To Which I Would Add One More Concern

Don Boudreaux had these two rejoinders to the notion that the GM bailout is a success simply because GM is making a profit.

Economically literate opponents of the Detroit bailout never denied that pumping hundreds of millions of taxpayer dollars into Detroit automakers would restore those companies to health.  Instead, they argued, first, that bailing out Detroit takes resources from other valuable uses.  Because he doesn’t even recognize that other valuable uses were sacrificed by this bailout, Mr. Dionne offers no reason to think that the value of saving Detroit automakers exceeds the value of what was sacrificed to do so.  No legitimate declaration that the bailout is successful is possible, however, without evidence that the value of what was saved exceeds the value of what was sacrificed.

Economically literate bailout opponents argued also that it sets a bad precedent.  By signaling to big corporations that government stands ready to pay the tab for the consequences of their poor decisions, big corporations will more likely make poor decisions in the future.  It’s far too early for Mr. Dionne to conclude that this prediction is mistaken.

I would offer a third concern -- that the government has kept hundreds of thousands of skilled workers and billions of dollars of physical assets under the management of the same group that have decidedly underutilized these assets in the past.  A bankruptcy without Federal intervention would likely have shifted assets and skilled workers into new companies with different management teams and cultures pursuing different strategies with different information.

I always have trouble explaining this issue to people.   Think of a sports team with great players but a lousy coach and management team.  Having the government ensure that the lousy management stays in control of the great players is a waste for everyone.  I explained it more in depth in this post, where I concluded

A corporation has physical plant (like factories) and workers of various skill levels who have productive potential.  These physical and human assets are overlaid with what we generally shortcut as "management" but which includes not just the actual humans currently managing the company but the organization approach, the culture, the management processes, its systems, the traditions, its contracts, its unions, the intellectual property, etc. etc.  In fact, by calling all this summed together "management", we falsely create the impression that it can easily be changed out, by firing the overpaid bums and getting new smarter guys.  This is not the case – Just ask Ross Perot.  You could fire the top 20 guys at GM and replace them all with the consensus all-brilliant team and I still am not sure they could fix it.

All these management factors, from the managers themselves to process to history to culture could better be called the corporate DNA...

So what if GM dies?  Letting the GM’s of the world die is one of the best possible things we can do for our economy and the wealth of our nation.  Assuming GM’s DNA has a less than one multiplier, then releasing GM’s assets from GM’s control actually increases value.  Talented engineers, after some admittedly painful personal dislocation, find jobs designing things people want and value.  Their output has more value, which in the long run helps everyone, including themselves.

The alternative to not letting GM die is, well, Europe (and Japan).  A LOT of Europe’s productive assets are locked up in a few very large corporations with close ties to the state which are not allowed to fail, which are subsidized, protected from competition, etc.  In conjunction with European laws that limit labor mobility, protecting corporate dinosaurs has locked all of Europe’s most productive human and physical assets into organizations with DNA multipliers less than one.


  1. Jon:

    Ditto to schools.

  2. Jon:

    ...government schools that is.

  3. Dr. T:

    Governments support bad management within rent-seeking corporations because all government departments, agencies, bureaus, branches, task forces, etc. have bad management. Like attracts like.

  4. Sean2829:

    If you are talking about diverting resources I think there is nothing like the tab being paid to the health care industry. I think we are nearly at or already at the point where $1 in $6 of the GDP is being diverted to health care. While there was lots of talk of shovel ready projects in Obama's stimulus, the realy shoveling took place in Medicaid for the states where before the end of 2009, $50 billion extra had been set aside for this program while infrastructure had gotten less than $5 Billion. This is in addition to $ 1 trillion dollars already spent by the government in health care. And there are a couple of insideous aspects of this unending funding for medical care. First of all, for all the tax dollars spent on medical care (it represents more than half the total), the government only reimburses ~75% of the expense and allows the providers to pad their bills to collect the difference from everyone else with private insurance. On top of that, the way the government spends money, it drives of prices while getting very little extra value. As bad as the Detroit bail out has been, it pales in comparison with the money pit that is Medicare, Medicaid and the American health care system.

  5. gadfly:

    Writing at Cato@Liberty, Daniel Ikenson had this to say about Government Motors "bankruptcy."

