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Now We’re Bailing Out the Auto Companies? Who’s Next?
Soon every poorly-managed and uncompetitive industry will want to line its pockets at the expense of taxpayers.
- Subsidies harm growth by replacing market forces with special-interest politics. There is a reason why nations such as France suffer from slower growth and higher unemployment. When politicians have control of the economy, resources are allocated based on political power and bottom-line economic factors are, at best, secondary. Politicians apparently do not understand that governments never create wealth, they only redistribute it. Every dollar the government spends for bailouts and subsidies first has to be taxed or borrowed from the private sector.
- Subsidies reward companies with the best lobbyists, not the ones with the best products. Every time government expands in size, or seizes new power over the economy, it gives companies and other interest groups an incentive to use more of their resources to play the Washington game of lobbying for unearned wealth. At best, this is a zero-sum game, as any loot obtained by one interest group means fewer resources in the productive sector of the economy. When businesses focus on trying to make money by serving the interests of consumers, by contrast, everyone wins since free markets are based on voluntary exchange.
- Subsidies destroy more jobs than they save. One of the big arguments for bailouts and subsidies is that jobs will be saved. This is true, but only if one ignores the other side of the equation. As noted earlier, governments can only give money to one group of people by first taking it from another group of people. This means either taxes that discourage productive activity or government borrowing that displaces private sector investment. Regardless of how government spending is financed, and the scholarly evidence shows that net effect is to reduce total employment.
- Subsidies entrench incompetent management and myopic unions. American auto companies suffer from self-inflicted problems. There is a bloated and inefficient management structure, which is a problem that will get worse if Detroit gets to stick its collective hands into the pockets of taxpayers. Moreover, unions have behaved in a self-destructive manner, putting companies in the hole by insisting on featherbedding and absurd work rules. Bailouts and subsidies perpetuate these misguided practices.
One of the most perverse arguments for the bailout of auto companies is that politicians already squandered $700 billion on a failed bailout of Wall Street, so it should not be a big deal to give taxpayer funds to General Motors, Ford, and Chrysler. But as our parents probably told us at some point, two wrongs don’t make a right. Just because politicians made one mistake, that is hardly a good reason to travel down the same path — especially when the evidence already indicates that the Wall Street bailout has been a dismal failure. Financial markets have declined and the overall economy has stumbled ever since Treasury Secretary Paulson decided that his friends on Wall Street deserved handouts from the taxpayers. This is hardly a surprise since many people warned that repeating the mistakes made by Japan in the 1990s was going to hurt the economy.
If politicians really want to help the auto industry, they should reduce the burden of government. America’s corporate tax rate is 35 percent, for instance, and rises to nearly 40 percent if state corporate taxes are included. This means the United States has the world’s second-highest corporate tax burden: a rate higher than every single European nation, even welfare states such as France and Germany. The corporate tax rate should be slashed substantially, down to at least 20 percent. This would boost the entire economy and generate substantial new investment. Politicians also could make much-needed changes to regulatory policy and labor policy — reforms that would benefit all companies, not just GM, Ford, and Chrysler.
Some people wonder if America no longer is a good place to manufacture cars, but that is not the right question. After all, Nissan, Toyota, BMW, and Mercedes are among the foreign companies that have been expanding their American production. The problem is that American companies and the United Auto Workers have refused to undergo long-overdue restructuring.
This is why bankruptcy may be the best option. This does not mean the companies disappear. But it does mean that both management and union will be forced to deal with reality and make the changes needed to compete.
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Dan Mitchell is a senior fellow at the Cato Institute and co-author of Global Tax Revolution: The Rise of Tax Competition and the Battle to Defend It
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18 Comments
1. Marc Malone:When you give to beggars, if there are other beggars around, they will flock to you with hands extended. Always they will demand more. Whatever you give them will never be enough.
Nov 3, 2008 - 4:25 am 2. Jarhead91:“Who’s next?” The American taxpayer hopefully.
Marc, You are right. Anyone who has visited the third world knows to never give anything to a beggar if there are other beggars in sight.
At this point the (not so) big 3 are health and welfare companies that sell a few cars on the side to raise cash – like a church bake sale. They have never successfully stood up the UAW. Until they do, their declines will continue.
