regards,
Ken

Joshua May 9, 2011 at 5:43 pm

I’m not sure. My line of thinking goes this way though: If I were a reserve bank i wouldn’t want to crowd out investment during normal times, but if no firm has the ability to provide liquidity due to a crisis of confidence, i do want to because of the mammoth consequenses of not doing so(dispite the moral hazard).

Equally, if I were a congress, I wouldn’t want to lend money to a failing firm because of the obvious risk and lost opportunity cost, except when no firm has that ability for the same reasons as above, despite the moral hazard and the incresed debt load.

Ken May 9, 2011 at 6:40 pm

Joshua,

“but if no firm has the ability to provide liquidity due to a crisis of confidence, i do want to because of the mammoth consequenses of not doing so”

So you want to purposefully undermine a market system of profits and LOSSES. Without losses, bad decisions don’t mean a whole lot, including in banking.

“if I were a congress, I wouldn’t want to lend money”

1) Congress has to TAKE money to get money; banks get money through voluntary market transactions called deposits. 2) The problem with this statement is that congress definitely insulates itself from ALL losses; why do you think Barney Frank is still talking about Fannie and Freddie intruding further into the housing market after it has been shown that these two agencies bare LOTS of responsibility for the housing meltdown? Is it possible to sue members of congress for the shitty laws they write?

“I wouldn’t want to lend money to a failing firm because of the obvious risk and lost opportunity cost, except when no firm has that ability for the same reasons as above”

This is an illogical statement. When has NO firm had the ability to lend to another? To keep it simple, I answer it for you: never. What happened in the financial crisis was that some, NOT ALL, banks got into trouble using tools created in direct response to government intervention. Which brings up the next point. Implicit in your statement is that it’s possible to for a government to know which company should be bailed out, but private markets are unable to determine this. What information is available to the government that isn’t available to private institutions during these types of crises?

The last financial crisis shows clearly is the failure of the SEC and government as watchdog. Too many bureaucrats and politicians in bed with the banks.

Regards,
Ken

Economiser May 9, 2011 at 6:41 pm

Joshua,

How do you know that no firm had the ability to lend during a “crisis of confidence?” Berkshire Hathaway lent billions of dollars in late 2008. I was buying all the way down, as were many others. Ben Bernanke doesn’t have any special insight to know when to move the levers. All the Fed does is create uncertainty and rob the masses.

Methinks1776 May 9, 2011 at 8:47 pm

Joshua,

There was not crisis of confidence. There was a crisis of we borrowed too damn much.

And, uh, my firm had its best year on record providing liquidity in 2008 – as did many firms like mine. Also, I’m not sure you understand what “liquidity” means (Economiser obviously does).

Methinks1776 May 9, 2011 at 8:49 pm

Ken,

Commercial banks are not an SEC problem. They’re regulated by the Fed. The ratings agencies fall under the SEC and parts of the I-banks. Gotta keep all of your regulatory agencies straight, my friend. It’s a tough job! And now we have the team of czars too. Oy.

Joshua May 9, 2011 at 9:20 pm

OK thanks John Bhoener. “We’re broke” Simple. Authoritative. Bogus.

Ken May 9, 2011 at 10:11 pm

Joshua,

“OK thanks John Bhoener. “We’re broke” Simple. Authoritative. Bogus.”

The government is broke. I’m not sure how you can possibly say trillion dollar deficits somehow makes this claim bogus.

Regards,
Ken

vidyohs May 9, 2011 at 2:32 pm

The federal government being the largest employer in the USA and having an enormous fleet of vehicles; would anyone be surprised if the data shows that the surge in GM sales after the bailout/buyout is vastly dominated by government doing the buying?

Ryan Vann May 9, 2011 at 3:09 pm

Hmm, might be something to look for in the financials.

Rugby1 May 9, 2011 at 3:49 pm

To further your point, if I am not mistaken the government is already the biggest single purchaser of the Volt. So we are in effect continually subsidizing the making of a substandard car, that is far inferior to it’s competitors. Nope, no conflict of interest here, please move along.

Rugby1 May 9, 2011 at 3:50 pm

Sorry I also meant to mention GE is the 2nd biggest buyer. I am not making this up.

