Detroit: Bailout Necessary Due to Unlevel Playing Field

Economics Economics Questions
1

It’s the 1st time I’ve seen Peter Schiff dodge a point, and at the time I couldn’t think of the correct economics either:

In this interview [ http://www.europac.net/Schiff-CNN-12-4-08_lg.asp ], the mayor of Detroit argues that the automakers need a government bailout because, among many other reasons, their foreign competitors are currently being subsidized by their home governments and, as a result, Detroit cannot compete with them.

Let’s assume for the sake of argument that this is true. Here’s what Robert P. Murphy has to say:

“Fair Trade”

"Many people deride free trade and instead champion what they call “fair trade.” To the extent that this is a voluntary plea for consumers to refrain from purchasing the products of slave labor, I have no problem with the movement. But often the proponents of “fair trade” want to use the US government to penalize imports made by foreigners earning low wages or by companies receiving subsidies from their governments. Both accusations have been leveled against Chinese imports that allegedly are “unfair” to their American counterparts.

It is true that the average Chinese worker earns a lower hourly wage than the average American worker. Our workers (in general) enjoy better training, as well as the use of more capital and superior legal institutions. American laborers are hence more productive, and that’s why they get paid more. It is also true that in certain industries, American firms can’t stay competitive with Chinese imports if they have to pay wages attractive to US workers. Yet that is exactly what should happen when two countries trade with each other; relative prices and wages channel the workers in each country into those industries in which they have a comparative advantage. If cheap Chinese imports didn’t put some US manufacturers out of business, then what would be the point of trading with China in the first place? You trade with others so you don’t have to make everything yourself.

Regarding foreign governments’ subsidies to their manufacturers, we must never forget that receiving gifts doesn’t make one poorer. Even in the “worst case” scenario, where the Chinese government (say) completely subsidizes its TV exporters in order to ship US consumers free plasma screens, this would be a boon to the American economy. Yes, it would put US television producers out of business, but it would allow US consumers to get TVs for free. After American workers had reshuffled in response to the free goods, per capita US income would be higher; instead of using scarce resources to produce television sets, we would now be showered with them for free and could use the freed up resources to produce additional goods and services. If, instead of free imports, American consumers receive merely cheap imports, the principle is the same: Foreign governments taking money from their own people and giving it to American consumers doesn’t make us poorer."

link: http://mises.org/daily/1979

So, in the face of subsidies to foreign car manufacturers by foreign governments, the correct policy looks to be "Great, let’s enjoy cheaper vehicles, courtesy of (whichever country). " As for Detroit, again assuming for the sake of argument that foreign competitors are being subsidized, the workers and owners of capital must suffer the individual consequences for the sake of the greater good.

In the short run this is some hard truth to face, to be sure. But the general standard of living will thus be increased.

2

Thoughts from my blog:

First of all, there is no point in having “domestic car producers” if foreign car producers do the job more efficiently. Whether or not this is the case should be decided by customers and not by central bureaucrats. Now one might argue that tax-subsidized foreign car producers are being advantaged since they can make cheaper offers or include more features for the same price or whatever. To this I say, good for the customer. Taxpayers in a far-away land had to give their earnings to allow for such a great bargain, and Americans would only be disadvantaging themselves if they did the same or refused to take the subsidized offer.

Furthermore, subsidies lower the incentive of producers to improve price and quality conditions. Faced with below-market price competition from abroad, domestic car producers would have a huge incentive to implement even the smallest improvements, thus constantly pushing for the most efficient ways of production, the highest gas mileage, the most economical transportation routes and so on. In short, they’d be working for the customer which is what free markets are all about.

Subsidies, to the contrary, would set an incentive to hire more and better lobbying personnel to make sure the next bailout won’t be all too troublesome to get. Car quality would be degraded to second rank, in spite of what all those neatly dressed spokesmen will tell you in the next few weeks.

