Browsing the blog archives for September, 2012.

More on GM

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I’ve received some interesting water cooler and email comments after my recent blog post and appearances with Andrew Wilkow on his radio (Sirius) and TV (The Blaze) shows. I do my best to be fair to those with different points of view, so I will address the 3 best arguments I got about the GM situation:

1. “Nobody likes the bailout, but it was better than letting GM go under.” This statement is both false and a bit deceptive. GM would not have gone under without a government bailout (or “bridge loan” as the administration likes to call it). The company would have entered a standard bankruptcy that would have enabled its managers to renegotiate terms with labor and suppliers. This might be a bitter pill for some to swallow, but it was (and still is) the only way that GM can survive on its own over the long term. The government has lost billions, GM hasn’t recovered, and there’s a good chance that the company will find itself in the same predicament in the next few years.

2. “We would have lost a million jobs without the bailout.” The number here changes depending on who’s making the claim, but auto manufacturing employs less than 800,000 in the U.S. (according the the BLS). The assumption here is that IF GM CLOSED (not true, see #1) the U.S. economy would lose the sales of all GM vehicles. This is simply untrue. Would-be Chevy purchasers would still need a car if Chevys were no longer available, so other manufacturers would pick up the slack. It is true that some jobs would be lost, but the actual number depends on how you do the math and it would be nowhere close to a million. Besides, if the US incurs a $50 billion loss on the bailout and 100,000 jobs were saved, the cost per job would be $500K. It’s difficult to defend this even with Keynesian logic.

3. “Other countries subsidize their carmakers, so why can’t we?” It is certainly true that countries like China subsidize many of their own manufacturers, but why should we mimic our socialist competitors?Every dollar spent propping up an industry must come from private sector sooner or later. Besides, the Obama Administration recently filed suit against China in the WTO claiming that its government unfairly subsidizes Chinese carmakers. Such a suit implies that the President opposes the notion of subsidies, yet he vigorously defends the government’s bailout and ongoing control of GM.

I’ve discovered that many who disagree with my posts tend to communicate by email or other means instead of sharing their views on the blog. If you’d like to defend the GM bailout, post your comments here. I’m still waiting for a sound argument.

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The GM Economy

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Several weeks ago President Obama told us that he wanted to do for the rest of the country in hi second term what he did for GM and the auto industry in his first term. Indeed, a close inspection of Washington’s intervention into the auto industry can tell us a lot about his economic worldview.

When Obama was elected President, GM was headed for bankruptcy. It was not facing imminent dissolution, however, and was not in need of a savior. Rather, GM needed bankruptcy protection to facilitate the type of real, long-term reorganization required to make it (truly) profitable again. Instead of allowing this tested and established process to take place, the President stepped in with billions of taxpayer funds to “rescue” GM in the ostensible interest of jobs and economic prosperity. At the time, he claimed that GM was a special case and that this type of economic intervention was the exception, not the rule.

The details surrounding GM are well chronicled. Suffice to say that after redistributing a significant chunk of the firm’s ownership to the UAW, the Obama administration has done all it can to prop up the behemoth. From the original “loan” that will never be fully repaid, to a cash-for-clunkers program that subsidized new car purchases, to long-term tax credits against future GM profits, to a $7500 consumer tax credit for Americans who buy a Volt, Obama’s is committed to “success” at GM at any cost. He’s even pressing to increase the tax credit to $10,000.

But how has GM fared since the bailout? The firm has cut jobs in the US, and according to its own projections, most new production jobs will be created in other countries. Chevy Volts are not selling as well as originally hyped. Quality concerns—including the battery fires—and a hefty price tag in excess of 40K have taken a toll. The company recently halted production to avoid a glut at dealerships and Reuters even reported that GM spends $89K to produce each Volt. While the actual figure might be a bit lower, the Volt is clearly a losing proposition made to appear viable by a massive influx of taxpayer subsidies. As I stated in 2009, GM will “succeed” as long as Obama is in office. There’s too much at stake politically for it to be allowed to fail, and Washington has the power of the printing press to ensure that it never runs short on cash.