    . . . GM is making sales and accounting for market share, but only at the expense of the other automakers. Had GM been forced to severely atrophy or liquidate, the other automakers would have had greater revenues, more market share, and probably higher profits. They would have been able to attract GM’s best engineers and line workers. They would have more money to invest in R&D and to lead the industry into the future. Instead, by keeping GM in the mix, some of those industry resources remain misallocated in a company that the evolutionary market process would have made smaller or extinct.

    You can argue that the government shouldn’t pick winners and losers. But regardless of the party in power, the multitude of politicians are returning gifts to compensate for campaign contributions. Sadly, the auto industry lost all the jobs that were required to stabilize this segment for now -- but the UAW, complete with its overabundance of contract work rules, remains in place to bring down this American institution yet again in the not-to-distant future.

    Sadly, in the next crisis, our politicians will again not have grasped the history lesson.

  6. An Inquirer:

    The bailout of GM may have been worst of all scenarios. (1)Moral Hazards phenomenon is all over this story. (2) Although there were several managment personnel changes, Warren complains that management stays as the same group that has mismanaged assets. (3) Plus we still continue union agreements that make our auto industry non-competitive. To a large extent, management pursued the strategy they did (high margin vehicles) because of the need to pay for expensive union contracts. (4) The resolution showed that political favoratism pays off.

  7. morganovich:

    if you gave me $30 billion in debt to buy assets then forgave all the debt, i could make money doing damn near anything.

    however, i'd be willing to bet that GM NEVER makes future profit equivalent to the money paid in.

    they will be losing money again long before they ever get to a positive ROIC on the bailout.

  8. Benjamin Cole:

    Farm subsidies, and rural highways, water systems, power systems, telephone systems subsidies. Without federal subsidies, rural America would depopulate, thus freeing up capital for urban areas--without federal intervention.

    The Defense Department has just about become another rural subsidy in drag, along with the ethanol program.

  9. john:

    GM: All anecdotal, but call it the pulse of the times. I drove by a Chevy dealership yesterday on my way to somewhere else and their lot was full of brand new cars and trucks. I don't see where they could have parked one more, or for that matter where a customer could park while they looked at one. Fortunately that wasn't a problem as the place was completely empty. I had a conversation last weekend with several family members who are considering new cars. (one has since bought a Subaru) GM (and to a lesser extent Chrysler) are off the table for everyone in the discussion. Politics was the main reason cited, but several also mentioned very low value proposition and very high prices. (Apparently GM gives MSRP in the low 20s for some of their trucks, but I couldn't find one on the lot for less than 38K and most were around 50K. )

    Rural America:
    I don't know where these ideas come from. Perhaps there is some kind of net transfer from urban to rural areas, maybe in the way of aid to State and County govt. But the first items cited are an illusion.

    Farm subsidies do not exist keep farmers in business, they exist to provide artificially cheap food to urban populations and cheap feedstocks to industry with political connections. In my experience most rural power systems are cooperatives owned by their customers, ditto water and sewer in the limited areas where those services actually exist. Trust me, my septic system and cisterns are not federally subsidized. There are telephone subsidies, but I'm not sure how they work, so maybe you've got something there, though most of that is going cell now.

    Count me as one rural resident entirely willing to take my chances on the elimination of those subsidies. I think you're mistaken about the outcome though. (I might prefer you were right.) Without cheap food, power, water, sewage, etc. I don't think the cities would last very long. I think those subsidies are really urban subsidies. It is kind of colonialism. Shut off the cheap power, water, food, etc. and people would start to spread out more and get closer to the sources of supply of those things.

  10. Sam L.:

    "Don Boudreaux had these two rejoinders to the notion that the GM bailout is a success simply because GM is making a profit.

    'Economically literate opponents of the Detroit bailout never denied that pumping hundreds of millions of taxpayer dollars into Detroit automakers would restore those companies to health.' "

    I disagree. The expected outcome was a semblance of health, due, as you yourself described it, to an apparently healthy body with the same old brain-dead head. It wouldn't be smarter, it couldn't be smarter. and there was the union ball-and-chain as well.

  11. Voolfie:

    I don't know which is more depressing: the paucity of economically 'literate' among the laity...or having to waste valuable time and brain cells dealing with an Epsilon-minus semi-moron like E.J. Dionne. God save the republic.