United Liberty

Last week, President-elect Obama held a press conference, flanked by members of his economic advisory team, to discuss the federal government’s response to recent economic weakening.

The item that appeared highest on the new administraton’s agenda was the proposed bailout package for Detroit’s “Big 3” automakers.

As this Bloomberg article explains,

President-elect Barack Obama is pushing Congress this year to approve as much as $50 billion to save cash-starved U.S. automakers and appoint a czar or board to oversee the companies…

The president-elect also wants the Federal Reserve to extend emergency loans to General Motors, Ford Motor Co. and Chrysler LLC, according to Obama aides who spoke on condition of anonymity.

What is ironic about Obama’s push is that he is essentially calling for the same actions as those Congress took a few months ago (not to menton, 30 years ago). As Richard Ebeling notes, an auto industry bailout is hardly change from the status quo:

In September, Congress approved a $25 billion subsidy to the major automakers under the guise of financing improved fuel efficiency technologies. The Energy Department soon is to be disbursing these monies.

While The Change Gauge doesn’t rule out the possibility that the Obama administration is seeking to nationalize the Big 3 in order to turn them into a “sustainable and green state-directed enterprise,” it’s important to pause and consider the economics of the situation.

The reason that giving subsidies or loans to the Big 3 (or to Wall Street, or to farmers, etc.) is unlikly to have any long-lasting effect is because doing so does not change the fundamental problem that the automakers face. Detroit’s manufacturers largely are producing inferior cars at prices that consumers are unwilling to pay. If a restaurant down the street did that, it would quickly go out of business, so why should Ford or AIG be any different?

Adding to the irony of Obama proposing a Big 3 bailout is that this policy appears to be supported by the Bush administration — the same people who Obama derided on the campaign trail [often accurately] as being responsible for our current economic hardship. According to the Washington Post:

The Bush administration is in negotiations to broaden its $700 billion financial rescue plan to include U.S. auto companies, potentially opening the door to an array of industries to seek federal aid.

Detroit’s Big Three are eligible for aid under a broad interpretation of the law that authorized the $700 billion financial rescue, Treasury Department officials said yesterday. But they declined to discuss the details of any assistance.

In short, Obama has proposed a policy that Congress already has tried and that President Bush is likely to support. And let’s not forget that a bailout is supported by the group that is not only responsible for strong-arming the Big 3 into above-market wages, but also endorsed Obama for the presidency — the UAW. Public choice theory wins again, apparently.

For these reasons, The Change Gauge finds it disheartening that President-elect Obama is pushing a failed policy that seems likely to do more harm than good. A bailout of the auto industry… that’s not change, that’s more of the same.

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For some great additional reading on bailouts and the auto industry, The Change Gauge strongly recommends the following:

1. The Atlantic’s Megan McArdle, in “Save the Rust Belt!” asks why we aren’t saving other long-obsolete industries as well [hint: it has something to do with ‘opportunity cost’]. This is a must-read if ever there were one on the topic.

2. Eric-Charles Banfield’s classic Freeman piece, “Business-Government Collusion,” clarifies the important, but often misunderstood, distinction between being pro-business and pro-free-market. More specifically, Banfield explains how most corporations are opposed to free markets, because a lack of entry and exit restrictions impedes their ability to acquire even greater profits.

3. This Business Week article, “The 65 mpg Ford the U.S. Can’t Have,” is a great piece that illustrates how flawed government policies have handcuffed Ford and made us all worse off.  The article details how diesel taxes have made it no longer cost-effective for Ford to sell its diesel Fiesta in the U.S. Ironically, Ford’s Fiesta is selling like crazy in other countries, and in particular, France, where over 60% of cars run on diesel, compared to less than 3% in the U.S. If the Obama administration wants to help Ford, wouldn’t it make more sense to repeal our diesel taxes? Probably, but that would reduce government revenue.

4. Finally, to understand why the Big 3 are struggling, check out this chart by Carpe Diem’s Mark Perry, which shows the massive difference in wages between unionized Big 3 workers and those of their ununionized Japanese competitors. Perry also makes some nice observations here, here, here, here, and here.

Further reading-

Congressman Ron Paul on Bailing Out the Auto Industry

Lessons from the Auto Bailout Controversy

Bailing Out the Auto Industry: A Perspective

The Craziness of the Auto Bailout