Posted by Jim Lindgren: A Simple Argument Against the Auto Bailout: A Bailout Would Destroy Jobs. http://volokh.com/archives/archive_2008_11_16-2008_11_22.shtml#1227141469
I have hesitated writing about the GM bailout for two reasons. First, I like GM cars; I bought two of them in March, and every car I�ve ever bought was a GM car. Second, a professor with tenure should be somewhat circumspect in writing about the jobs of people who do not have the protections that we have. But in watching CNBC debates on the Auto Bailout, I have been frustrated by the arguments of those who favor bailouts that government largesse will on balance lead to more employment, rather than less. Those inclined against the bailout seem mostly to say, �When will the handouts end?� Yet the best way to meet the �jobs argument� is with another jobs argument. Making bad, uneconomic investments in failing industries does not, on balance, preserve jobs; it tends to destroy more jobs � and more good jobs � than it saves. If you give money to failing industries to save jobs, then you are probably taking even more jobs away from other industries who would hire or retain workers but for their higher expenses. In essence, throwing money down a hole may preserve jobs in the short term but should lose jobs in the medium and long term. If you pay for an auto bailout with today�s tax money, then over the next couple years you are taking jobs away from lots of people currently working. If, on the other hand, you pay for today�s auto bailout with an increased deficit, then lots of future workers will be unemployed or take worse jobs in order to pay for today�s auto workers. Again, you would be taking jobs away from lots of people (mostly in the future) to preserve the jobs of auto workers and their suppliers today. Heavily unionized businesses usually have trouble competing with non-unionized businesses. Unions are successful in getting above-market wages and benefits, which makes it difficult for the businesses to compete. In the auto industry, there are many more dealerships than necessary. And, according to Larry Kudlow, the average compensation and benefit rate for auto workers in Detroit is $72 an hour, compared to $44 an hour for foreign car workers at US plants. Even if two of the three Detroit automakers were to go out of business, most of their workers and the workers for their suppliers would be able to get some sort of job. That the jobs they would get would pay a lot less suggests just how much they are overpaid now. If, General Motors has become a health and pension plan that makes cars on the side � in other words, unions pressured bad management to make promises they couldn�t keep � then inducing GM to go out of business should be on balance good for the economy. Any government bailout should go to the Federal Pension Benefit Guarantee Corporation, to provide money to cover partial pensions for the employees of companies in the bankruptcies certain to come. As with so many problems, it is unlikely that GM would have made such foolish deals if the government had not forced it to bargain with striking workers, rather than simply replace them. As with mortgages in the banking industry, the federal government pressured businesses to make deals that were economically bad for the businesses involved. If an industry is contracting and there is an oversupply of productive capacity, then the worst thing we could do is prop up that industry by taking jobs away from the healthier portions of the economy (including better run automakers). If government planners really were a lot smarter and better planners than business people (they aren�t), then the government�s strategy should be to try to drive bad businesses out of business quicker, not try to destroy the healthy companies by propping up the dying companies. The argument that the auto unions and the auto executives have already made sufficient givebacks is not credible. And as the Congressmen pointed out, the Detroit executives could have flown to Washington on commercial flights (in first class), instead of in private planes. If a business is failing, union auto wages should be priced well BELOW what nonunion auto workers make, not well ABOVE what nonunion workers make. So until the unions have given back everything above the market value of their labor, they haven�t given back nearly enough. I don�t know enough about what goes into the $72 compensation rate, but perhaps the parties should consider having all current employees, both management and union workers, take a 50% pay cut. The only job-saving justification I can think of for a Detroit bailout is if the problem were only temporary; then destroying jobs might be imprudent. If Detroit�s business model were strong, if there were little or no overcapacity, and if Detroit�s problems were only a temporary, then one could reasonably think that a bailout might be efficient. But there is no temporary market failure here to redress. Detroit�s problems have been here since the late 1970s. Anyone who thinks that giving money to a company losing 2-3 billion dollars a month -- with overpaid workers and overpaid executives � would usually save jobs, rather than lose them, doesn�t understand economics.
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