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What’s Good for General Motors May be BAD for the Country

by Matt Mitchell on January 8, 2013

in Government-Granted Privilege

Marketplace recently did a segment on the federal government’s announcement that it was getting out of the car business and would be selling off its stake in GM over the next two years. Marketplace reporter Nancy Marshall-Genzer first turned to Cato’s Dan Ikenson who noted that taxpayers would likely “need to assume a loss of $15 to $20 billion.”

Then, she turned to Sean McAlinden of the Center for Automotive Research who believes that taxpayers will break even.

“Is he math-challenged?” she asks. Not when you “look beyond the bailout cost” and consider that the bailout meant government ended up spending less on unemployment checks, that it got more income-tax revenue from auto industry employees, and “Then there’s the trickle-down effect.” To wit:

Without GM, auto parts suppliers would have struggled. Maybe gone under themselves. The carmakers use many of the same suppliers, so assembly lines at Ford would have ground to a halt. Dealerships would have suffered too.

A few things to note:

First, I love that she uses “trickle-down” in the way it should be used: in reference to a top-down government policy that transfers wealth from the taxpayer to well-to-do firms in hopes that the transfer will eventually “trickle down” to the little guy. I’ve long felt that if there were any justice in the English language, policies such as these would be called “trickle-down economics.” More commonly, of course, it is across-the-board tax cuts that don’t transfer wealth but instead abstain from taxing that go by the name “trickle-down.”

Second, as long as we are looking “beyond the bailout cost” let’s also look beyond the “trickle-down” effect (which I find dubious, but I’ll leave that to another day) and consider some additional negative consequences of a bailout. In my paper on government-granted privilege, I catalogue a host of problems that may arise when government bestows favors on particular firms or industries. These include:

  1. Less competition, yielding higher prices for consumers and less economic surplus
  2. X-inefficiency (i.e. higher production costs)
  3. Lower quality goods and less innovation
  4. Rent-seeking (people invest valuable resources asking for bailouts)
  5. Unproductive entrepreneurship (entrepreneurs busy themselves thinking of new ways to obtain bailouts instead of new ways to create value for customers)
  6. Moral hazard (firms are incentivized to make mistakes when they know that mistakes might entitle them to a bailout.
  7. Loss of innovation and diminished long-run economic growth
  8. Increased short-run macroeconomic instability
  9. Increased cronyism, which can erode social trust and diminish the legitimacy of both government and business

You can read my paper for arguments and citations for each of these claims (though this appropriately-titled paper is a good place to start).

Now let me add two more problems that are specific to the auto bailout:

  1. In choosing to give the union’s Voluntary Employee Beneficiary Association greater priority than claims by other unsecured creditors such as suppliers and unsecured bond holders, the Administration’s auto bailout overturned a bedrock principle of bankruptcy law (namely that those creditors with similar claims be treated equally). My Mercatus colleague, GMU Law Professor Todd Zywicki, has written about this with the Heritage Foundation’s James Sherk here, and here. It isn’t clear yet at this point what sort of precedent this will set. But if unions were the winners here, generality and the rule of law seem to have been the losers.
  2. The auto bailout seems to have radically shifted the Democratic Party’s position on the relationship between government and business. As Timothy Taylor pointed out in October, there was a time when Democrats openly mocked Republicans who claimed that “what’s good for General Motors is good for the country.” There was a time when Democrats believed that social safety nets were supposed to catch individuals who were down on their luck, not the firms at which these individuals happened to work. As Luigi Zingales points out in A Capitalism for the People, the Democratic Party’s one-time antagonism to business sometimes proved a healthy check on Republicans who too often confused being pro-market with being pro-business. Now that Democrats, too, think that their job is to help corporate America, there is effectively no organized political check on crony-capitalism.

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