Fuel Injection - On Bailing Out the Automakers

North American automakers are in economic trouble. Those corporations are reportedly sinking and they want taxpayers to bail them out on both sides of the border. "Bail us out!" they say. Or the economic fallout from our demise will be catastrophic. Others surmise that the "Big Three" automakers are "too big to fail."

Talk of subsidizing these companies is all the rage. From U.S. Congress to television reporters, the issue is impossible to ignore. The leaders of these three corporate giants have flown to Washington in a desperate effort to secure public money for their dying corporations.

Yesterday, President George Bush finally announced a 17.4 billion dollar bailout package for the ailing North American automakers. In addition to this, the Canadian government may go ahead with a potential 4.2 billion dollar bailout package contingent on Washington making the first move.

Considering the unprecedented amount of public funds being spent on these three corporations, it is worth the while to examine whether or not these policies are economically sound and if the claims of the bailout proponents are plausible.

When considering the pros and cons of the arguments made for and against bailouts, it is important to consider the source of bailout money. There are three ways in which the government can raise the cash to give these car firms. Government has the option of taxing, borrowing, or printing.

Taxing directly places the financial burden on the economy in the present. Borrowing not only places the responsibility to pay back the debt on a future generation, but also saddles the current taxpayers with the obligation to pay the interest on the debt. Printing money reduces the value if each individual dollar in circulation and is also accompanied by problems of its own.

The Austrian school of economics has argued that governments are powerless to create wealth. They argue that the only function governments are capable of is the transferring of wealth. Governments can do this through all of the above. Moreover, Austrian economists have argued that this process of transferring wealth distorts economic calculation, sending wrong economic signals to investors and entrepreneurs.

Arguably, economies that have prospered around the world are ones that have been rooted in market principles. In such a system efficient companies survive by serving consumers properly while inefficient companies that produce poor products go under. This necessary competitive process helps keep an economy developing.

It would appear the North American Automakers now represent an inefficiency on the market. On the market they have failed to please enough customers in order to justify their prices and vehicle production. Their union labour is arguably over-paid and these companies are requiring a considerable sum of credit to stay solvent.

Thinking about the plight of the automakers by way of analogy is a helpful way to understand the situation. Imagine that in order to "create employment" during a bout of economic trouble, that the government comes up with a massive make-work project. This project involves thousands of men and women with sledgehammers pounding away on chunks of sandstone in order to pound it into sand. This sand will aesthetically improve the appearance of the country's beaches.

On the surface, production and employment appear to be stimulated. After all, thousands of previously unemployed people now have jobs. In order to supply these thousands working, a supply chain must develop, involving others working to produce and deliver
for those producing sand.

Ore must be mined and refined and then produced into sledgehammers. Machinery for these enterprises must be produced. Trees must be felled and worked to create sledgehammer shafts. Stone must be blasted out and delivered along with the other supplies to the workers. This would require machine operators and truck drivers as well as the heavy equipment itself.

“All very good,” one says. Here is a complex economic situation involving production and employment on a grand scale. Break out the champagne! Not so fast. The apparent advantages of this situation start to disappear when one starts to look at it from another perspective.

First of all, no one really wants sand. There has been no market demand for sand. This has simply been a scheme of employment fabrication for the government. All those men who are working are doing almost absolutely nothing useful.

In addition to this the entire supply chain that has been supporting this enterprise has been diverting physical resources from the rest of the economy that produces goods and services people actually want and need. Farmers who still need to produce food might face increased fuel and machinery costs due to the increased consumption of the government employees and their supply chain. Tool manufacturers may have to pay increased labor and resource costs due to the government making both in smaller supply.

In addition, the government has been moving capital from the productive private sector for the creation and support of its make-work scheme, eliminating potential job creation in market-directed industries. Men, who could have been at work producing the things which society wants, have been busy producing things it doesn't want.

"Ah, but wait a minute," someone says. "Wouldn't those people who were put to work pounding stones otherwise not have had any employment and thus had nothing better to do?" While it may be true that for a time these men would have had no employment, it is the economic effect all the way down the line. The jobs that will now be lost in the private sector, the wealth diversion etc. It will now take the economy longer to recover from its economic downturn. It will now take longer for these men to be put back to work

doing something productive.

Sadly, while many people would decry the utter absurdity of grown men pounding away on rocks in order that they might be put to work, many of these same people would not think of this when they cry for the government to bail out the automobile industry.

To paraphrase from Henry Hazlitt's book, "Economics in One Lesson," these people are only able to see the immediate jobs that would be lost with the closure of the automakers and their supply line. All of the jobs which will be destroyed or not created and the wealth that will never come into existence is invisible to them.