Joshua May 9, 2011 at 4:24 pm

Alot of what are called bailouts are merely loans. Didn’t I read that GM just paid back what it was given to bridge it’s restructuring? Heck, the unions were busted are you guys never satisfied? If we had gone down to one domestic automaker the consumer would have suffered as well as the pentagon and thus the tax payer as these guys are involved in defense contracts as well.

kyle8 May 9, 2011 at 4:39 pm

Do you live in fantasy land? The UAW was not “busted” by the bailout, it was rewarded at taxpayer expense.

Share holders were wiped out. And NO, GM did not pay back all of that money.The treasury is still on the hook for the value of loans paid in GM stock. It has to sell off that stock. the UAW has additional loans out against GM itself for it’s pension fund.

In typical Washington slight of hand some of the Tarp funds were paid back while more credit was being extended by the treasury.

Economiser May 9, 2011 at 4:46 pm

If we had gone down to one domestic automaker the consumer would have suffered…

I’ve never purchased a domestic car, so I fail to see the problem.

Don Boudreaux May 9, 2011 at 4:49 pm

What is your evidence that consumers would suffer if there were only one – indeed, not a single – U.S. auto maker?

There’s not a single U.S. producer of television sets. Are American consumers suffering as a consequence?

Emil May 9, 2011 at 4:56 pm

money also has a time value

Joshua May 9, 2011 at 5:22 pm

Money aint earning much these days.

Methinks1776 May 9, 2011 at 5:27 pm

Central planning of interests rates and lending standards can sometimes have that effect.

Joshua May 9, 2011 at 5:48 pm

Or is it the bust that had that effect?

Methinks1776 May 9, 2011 at 9:10 pm

Or is it the bust that had that effect?

What?

The boom rested on credit spreads tightening to unprecedented levels. The bust meant the opposite happened – credit spreads exploded. Interest rates skyrocketed almost overnight.

The Fed assaulted virtually every part of the curve to hammer down interest rates. Low nominal interest rates are a Fed central planning illusion (at least at the short end of the curve – the Fed can’t effectively control the long end of the curve).

Joshua May 9, 2011 at 9:27 pm

Fine. Touche, you are correct on that point. I take your arguments much better when you aren’t spouting sound bites like “there was no crisis of confidence, we borrowed too damn much”. Japan isn’t going to default on their debt at 200% of GDP, America isn’t tied to the euro like greece. We are AAA rated credit worthy, not broke.

Methinks1776 May 9, 2011 at 9:45 pm

Josh, you would do well to refrain from spouting talking points unless you’re sure you’re not completely clueless (which you so clearly are).

If you understand that credit spreads were too tight, then you agree that leverage was too high. The other way to put that is “we borrowed too damn much”. If leverage wasn’t too high (i.e. credit spreads were not too tight), then you have to explain why unprecedented low credit spreads are warranted – especially in light of what happened in the CDS market and the increased credit spreads now. You cannot have it both ways.

You might also take note that part of the reason credit spreads tightened to such ridiculous levels and the financial system almost collapsed is because the very same oligopoly of rating agencies that maintain a AAA rating on the U.S. now assigned that same rating to utter trash. So, you understand how much that means to me, right?

Joshua May 9, 2011 at 9:55 pm

If you were refering to consumers (and firms) rather than the government, then yes of course we borrowed too damn much. And, a lower deficit and debt would always be preferable to a higher one, but considering the loss of property tax, income taxes, sales taxes, and other revenue, running deficits at this time is to be sort of expected. We will have time to reduce deficits and pay down debt in the medium to longer term.

Methinks1776 May 9, 2011 at 9:58 pm

Don’t change the subject. I’m not talking about deficits and neither were you.

I responded to your inane comment that we had a “crisis of confidence”. Prove it.

Joshua May 9, 2011 at 10:12 pm

The financial crisis was just that. A crisis of confidence. Banks werent lending to one another because each was worried about the solvency of the next. I’m sure you know better than I and in much detail.

Methinks1776 May 9, 2011 at 10:36 pm

You seem to understand that you’re wrong, but you cling to your idiotic statement like a life saver. You’re beginning to sound like a fanatic: Someone who redoubles his efforts after forgetting his aim (actually, so does Ben Bernanke).

Why did banks shy away from lending to each other in the repo market? Because no bank was confident that the bank it was lending to did not lend too cheaply and too loosely.

