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.