Nov 3, 2008 - 5:47 am 3. RE:Is anybody surprised?
The incompetence of our government is extremely depressing. And Obama promises even more government intervention! Great. Just Great.
Nov 3, 2008 - 6:06 am 4. cedarford:Bailouts and subsidies are bad policy.
Yes, bailouts and subsidies are bad policy, but the basic fact is that we are outsourcing the guts of an advanced nation to overseas competitors because of blind adherence to dogma of free trade where the rules and circumstances are fundamentally against the US worker and growingly, the US professional.
We have a trillion-dollar trade deficit and mass unemployment within the lower-skilled US population largely because foreigners and illegals can out-compete us on labor cost, freedom from environmental, legal, health care costs.
We lost our lead in 18 of 20 industries we used to dominate, and 16 of the 25 major technological areas (we never had a lead in 3 technologies) not because the American citizen suddenly got stupid and uncompetitive – but because we had built a better life and employment compensation structure than most.
(and for most of our history, with barriers that allowed us to develop industries and skills that would have never come to us if we had had “fair competition” with established European and to a lesser extent Asian competitors)
And the way we get competitive again is to either change the circumstances and rules rigged against us that kill us on “unfettered” free trade – or we get there by “levellizing” the citizen’s compensation to match overseas competitors who have similar intelligence and ability to do jobs at all skill levels. Levellized means the Chinese and Indian worker and professional average hourly compensation goes from 5.50 to 9 bucks, and the average American compensation goes from 28 bucks down to 11.50 to 12 an hour (outside the investor class and those protected by jobs that skirt “unfettered free trade” by requiring US citizenship (government jobs, security, lawyers) to make their particular “product”.
It is important to get past delusions:
1. Slogans like “the American worker can out produce and out-compete anyone” have proven false unless you exclude cost per unit of work produced in most US jobs. Which in the real world, no one does.
2. Suggesting that “education, more teachers, and retraining” will make us competitive again ignores many 3rd World nations have cheaper and equally, if not more succesful education systems cranking out workers….and the American edge is only in a small, high-end of elite jobs.
3. The “miracle cure” approach is no longer credible. Suggesting that miracle new High Technology will take care of American needs with new exciting “nanotech, green energy solutions” is about as realistic as saying we secured our future by great jobs that stayed in America from past “technology miracles” like electronics, Computer compenents, software programming, telecomm factories making fiber optics & cell phones. All that went overseas, for the most part.
At an investor summit, I heard from VC leaders asked about nanotech, “green energy”, and “unequalled American creativity” being a solution for all the jobs disappearing due to free trade.
A. Nanotech will be built in Japan, Korea, German-run plants in E Europe, China – without
the exercise of opening then closing factories in the US. Which were largely a bad historical investment play as investor losses for cell phones, chips, computer compenents, and flat screen components US manufacturing happened as soon as technology could migrate and cheaper product obtained outside America.
B. We don’t even lead in “green energy technology”. And the countries that do, have largely outsourced the environmentally unfriendly manufacturing of things like batteries, solar cells to 3rd world ratholes – and only diminished their fossil fuel use by moving energy-intensive basic material goods manufacture (common chemicals, cement, steel, aluminum) to developing countries not ashamed to use more coal.
C. To the extent that America had “unparalleled creativity value” that value was mostly captured in US production companies in the past. Most creativity is not protectable as intellectual property, is stolen by countries that ignore our laws that we wish to not antagonize because Ruling Elites see other benefits with them worth more than pushing IP, or it is given away as a condition of a country like China allowing wealthy owners to get a nice cut of the production and export action ..
D. The VC people said great creativity only benefits a small circle – it does not translate generally into significant benefits for the masses – unless a creative entrepreneur gets in early on a technology and manages to erect barriers to entry to freeze out other American competitors and foreign ones (Gates, JD Rockefeller).
One VC lady from McKinsey Associates gave an example of both the vitality of creativity and the mistake of thinking it translates into “a rising tide that lifts all boats”.
In the 60s and 70s, the Italians revolutionized fashion, industrial design, art – in a wave of tremendous creativity. It made many “creators” wealthy, but did little to nothing for the average Italian worker – who were legion while the “creative element” was tiny in comparison.