3

Unemployment in Michigan is now 9+%. Suppose Michigan were to print up, say, $20 billion of its scrip currency and loan it, secured by assets, to the car companies. Assuming the car companies recovered enough to make this loan pay off, would this not be a beneficial outcome? Wouldn’t otherwise disinterested Michigan citizens benefit from the increase in economic activity? Or would it be better to let the unemployment reach 20% and encourage the unemployed to move to another state?

Raftshol for Governor 2010

4

But receiving stolen goods will probably lead to problems in the long run.

Yet the local manufacturers will go broke not because they are inefficient but because other manufacturers are being subsidized. That’s not the free-market at work…

That may be true, but it’s not the whole story. The subsidized producers will sooner or later start producing low quality products. At that point real entrepreneurs will probably enter the market again. Yet ‘local’ manufacturers going broke is not costless. And the lowering of quality standards that subsidized firms must bring about is not costless either. So the advantage of ‘free’ (stolen) goods is probably offset by the problems the subsidies cause.

So…recipients of subsidized goods benefit from the scheme. The ‘local’ manufacturers certainly don’t. The ‘foreign’ manufacturer benefit. The ‘foreign’ taxpayers don’t. It can’t be said that overall the system is harmless. Actually if we forget about artificial national boundaries, it’s obvious that ‘society’ as a whole is harmed by subsidies.

5

Scrip currency? Is that just your plan (as I assume after reading your website) or does it already exist? In any case, by which assets will it be backed? Maybe the assets of Michigan taxpayers?

Don’t you think that Michigan taxpayers might want to decide whom they want to lend their money themselves?

6

I didn’t mean the scrip would be backed by anything. I meant the loan of the scrip would be secured by

car company assets. The scrip gets its value in payment of state taxes. The taxpayers would benefit by

the interest collected on the scrip funding the government in lieu of taxes.

7

Yes, we should be clear that subsidies cause a NET SOCIAL LOSS. Given that we have no say in whether foreign governments choose to subsidize, the best option available - i.e. the one which mininimizes the net loss to society to the largest extent possible - is to adjust accordingly and accept the “free gifts”. But, again, the ideal situation is an auto market free of all subsidies and other types of interventions.

8

So Michigan taxpayers will pay for it at the end of the day.

Then my question remains: why shouldn’t these people decide by themselves whom they want to lend their money? If they do not consider the Big Three to be a worthwhile investment, why force them to pay anyway? Do you think you know better how to spend their money than they do?

9

Pay for what? Scrip is ‘printed out of thin air’

The elected leaders would act if there was a consensus that it should be done. There is no money at risk. The scrip is not

borrowed into existence and it is secured by the car company assets, so if the car comapany goes under, the state holds some assets.

10

Why complain? It’s a free ride. Let other suckers pay for their cars to be artificially cheaper. It’s moronic to then go and do the same, though.

11

That’s how we got into this mess.

12

The money won’t help MI unemployment. It will help retired exec’s keep their pensions, and maybe some of the retired workers keep a few benefits they might have lost - discounts on cars for example.

Look at what the financial’s did with their bailouts. They didn’t increase business or use the money to keep employees. Auto employees are just as doomed. They’ll use the funds to retool / outsource more to try to become competitive, or else they’ll be back in 12 months looking for more.

13

There is no way to compel anyone to accept this scrip currency as payment.

In order for the automakers to become viable, they must first produce. In order to produce, they must pay suppliers and workers. Suppliers must be compelled somehow to accept scrip currency as payment. And the suppliers of these suppliers. And the suppliers of these suppliers, etc. Same goes for those transactions involving workers when they go to spend their scrip currency earnings. It’s impossible.

14

Car companies that don’t want to go out of business will accept scrip.

.

Suppliers who don’t want to go out of business will accept scrip.

Suppliers of the suppliers who don’t want to go out of business will accept scrip - wouldn’t you?

Businesses who want the auto workers business will accept scrip.

Worgl

15

Also, I may not have made clear. Scrip is accepted by state in payment of taxes - scrip has real value.

16

No, I get it.

You’re going to print up a bunch of paper, give it to the auto companies, who will try to pass it off as currency, because it is ok to pay taxes with it.