Now, is that a “crisis of confidence” or an “oops. We overlent and overborrowed and now we can’t tell which of us is about to collapse because of it.”? The problem wasn’t that banks didn’t want to lend to each other. The REASON for that hesitancy was the problem. That reason? I won’t repeat it.

Methinks1776 May 9, 2011 at 10:38 pm

“Because no bank was confident that the bank it was lending to did not lend too cheaply and too loosely.”

Or borrowed too much (related).

Joshua May 10, 2011 at 12:36 am

If there is any central planning going on, it’s wall st. doing the planning because the Fed is an appendage of the financial industry, and I’d bet by your lingo and your politics that you, methinks, are in that racket, no?. So why all the complaints? The Fed probably saved your job and you’re are in total denial about it, too worried about your crappy bond yields and lousy investment choices. It’s better than what would have happened. If we have to have central planning, it should at least be in the hands of congress. Maybe Ron Paul is on to something.

Methinks1776 May 10, 2011 at 8:49 am

So, now you’ve trained your vast reserve of drooling ignorance to foaming at the mouth ad hominem. Super.

Ken May 9, 2011 at 5:34 pm

Joshua,

“Didn’t I read that GM just paid back what it was given to bridge it’s restructuring?”

Yes, GM did make that claim. They used unspent TARP money to pay off their loans. They used money the government borrowed to pay for money borrowed from the government. In other words, they lied to the American public.

Regards,
Ken

Joshua May 9, 2011 at 5:46 pm

But, they are now a going concern, profitable, with new shareholders, bondholders, and a big payroll. I don’t know if they are using their profits to pay loans back or not, but with time they certainly could.

Ken May 9, 2011 at 6:12 pm

Joshua,

“But, they are now a going concern, profitable, with new shareholders, bondholders, and a big payroll.”

Which brings us back to “that which is unseen is as real as that which even the most myopic pundits manage to spy.

Economically literate opponents of the Detroit bailout never denied that pumping hundreds of millions of taxpayer dollars into Detroit automakers would restore those companies to health. Instead, they argued, first, that bailing out Detroit takes resources from other valuable uses.”

“I don’t know if they are using their profits to pay loans back or not, but with time they certainly could.”

It matters whether or not they were using profits or free money from the gov to pay off loans. Acting as if it doesn’t means you don’t really understand what economics is about. If I rolled over a credit card from Wells Fargo to a card I had with Sun Trust, then claimed that I paid off my credit card debt would you take me seriously as a businessperson?

Also, how can you be so certain that “with time they certainly could”? Didn’t they have enough time in the past to create a profitable company, rather than run the company into the ground, then lobby for government money?

Regards,
Ken

crossofcrimson May 10, 2011 at 1:46 pm

“Alot of what are called bailouts are merely loans.”

That’s a somewhat interesting point. It would more interesting if time wasn’t a factor regarding the cost of money.

Chucklehead May 9, 2011 at 4:25 pm

What is the most likely outcome had the government not stepped in. Most GM and Chrysler plants would close. Ford would increase sales as a result along with Toyota, Honda, Subaru, Hyundai. Some investor group would have picked up a few GM product lines, started say Cadillac Motors and continued production on the few profitable lines under new non-union contracts. Some redundant plant and equipment would be sold to other manufacturers to increase their production. Bondholders would get fifty cents on the dollar haircut. Thousands of union workers would be laid off, pensions would be turned over to the pension benefit guarantee corp, which would go bust and require a bailout of tens of billions of dollars. Union contracts broken, and warranties left void.Why would this be a good thing?
Because, much like the call to dismember and kill Fannie and Freddie now, the would be a similar call to kill the Pension Benefit Guarantee Corp. This would result in the death of defined benefit pensions which are all ponzi schemes and will cost us all trillions in the end. This will make the bailout of GM and Fannie and Freddie seem cheep by comparison.
This combined with future lessons to unions on the limits of pay and work rule costs, buyers of being wary to buy from a company that is negligent of its own survival, suppliers of selling to such potential deadbeats without the price premium commensurate with such risk, and government officials for using taxpayer money to buy political favors.
There is more, I am sure, but my gray mater just quit.

whotrustedus May 9, 2011 at 6:07 pm

pretty brutal but I like it!