In the US, the longer innovation and creativity were kept “in house” – the greater the benefit to Americans of it. But now, like capital and technology, creativity and innovation are fungible – what the Italians did was lost to foreign firms using their own workers – who expressed in products the US, Japan, Brazil managed to mass produce in the 60s and 70s with almost no benefit of the “value” of Brazilian shoes, Italian-style suits made in North Carolina (in the pre-China textile dominace days), or Japanese cars with 100 Italian-inspired creative, innovative elements thrown in to sticker price. The Italians got a penny to a dollar or less, of the value of it’s creativity and innovation, realized elsewhere.
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My own read is that 1 trillion trade deficits are untenable.
Nov 3, 2008 - 8:14 am 5. Chuckt:That we must preserve basic US industries and retain semi-skilled jobs for those that will never get PhDs in “RNA-directed protein-folding as applied in a nanotech matrix.” so we start with some knowledge base and skills to resume building cars, electronic devices, our own cloths – again. Rather than face a future where we cannot compete because we have no ideas or means to make the stuff we used to make that Americans will always need..
That unfettered free trade has killed us and since we do not want a catastrophic drop in out standard of living by levelizing wages so Americans can compete against 2 billion excess people capable of good work elsewhere, and we don’t want to end environmental laws or end health care for workers or see 2 million surplus N Koreans applying for police jobs in the USA at a tenth of native’s cost – we need strongly modified, somewhat protectionist rules established for trade, who produces what we buy in our market, and no flood of people into the US or by outsourcing even service sector and white collar jobs – to wreck labor markets. Most Americans are not owners of companies or distribution channels that reap most of the benefit of “free trade, outsourcing, illegal workers”. Or in professions that have “rules” against competitors from foreign lands “eating their lunch” like teachers, lawyers, America’s “security heroes who protect us all..”.
This is a great piece; your point is dead on. I recently ate lunch with a high muckety-muck at a local paving company (guess where most of their business comes from – for those of you educated in government schools, I’ll give you a hint: it’s not the private sector) and he tried to tell me that high taxes are great b/c they provide jobs at companies like his. The problem, as Mitchell so eloquently points out here, is that when money is transferred from the private sector to the public sector through draconian tax rates, there’s almost always a net reduction in total employment. Private money that manages to escape government confiscation can and should be used to start and build businesses, i.e. the small entrepreneur, the father/son business, the fellow (I use this term generically, i.e. gender neutral) who comes up with a better mousetrap, etc. It’s no wonder Detroit is in trouble, due, in part, to what you point out: failure of the American manufacturers & the UAW to restructure, PLUS, their failure to build a quality product, although that has improved somewhat in recent years. Marc is right- handouts do nothing to incentivize folks, except make them look for ways to get more and more for nothing.
Nov 3, 2008 - 8:46 am 6. Zane:Who’s next? The MSM.
Nov 3, 2008 - 8:53 am 7. Ex-fetus:I opened up a lemonaide stand yesterday. I haven’t made a million yet, so obviously I need a bailout.
Nov 3, 2008 - 9:12 am 8. Jarhead91:cedarford: Do a web search for corporate tax rates around the world. The U.S. is the second highest in the world – #1 in high tax states like CA and NY. Of course work and investments are going to places that are less heavily taxed.
More or different taxes and regulations aren’t the answer – less regulation, holding unions to standards and far lower taxes are the answer.
Nov 3, 2008 - 10:06 am 9. njcommuter:What’s needed is a structural cure. Here it is: Make the unions responsible for health care and retirement benefits, and make them separate line items on the pay stub.
Nov 3, 2008 - 10:42 am 10. Edward A.:We can all thank G W Bush. Could he be responsible for a new UUSA? (United Socialist States of America) And, I smile when we hear McCain/Palin call Obama the socialist…what about their very own Bush?
Nov 3, 2008 - 10:53 am 11. Chuckt:Hey ex-fetus: when you get your bailout, book yourself a well-deserved $400K spa vacation and go get pampered. You failed, so you earned that bailout!
Nov 3, 2008 - 1:41 pm 12. seguin:I don’t like it principle, but when you consider the regulatory crap that has been thrown at GM for years, as well as the ridiculous Union BS and assorted other issues that good governance could have ameliorated – for a recent example look at the increased CAFE standards. 35 mpg is insane for a company that does a brisk business in trucks and commercial vehicles.
