In my post supporting Paul Krugman’s dim view of the proposed (and now imperiled) Congressional bailout of the Big Albeit Imploding Three (BAIT) auto makers, I posed questions which are likely destined for the ash can of the rhetorical:
How could the math of the bailout possibly make sense? If there are really 3 million jobs in jeopardy, how does $5k per job really get a horribly unprofitable and competitively disadvantaged industry out of trouble? Wouldn’t it make more sense to spend that (and regretfully, probably a lot more) on retraining displaced workers up and down the U.S. automotive supply chain; providing incentives to (or even investing in) startups like Better Place; and even providing supplemental, directed unemployment benefits? Isn’t that a better use than propping up a busted business model with no real game-changing plan for the future? Surely, holders of stock and debt in these enterprises should get up close and personal with the meanings of “common” and “unsecured, ” respectively, before the taxpayers start writing checks. Shouldn’t they?
Among my many omissions was my failure to explain why I supported the unfortunately named TARP while remaining willing to leave BAIT circling the Chapter 11 drain. John in Austin cut right to the error of my ways:
I’m sorry, but you need to travel to Michigan and take a look around. If these companies are allowed to collapse, the blight and disaster will cost far more than some kind of government-sponsored workout will cost now. I also find it interesting that you’re not offended by the far greater amount of $$ that the ex-GS crew at the US Treasury has thrown on their once and future workplace on Wall St with very few strings attached. Why is banking and trading any more important than making Cadillacs? Perhaps you’re on the far side of the class divide and figure that middle-class America should continue to live hand to mouth while the rich and powerful live the good life, and send the bill to future generations?
Well, where to start. First of all, I should probably take a look around in Michigan. That’s what I continually urged the Obama campaign to do this fall, warning that this would be a “people with problems election,” in which Michigan would be ground zero. Second, I’m embarrassed about the ham-handedness of Treasury’s execution of the TARP and the fire hose-full of alphabet soup which has followed. That said, Treasury and the Fed were dealing with a helluva mess metastasizing at dizzying speed, and I’m glad it was Paulson/Geithner/Bernanke standing in the breach rather than yours truly (or Barney Frank and Chris Dodd, for that matter). And third, I should explain what I see as the difference between saving Wall St. and saving BAIT.
To oversimplify the finanical crisis by about three orders of magnitude, our problem was and is that a whole stew of factors–a lack of regulation being prominient among them but by no means solo–left us with multiple single points of failure. In retrospect, the failure of Lehman–a rather minor player in the grand global scheme–nearly locked up world-wide liquidity in a manner that caused a Run On The Bank, writ large. Almost no one argues that the failure of AIG would not still still be rippling through global commerce–forget Wall Street–with tsunami-like force. What would happen if 40-ish% of insurance contracts were suddenly null and void? Nobody–whether in Washington, New York, London, or Hong Kong–nobody could even fathom it. That’s why Treasury and the Fed demanded and got unprecedented power and flexibility. The confluence of greed and underregulation produced a system of global finance with so many interdependencies that the whole system was vulnerable to failure if even one link in the hopelessly knotted chain broke.
And sure, it’s easy to be bitter that the guys (and they were almost all guys) who knotted the chain got really, really rich in the process. It’s easy–but it’s just not very relevant, especially since a lot of the $700 billion is going to go to bail out normal people who made abnormally stupid personal finance decisions.
We only have one global finance system, and it’s subject to the same Pottery Barn Rule which Colin Powell invoked to warn the Bush Administration before invading Iraq: “you break it, you buy it.” There was–and is–no substitute for the finance system’s ultimate product, which is the reliable flow of global commerce.
No so for BAIT. There are, as has been well chronicled, plenty of substitutes for its products. Those substitutes are generally better-designed, cheaper, and more attractive than the products BAIT produces. That has been true for a generation, at least.
“Well,” John might say, “you’re missing the point. BAIT supplies cars, sure, but they also supply 3 million jobs, if you include the entire automotive supply chain.” I doubt that’s true, but I’ll take it on faith for the sake of argument. And my argument is, no one–not the U.S. Government or the Almighty Himself–is going to save even a fraction of those jobs with a $15 billion injection–$5,000 per job, or something like 6-7% of a worker’s average annual salary. The United States automotive industry as currently configured is just dead. I’m sorry, it just is. And there’s not even a glimmer of hope for a miraculous resurrection. It’s tough to tell where BAIT is worse-positioned: in conventionally powered cars and trucks, or in the future market for “next-generation” vehicles emphasizing fuel efficiency. The only question is when we pull the plug on the patient.
Pouring $15 billion into BAIT would truly help only the narrowest slice of the automotive workforce: those few who could make the leap to retirement before the last government nickel drops through the slot and BAIT is back at the brink of bankruptcy. And even then, there’s that nasty little problem of what “retirement” looks like, given the sorry state of BAIT’s pension assets.
No, if we really have 3 million workers who are dependent on the solvency of BAIT, the government should get really serious. I’m making up a number, but between directed-short term assistance, retraining, and pension assistance, isn’t the more likely amount needed more like $50k per job– $150 billion in total, an order of magnitude more than proposed? That certainly seems more realistic, as does the stipulation that none of this amount should go to fund the operating losses of a business broken beyond repair.
Oh, and by the way, John, this is where the inter-generational rubber seriously hits the road. We’ll be borrowing every cent of that $150 billion from your kids. Well, we’ll actually be borrowing it from China, but your children are far more likely to have to pay it back than we are. If you want an idea of how utterly lacking in a sense of humor your kids’ Chinese creditors will likely be by that time, check out James Fallows’s recent piece in The Atlantic.
And as for me being too far on the “other side of the class divide and figure that middle-class America should continue to live hand to mouth while the rich and powerful live the good life, and send the bill to future generations,” well, I suppose that’s a reasonable speculation. I cop to which side of the class divide I’m on, but I don’t know about the rest, and don’t think I argue my pocket book very often. And especially for somebody without kids, I think I stick up for future generations more than most people with a whole brood (see here, here, and here, and here.). But that’s obviously for readers to decide.
I hear you, John. But I still really hate the idea of a Big 3 bailout. Hate it, hate it, hate it.