So what does the GM experience tell us about Obama’s economic worldview? In general, there are 2 fundamental economic visions. Capitalism—or free enterprise—respects the rights of individuals to engage in business as producers, consumers, or laborers, as they see fit. Marxism—or socialism—rejects a strong affirmation of personal property rights (except for the ruling elite) and seeks to overcome the alleged inequalities rendered by free enterprise through central economic planning. Capitalists need a small, but effective government to protect individual liberty. Socialists need a large, intrusive government to protect people from themselves.

While President Obama is not a pure Marxist, his economic philosophy clearly leans in that direction. But the GM experience gives us a deeper insight. The President departs from pure Marxism by recognizing the need for a productive private sector. In a socialist nation, the government owns and is responsible for all means of production. President Obama does not want that responsibility, at least not in all industries. Moreover, he needs a private sector—big pharma, the oil producers, evil bankers, and the like—to blame for the economic ills his heavy-handed intervention creates.

But the President’s worldview is tainted with fascism as well. Whereas Marxists control production directly by taking it over from the private sector, fascists control it indirectly through heavy regulation. Under fascism, private enterprises are “free” to operate as long as they take their cues from government. The same leaders who seek political gain by associating business with greed and excess also promote programs that benefit those that “partner” with government “voluntarily.” This soft form of fascism is commonly called crony capitalism. If widespread, it takes a heavy toll on the economy, as we have already seen.

To be fair, Romney and the Republicans have dabbled with both soft socialism and soft Marxism as well. That’s a topic for another day, although it’s safe to say that the President is operating on an entirely different level. The key point here, as the GM experience teaches us, is that President Obama is not merely seeking to sand off the alleged rough edges of capitalism. He is seeking a complete transformation of the economy, just as he promised.

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Are you better off?

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In 1980 Ronald Reagan asked a question that struck a chord with many voters: Are you better off today than you were four years ago? (click on the youtube link for a classic Reagan delivery)

http://www.youtube.com/watch?v=loBe0WXtts8

Mitt Romney is asking the same question today, but the Obama camp is putting a different spin on the answer. Insisting that the nation is better shape today than when he first took office is a tough sell, so the President is playing the class card. Rather than compare your situation today to four years ago, you are really being told to compare your change in situation to that of your wealthy neighbor. You might be struggling–the narrative goes–but the rich seem to be doing OK. Your vote for Obama might not help your actual predicament, but it will help your relative situation by redistributing your neighbor’s wealth. The conservatives who seem to notice this sleight-of-hand reject it as folly, but some truth is being overlooked. Could it be that many Americans believe they are better off today, and if so, why?

Class warfare appeals to a carnal instinct in all of us. We like to think that we deserve a little more than the next guy, so it’s tempting to blame our economic shortcomings on “the system,” better known as free enterprise or capitalism. Besides, the “rich” always seem to be doing OK, regardless of economic circumstances.

Strict socialists reject capitalism in its entirety, but neo-Marxists and fascists recognize some value in private markets. Rather than eliminate them altogether, they seek to resolve the alleged inefficiencies that emanate from capitalism through various types of regulation and control. Even if we assume a modicum of good intentions, this government intrusion inevitably creates unintended consequences that worsen the situation. The failed stimulus, the GM bailout, and Obamacare are examples of legislation purported to promote economic growth but have only resulted in greater debt, cronyism, and government dependency.

But could the case be made that the policies and political philosophy that fosters the current economic malaise has actually helped certain classes of Americans? Doesn’t wealth redistribution benefit the poor? The answer to both questions, unfortunately, is a qualified yes, at least in the short run. This is a challenge for those who wish to unseat the President, many of whom don’t recognize this reality. As Keynes chastised those who opposed him, “in the long run, we are all dead.”

Many Americans are caught up in the short run as well, putting vacations on a credit card and depending almost completely on programs like Social Security and Medicare in their senior years. Unlike those evaluating Reagan vs. Carter 32 years ago, many of today’s voters are more likely to reject sound economic arguments for reductions in the size and scope of government, and tax cuts for all income categories. They don’t see the coming crisis associated with $16 trillion of national debt and a society addicted to government programs. We won’t win over all of the detractors, but we must persuade some of them that liberty and free enterprise are the only long term solution to our economic stagnation. We only have 2 months to do it.

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