I’m not saying GM hasn’t had some poor management over the years. Ed Cole rushed the Vega into production before the Nikasil process and rustproofing processes were ready and Rick Wagoner gave far too many concessions to the Unions when times were good in the nineties.
But the government is far from blameless and I’m buying GM stock to put weight behind my assertion, as well as a GM automobile as soon as I’m able.
Nov 3, 2008 - 6:13 pm 13. TBoneJones:Time is short. Only a few more Months for Bush and the bankers to suck the life blood out of us. Can you imagine how proud his Dad must be? (He only managed to centralize a few smaller banks) Also, a special thanks to the Republicans who voted for him. TWICE. And, the Republicans who backed him on all the ridicules laws/acts/bills he rammed through/signed.
Nov 4, 2008 - 12:50 am 14. Someone75:Actually, every report I read said that we are NOT bailing out GM. Is this article just WAY behind in the news stream, or . . . well, I guess there’s no excuse.
The 700 billion dollars should not be like grant money that anyone can apply for. American auto companies had their chance, and they blew it.
Nov 4, 2008 - 8:22 am 15. jaw dropper:seguin writes: “I’m buying GM stock to put weight behind my assertion, as well as a GM automobile as soon as I’m able.”
That qualifies you as the stupidest person in the room. GM stock is worthless and GM automobiles are worthlesser.
Nov 5, 2008 - 11:03 pm 16. Ken:The auto industry will get what they deserve.
Nov 6, 2008 - 4:52 am 17. James Jardine:I watched the governor of Michigan on election night refer to “The Grand Bargain” between the Obama administration and the auto industry, and I have heard Obama make veiled references to the conditions that will be attached to any bailout. This “bargain” will be about the manufacture of the “right” kind of cars, mainly Hybrids, electric cars and of course a rise in the CAFE (Corporate Average Fuel Economy) standards.
The results of this government interference will leave consumers with poor choices for new vehicles and leave the auto industry needing another bailout. Here’s the nut shell version on why this is a bad idea.
Hybrids are no more than “disposable vehicles“. The cost of replacing the batteries after three years far out weighs the value of the car. There are some that believe that the technology will catch up before they have to replace the batteries and that the increase demand will lower the price. This is the same logic that was used in the sub-prime housing debacle and we all know how that has turned out.
Is America ready to purchase a vehicle that can travel only forty miles before it needs a recharge? Perhaps for some this is a viable alternative, but for most of us the limitations make this alternative unworkable.
The unrealistic rise in the CAFÉ standards will leave us with plastic and tin cans on four wheels that no one will want to buy.
So, the government will coerce the auto industry into making cars no one will buy and the auto industry will wind up bankrupt again.
You are right on Ken. Also remeber that GM destroyed an earlier electric car than had some chance of success. I see the future for transport going back to the turn of the last century, with boutique builder supplying specialized vehicle which we drive longer. Comapnies such as Tesla Corp and their electric vehicle. American have wated the best years of their country. here in Australia, cars have always been expensive and we drive them longer. We have 2 Volvo’s which have each done over 300,000 KMS and which will do at leat another 100,00 before we even think of replcacing them.
Nov 6, 2008 - 4:57 pm 18. Herb Thacker:My uncle had a 34 Chev which he drove up until the late 1960’s. Dad had a chev 56 which he drove for 19years, so I can see people buying a boutique car which runs on hydrogen or similar fuel and driving it for a very long time.
Who started the bail outs? Sen. (Presidential Elect) Obama hasn’t been in the Oval Office yet, so it must be the “chosen son of Texas” who started this BS. Once Bush is gone in 74 days he and Cheney can take their Phillips Stocks out of the trust fund they had to put them in and bail out a few companies they ruined with their economical plan to balance the budget, give everyone a tax break (money has to come from somewhere), de-regulate all the things they could and let them spend like was no tomorrow, driving the National Debt so far in the hole we ended up in China borrowing money. If China was to call in the debt we owe them right now, we couldn’t pay it. I don’t blame GM, Ford or any other Auto Company for getting in line for the next 74 days for a hand out. After that, Bank Closed!!
Nov 6, 2008 - 7:22 pm