Bailing out the automakers is probably not a wise move as it will likely not work. These financial problems run deeper than 17.4 billion dollars. It's time to ask: is it the government’s job to take such risks with taxpayer money? After all, the automakers may be back in several months with empty wallets. Perhaps it is time to simply allow these companies fail - just as any other normal company in the free market fails when it makes poor business decisions and fails to please consumers.

The "Big Three" gas tank is not half full. The tank is half empty and there is a huge leak in the fuel line. Putting more fuel in this car wreck would be a sad idea indeed.

There's legislation in my soup!

We live in an age of unrivaled comfort. We are bestowed with unfathomable blessing. The dedication and perseverance of our ancestors combined with individual liberty and free markets have brought us luxuries monarchs only a few hundred years ago would have marveled at. We are reaping the benefits of a Christian society.

One hundred years ago, no millionaire could download his favourite song off the internet, nuke his spaghetti in the micro wave, or drive a car while protected by an air bag. Today, even individuals barely pushing middle class can do all of those things with routine regularity. However, with material plenty has come intellectual famine.

Slowly, we are rejecting the values which have made our country the wonderful place that it is. In the middle of this abandoning of principle is our degradation of individual responsibility.
Let's face it. With freedom comes risk. With risk comes responsibility. Sadly, people are not willing to take responsibility for their freedom. They would rather have the illusion of safety at the sacrifice of their freedom.

I was reminded of this the other day while listening to the radio. Recently there have been a number of deaths due to carbon monoxide poisoning. As a result of this, people are calling on the government to introduce legislation to prevent deaths from CO poisoning. One way of doing this would be to make it mandatory to have carbon monoxide detectors in all houses. Now, on the surface this may sound like a good idea. We tend to think. This saves lives therefore this is good. Now what really got my attention was something that an individual from the Kingston Fire Department said while being interviewed. He basically said that anything we can do to save lives should be done.

Wait a second here. Did I hear that correctly? ANYTHING we can do to save lives? Here's my question: how far are we going to take this? I'm going to invoke the slippery slope argument. So if mandating "healthy" diets for Canadians by law could save lives, should we do it? If wearing helmets in cars could save lives, should it become a law? If banning cigarettes and alcohol could prevent deaths, should those substances become illegal? Do you see where I am going with this?
The logical progression of this mentality is us losing more of our freedom and becoming more and more managed or "cultivated", like the tulips in front of parliament, by an extremely powerful government.

I believe that the more we hand off our responsibilities and obligations to the government, the more we forget how to live responsibly as free people. If you take a step back and think about how much the government has taken over our everyday lives, it is astonishing. When we are born we usually come to the world in a government funded hospital. As we grow up, most of us our educated in state-run schools. When we are down and out we collect money from the government. If we are doing well, we hand over vast portions of our wealth to the system. Our country is becoming more and more mired in a myriad of legislation restricting us in a multitude of ways. From the guns we buy to the milk we drink. Rather than look to institutions like the family or the church, we direct our pleas to the state. Sadly, it's not about to get better.

Perhaps it is possible to pinpoint where our society changed, but I cannot say. All I can say is that we have slipped into this mentality as one falls into a deep slumber. Now that we are on board with this "government is the answer" mentality, what can people say against any new law that claims to be in the best interest of the most people? With what logical consistency can anyone dare to oppose any new piece of legislation? If it sounds good do it. Each new act of bestowing this "safety" upon the public is supported by the laws that preceded it. The argument goes something like this: "We made wearing seat belts a law and everyone is ok with that now" or "we did that with junk food so why can't we do it here." In a disturbing manner, more laws help to perpetuate newer laws.

God made government and gave them power for a purpose. That purpose was not to act as overly protective parents over his creation, man. God gave us responsibility and he gave us obligations. We have obligations to look out for others, to help the poor, to do good works. Perhaps part of the reason of why we've reached this point in our history is because we were shirking our duties. I'm as guilty as anyone for not doing what I should be doing.

It is my hope that we would see where we are headed and turn things around before we end up so controlled that we dare not breath. (I'm purposefully exaggerating there.) Try to picture a world where what you eat, where you live, and who you associate with is tightly controlled by a central government. My challenge is this: the next time we think of looking to the government to solve a problem by taking away more of our money or freedoms, let's think twice about it and see what we can do ourselves to solve the problem.

Ben Franklin is a name a lot of people have heard of. As a founding father of the United States, I think he must have known a lot about government and liberty. Here's what he said on the issue of freedom and safety:

"They that can give up essential liberty to obtain a little temporary safety, deserve neither liberty or safety..."

Here here!