nailheadtom May 9, 2011 at 9:25 pm

Over 2000 different US automobile manufacturers have disappeared since the introduction of the passenger car. You may have observed that marques such as the Hubmobile, Cord, Auburn, Studebaker, Henry J, DeSoto, Packard and Hudson can now only be found in museums and at antique car shows. The failure of these businesses doesn’t seem to have had a lasting negative effect on the American economy or society. And Americans seem to have little problem getting from point A to point B by personal transport.

brotio May 10, 2011 at 6:13 pm

*like*

DaveyNC May 9, 2011 at 10:43 pm

I haven’t read Dionne’s piece, but I expect that like all pundits and particularly those with a leftward bent, he has declared the GM bailout a success without having calculated an ROI. ROIs are all mathy and not as fun to write about as simply declaring a political action to be a success.

russell May 10, 2011 at 7:34 am

I don’t know what Dionne’s children do for a living, but I’d like to see one of them rack up $50k in credit card charges, and then ask Daddy to “bail them out” by paying the bill. I wonder if Mr. Dionne would see any moral hazard in that scenario.

Heinzman May 10, 2011 at 8:22 pm

You wrote “By signaling to big corporations that government stands ready to pay the tab for the consequences of their poor decisions, big corporations will more likely make poor decisions in the future”. Let’s take a gander at the wonderful things that happened to the “Corporation”. The assets were stolen from the stock holders by the government and the secured creditor’s contracts set aside. The executive suite was cleared out and not paid their deferred salary. Those in management lost most of their pensions. Not so the union members they get theirs from the government. Seems to me the only ones signaled “that government stands ready to pay the tab for the consequences of their poor decisions” were the unions. Why worry about excessive wage and fringe benefit costs driving a corporation out of business the “government stands ready to pay the tab for the consequences of their poor decisions”.

Dan May 11, 2011 at 2:46 am

GM success is predicated on continual govt support. From intimidating those who held shares of GM and were legally due portions of their investment back (which the few investors left that wanted their legal cuts back after bankruptcy) to billions in bailout loans ( THEN GOVT REMOVED GM FROM HAVING TO PAY TAXES ON THEIR PROFITS OVER THE NEXT TWENTY YEARS AS A BACKDOOR WAY OF ELIMINATING TENS OF BILLIONS THAT THEY WOULD OWE) to priority fleet purchases to govt disallowing GM to reduce overhead by moving out of costly towers in Detroit to govt disallowing of closure of assembly plans that were not profitable (Barney Franks district) to sycophant media not properly disclosing how GM recent quarterly profits were obtained ( HINT: IT WASN’T DUE TO CAR SALES! BUT SALE OF SUBSIDIARIES LIKE DELPHI)…………… And I could go on………. GM success has been a costly example of govt overreach and malfeasance…….. And still GM is unlikely to remain independently successful without govt assistance. What a boondoggle.

Dan May 11, 2011 at 2:49 am

As for me and my family, we shall have an embargo on GM products.

brotio May 11, 2011 at 1:02 pm

Dan,

Do you have links for the statements here? I get in discussions all the time about the sheer stupidity of the Detroit bailout. You’ve added valuable ammunition.

I can do the research myself, but I’ll be lazy if you have the links handy! :)

Dan May 12, 2011 at 6:53 pm

These have all been in the WSJ, CATO, Fox news,…….etc.,… Over the past 5 yrs. I remember them like I remember to put on underwear. I do not have the links on hand, sorry.
These ‘ statements’ were public info and forgotten by the public.
Something I will have to learn to do more often is save links over the years to these revelations. Just like how GM had announced, via commercials, about paying back $10billion in loans, only to discover that the loan was paid back with another govt loan as another posted on this blog earlier. I remember that quite distinctly.

There were several bondholders who were holding out in 2009. They had even spoke out with their lawyer about the illegality of govt trying to intervene……. Then, over a weekend….. Can’t remember what month, the very lawyer went on the Andrew Napolitano radio show to say that his client is taking the govt deal and has nothing more to say. The lawyer could only say that his client would only release that statement and that the lawyer was befuddled. Judge Napolitano tried to get more out of him, but the lawyer informed he was legally obligated to respect the wishes of his client.

Dan May 12, 2011 at 6:54 pm

Intimidation was the reason.

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