Auto Bailout Drives Us Towards Socialism

It is an understatement in most instances to say that Washington politicians are economically illiterate. The bailout frenzy, for instance, is a massive transfer of wealth that rewards people who — by definition — have demonstrated that they do not make good decisions about money. This policy does not make sense, but it is just the tip of the iceberg. Since any first-year economics student can explain that subsidizing something is a very effective way of getting more of it, one can only imagine the perverse incentives that are being created in the bailout environment. The prospect of mortgage “relief” presumably has led some households to stop making monthly payments. Companies, managers, and shareholders, meanwhile, have probably figured out that hiring slick lobbyists — rather than producing goods and services valued by consumers — is now the best way to “earn” money.


The auto bailout is the latest example of upside-down economics. The Big Three auto companies and the United Auto Workers are in deep trouble because they have failed to innovate and economize. But rather than allow bankruptcy, which would lead to long-overdue structural reforms, the White House and its Democratic allies on Capitol Hill want a $15 billion bailout — even though that would subsidize the reckless and short-sighted decisions of both labor and management in Detroit (and also set a precedent for further handouts once the Big Three and UAW get hooked on the heroin of government dependency).

Some supporters say the auto bailout is okay because the government will be given oversight authority over the car companies. But this is not a reason to be mollified. It is an additional reason to oppose any transfer of wealth from taxpayers to Detroit. The corporate bureaucrats at General Motors, Ford, and Chrysler have demonstrated that they are not very competent. The bosses at the UAW have shown that they are stunningly myopic about the long-term best interests of workers. But there is one group of people that clearly would do a far worse job, and that group is comprised of the politicians and bureaucrats in Washington.

This is a serious threat to America’s economic vitality. Some politicians are talking about a “car czar,” for instance, though “commissar” might be a more appropriate term. Others are talking about requirements for “green” cars, whatever that means. Senator Chris Dodd, the scandal-plagued Connecticut Democrat, wants the CEO of GM to resign — though he never explains why that should be his decision and not the responsibility of GM’s shareholders or board of directors. Perhaps most stunning of all, some politicians want the government to have veto power over any expenditure greater than $25 million — which is a recipe for turning industry decisions into a perverse from of pork-barrel spending since lawmakers will want new factories built in their districts.

Unfortunately, nobody is stopping the bailout freight train and asking whether politicians have any qualifications to oversee private business decisions. The vast majority of them have never met a payroll or run a business. The political class knows how to spend money, of course, but the last thing the Big Three and UAW need is guidance on building bridges to nowhere or financing worthless bureaucracies. The Big Three should be paying attention to consumer sentiment and shareholder value without having to worry about a bunch of back-seat drivers in Washington telling them what to do and how to do it.


Ironically, the rest of the world is moving in a free-market direction while the United States is drifting toward socialism. Some European nations made the mistake of nationalizing industries after World War II. Their economies suffered and now those nations have since engaged in widespread privatization. Policy makers learned that government control of companies was a recipe for inefficiency, waste, and corruption.

The same thing happened in the developing world. After the end of colonialism, many nations in Africa and Asia nationalized industries. But the results were so dismal that even socialist governments began to privatize. International aid bureaucracies such as the World Bank and International Monetary Fund even became cheerleaders for privatization, notwithstanding their generally statist orientations.

After the breakdown of communism, nations in Eastern Europe went through the same exercise. Inefficient government-controlled businesses were turned into private companies. Sometimes, privatization did not happen in the right way, as ruling elites managed to profit from the transition. (The same thing happened in Western Europe and the developing world. Politicians always manage to extract a pound of flesh — even with doing the right thing.) But at least the resources wound up in private hands where incentives existed to use them profitably.


So if the real-world evidence is so overwhelming that privatization has taken place in every part of the world, why would the United States move in the opposite direction? Does anyone really think it makes sense to turn the Big Three into an industrial version of the Postal Service?

Many politicians apparently think the answer is yes, but there is hope. President-elect Obama, appearing on Meet the Press, noted that “We don’t want government to run companies.” In the understatement of the century, he noted that, “Generally, government historically hasn’t done that very well.” With any luck, he will apply this common-sense view once he gets inaugurated. After eight years of Bush, which have been disastrous for free markets, that would be change worth believing.

Barring an unexpected turnaround, the best option for the Big Three is bankruptcy (though industry experts say that Ford is in better shape and might be able to avoid Chapter 11 protection). A no-strings handout from taxpayers is a bad option since it will enable labor and management to postpone much-needed reforms. But at least the companies and workers would still feel some pressure to make changes. The worst of all worlds, however, is to give the political class a role in running the companies.



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