The only problem is, the Constitution forbids the state emitting it’s own bills of credit, only silver and gold in the tender of debts, blabity bla bla.

17

And then what are they supposed to do with it? Let’s suppose for the sake of argument that the primary suppliers accept scrip, and also the secondary suppliers (i.e. the suppliers of primary suppliers), and also the tertiary suppliers (i.e. the suppliers of the secondary suppliers).

(1) At some point along the chain, you will eventually find suppliers who are far enough removed from dependence on the auto industry that they will calculate the risk of accepting scrip as payment to be greater than the potential reward that they will actually be paid in dollars one day in the future once the automakers ultimately begin generating profit. The scrip is an IOU. Inevitably, at some point further removed, suppliers will refuse to accept mere IOU’s.

(2) Also, the workers will be paid in scrip. The can only spend this scrip locally, because only local vendors will be willing to accept it. But, as with the primary, secondary, tertiary, etc. suppliers to the auto companies themselves, you have a parallel problem in the supply chain for local vendors: Eventually, they have to obtain their supplies non-locally. Again, at some point further removed, suppliers will refuse to accept mere IOU’s.

In short, for the scrip system to work, the ENTIRE automotive supply chain has to be completely insular and self-sustaining because the scrip can only be exchanged among those willing to accept it, and absolutely no one outside of the supply chain will be willing to do so.

The scrip system is ultimately merely an elaborate funding mechanism. It is designed to provide that funding that stock and bond markets fail to provide. But this is not quite precise. It is not accurate to say that the stock and bond markets are failing to provide the capital Detroit claims it needs: In fact, the stock and bond markets are REFUSING to provide this capital. These companies are toxic and need to fail.

18

I have a question for everybody: does anybody in the US know about the downfall of the British auto industry? It bears lots of striking similarities with what’s happening in the US at moment. Why isn’t anybody remembering?

There are more than a few similarities: a strongly unionized workforce, a financially bankrupt country (Britons do not be offended, please… I have lived in your country and I love it!), an incompetent management which strongly believed that no matter what they did the government would bail them out, declining build quality and less and less investments in innovation… when the first Japanese cars started arriving in Britain at the end of the '60s there were even similar cries about an “unlevel playing field”!

The US is repeating exactly the same errors, only worse, first because GM & co are much much larger than Morris, Austin etc, second because you can read history and see where is this headed. Is anybody airing Jeremy Clarkson’s documentary on the downfall of British Leyland? Sure, it’s not a lesson in Austrian economics by Rothbard, but it’s in a language everybody can understand. I bet no, but you’ll have plenty of Ph.D.'s on the telly and the newspapers telling you how important is to help out Ford and if GM goes under it will be the end of human civilization as we know it.

Let me relate my personal experience in the matter: I’ve never owned a British or US car but I’ve always been a Triumph and Norton motorcycle fan. I’ve owned Triumphs for many years: I love their design and the British motorcycle manufacturers were always at the front of technical innovation. Then I started looking at Japanese machines and I realized they never went out in a puff of smoke, they required minimal maintenance, they always had spare parts readily available. Then I started seeing that Triumph wasn’t innovating anymore and their quality was either declining or not keeping up the pace with Japanese machines. So I did the unthinkable and bought me a nice Honda. I’ve sticked to brand ever since. need I say more?

19

The Supreme court has held that state tax coupons, i.e. scrip are constitutional see Virginia Coupon Cases

see also McCulloch v Virginia 172 U.S. 102

It would seem that coupons i.e. scrip currency, are somehow different than bills of credit

20

No. the scrip is a tax coupon.

Precisely. This would favor in state suppliers and be of further benefit to the Michigan economy.

The script is returned to the state treasury in payment of taxes. The state then uses to pay a portion (or all!) of the wages of state employees.

Then, the scrip will be accepted by vendors who wan the business of state employees.

As long as the state has its loan secured by real company assets, the state doesn’t have to decide whether or not the companies should fail.