Perhaps filled with the spirit of giving, Washington has announced that it’s giving the Big Three just what it wanted for Christmas. Whether or not the bailout is a good idea was debated by Peter Schiff and Stephen Leeb recently on CNN. Schiff gives the basic Austrian argument that such a subsidy can come to no good, while Leeb insists we can’t know whether we’re going to get wet until we step out into the rain.
The case against subsidies for failing business was given succinctly by Henry Hazlitt in Economics in One Lesson:
It is obvious in the case of a subsidy that the taxpayers must lose precisely as much as the industry gains. They must pay part of the taxes that are used to support the X industry. And consumers, because they are taxed to support the X industry will have that much less income left with which to buy other things. The result must be that other industries on the average must be smaller than otherwise in order that the X industry may be larger.
So the favored industry is merely a beneficiary of a wealth transfer. But its not just that they now get a bigger piece of the pie: such transfers actually contribute to a net loss of wealth, because capital and labor are driven out of industries in which they are more efficiently employed to be devoted to an industry in which they are less efficiently employed. Less wealth is created.
Leeb and other economic know-nothings argue that we should allow the market to operate until things go wrong, at which time there is an “emergency” which demands government intervention, an inconsistent approach by so-called “free market” advocates that has been rightly scorned by Mother Jones as a “clap on/clap off” attitude toward the market. We certainly can’t “do nothing”, they say, and who knows, the industry might clean up its act in a couple years. But the only thing encouraging efficiency in the first place is the profit/loss incentive of a free market. Subsidies insulate an industry from such pressures. Subsidies create incentives not to be more efficient (which would eliminate arguments for further subsidy). Even if it were possible that management of an industry could be made more efficient by government fiat, wouldn’t this be an argument for nationalization, not subsidy?
Hazlitt asks us to consider what would have happened if we had subsidized, not the industry now in crisis, but the competitors it had previously bested through innovation.
If we had tried to keep the horse-and-buggy trade artificially alive we should have slowed down the growth of the automobile industry and all the trades dependent on it. We should have lowered the production of wealth and retarded economic and scientific progress.
Incidentally, if WWII spending pulled us out of the Great Depression, as Leeb and others argue, why not kill two birds with one stone and send unemployed auto-workers to Iraq and Afghanistan? (CEO’s first!)
Despite the claims that they are necessitated by emergency situations, government interventions tend to become institutionalized, a fact effectively satirized by this bit from the Onion:
But America needs the money-hole!
A more serious look at this particular money-hole is given in a recent interview with economist Joe Salerno by Lew Rockwell, The Auto Bailout and Other Crimes.
There is a debate in the libertarian blogosphere on who is the source of the auto industry’s inefficiency, its management or the excessive demands of unions. To nobody’s surprise, left-libertarians attribute it largely to the former, and right-libertarians the latter. J.H. Heubert and Walter Block write:
Unions are like a tapeworm on the economy, sucking sustenance out of businesses. The entire rust belt is a result of unions demanding wages higher than worker productivity. The present problems of the Detroit Three (Ford, Chrysler, General Motors) are mainly due to their foolishness in not withstanding the unwarranted demands of the United Auto Workers.
To which Kevin Carson retorts:
Replace “unions” and “wages” with “CEOs” and “salaries,” and you get a pretty accurate assessment of the situation. The present problems of the Detroit Three, in fact, are mainly due to the mismanagement and pathological management accounting system . . .
Now I’ll admit I’m not very familiar with the economics of the auto industry (I’m a novice in economics in general), but it seems that there’s no reason it can’t be a combination of the two. Without a real competitive situation, we have know way of knowing. But it also seems common sense to me to assume that an institution thus insulated from the market would tend to become top-heavy, and that the fat would naturally tend to accumulate in management (which could very well be union management), which has more leverage to get away with it, rather than labor, which has much less (if only because their inefficiency is much more visible). If that is the case, then, as Roderick T. Long puts it in a recent Cato article:
In a free market, firms would be smaller and less hierarchical, more local and more numerous (and many would probably be employee-owned); prices would be lower and wages higher; and corporate power would be in shambles.