Topic: Finance, Banking & Monetary Policy

Correspondence with a Presumed Proponent of Auto Bailouts

As a supporter of free trade, I’m used to getting angry letters and emails whenever I do media. Below is one of the more civil, reasonable emails, which I received following my appearance on last night’s Lou Dobbs:

I would have liked to see the rest of what you said about the auto industry on the show but what I did see angered me. You said something to the effect that bad business decisions by the Detroit automakers should not get them a bail out and that one of them should be allowed to fail is what I heard you say. I am assuming that the out of control greed that has run unchecked for years and terrible government policies have allowed the investment banks to basically destroy thousands of peoples lives should deserve a bail out. My thinking is that none of them should get one penny. As for the auto companies failing. Lets see. The banks fail then they will not lend to anyone now. I with a 780+ credit score can no longer get a loan for a car which then hurts the auto company is one cause. The fact that people are losing their jobs by thousands is not helping, the people losing their houses and high gas prices are killing the sales of cars. I don’t know if you know that if lets say GM goes under 100’s of thousands jobs could be lost. Engineers, designers, line workers, computer guys, and so on, not to mention all the other business that supply the automakers. Did you give any of this any thought? I also would like to know what you think about the good paying jobs that go overseas. Plus can you tell me one benefit to this Global economy has had for the USA. Please don’t give me the cheaper prices line either.

Here’s my response:

Thanks for your thoughtful comments.  More often than not, the messages I receive from people who disagree with my perspective tend to be nasty and poorly articulated.  So, yours is a welcome dissent.

I am opposed to interventions of any kind. The Wall Street bailout and the subsequent partial nationalization of what were private U.S. financial institutions is in essence a penalty on prudent behavior and a subsidy for risk taking. It is patently unfair and grievously unwise to use taxpayer dollars to insulate people or institutions from the consequences of their actions, as it is unfair and unwise to deprive risk takers of the full fruits of their efforts.

The story is no different in the auto industry. Yes, the industry employs thousands of workers and there are many jobs in related industries that depend on a healthy (or at least functioning) auto industry. I am sympathetic to your suggestion that auto’s woes are at least in some part attributable to the credit freeze, which is a response to, among other things, circumstances beyond its control. But there’s much more to the picture than the one you seem to want to paint of the auto industry as an innocent victim. 

The fact is that much of the Big Three’s problem is self-made. The credit crunch and the contraction of demand is just the latest dark cloud, and a problem that affects all industries, not just autos. Thus, if there is a bailout for Detroit, where, how, and why do we draw the line to exclude other manufacturers, home builders, coal miners, and masseuses, who are all suffering from the same contraction in demand caused in part by the credit crunch? Don’t tell me we should bail everyone out. For starters, we can’t afford that.

Detroit’s problems predate the financial meltdown. Management and labor, together, consigned the Big Three to a future of troubles when ridiculously liberal work rules that flew in the face of basic economics were agreed upon, requiring management to pay workers at 90% of their salaries when they were laid off. The “Cadillac Platter” of health and retirement benefits granted to the UAW also dramatically raised the cost of producing vehicles at unionized auto plants in the United States. And let’s not forget about the far-in-excess-of-average manufacturing wages that auto workers “won” through concessions by management over the years. Management agreed to all of these conditions — and labor pushed them — because both sides assumed that the U.S. governent would come to the rescue (that the industry was too big to fail) when the chickens came home to roost over this inefficient, uncompetitive cost structure. That, to my mind, reflects labor’s and management’s greed.

On the demand side, Big Three management demonstrated an egregious failure of imagination, if not downright dereliction of duty, in assuming that large pick-up trucks and SUVs would never fall out of favor. Of the top 10 selling cars (not trucks or SUVs) in the United States, Big Three offerings have barely made the list this decade. Not one has been a top 5 seller. Shouldn’t producers try to make things that people want to consume before scapegoating their failures and seeking government bailouts?

One of the points I made in my interview with the Lou Dobbs show that didn’t make it to air is that a bankruptcy and liquidation or two in the auto industry wouldn’t be the end of the world. In fact, it would be a welcome development for the producers and their workers who remain in operation. They would be able to compete for a larger share of a pie that is currently shrinking, but will again expand. Which companies remain and liquidate should be determined by market forces, not by the coercive, thieving actions of the Michigan congressional delegation and Governor Granholm. 

I think an instructive example for the auto industry is the U.S. steel industry. During this decade, the steel industry responded to waning fortunes and dozens of bankruptcies by finally allowing unproductive, inefficient mills to shut down. As a high fixed cost industry with dozens of producers at the time, the industry finally did what is should have done long ago: it consolidated. In 2001, 12 firms accounted for 75% of U.S. hot-rolled steel production. In 2007, 3 firms accounted for over 80 percent of hot-rolled steel production. The consolidation has afforded the steel industry an alternative to requesting bailouts in the face of declining demand: it curtails output, which affects prices favorably for the mills. If there were fewer automakers in the United States making products Americans wanted to buy, and if labor costs were more variable and less fixed by unaffordable contracts, the auto industry might be similarly equipped to weather storms.

As to your questions about my views on trade, there is plenty of commentary and analysis on our website ( that I invite you to check out.

Cato Debates Potential Auto Industry Bailout on

Cato Senior Fellow Daniel J. Mitchell participated in a debate yesterday on that discussed the possible implications of a government bailout of the U.S. auto industry. Mitchell argued against it, and in the middle of the debate, NPR held an online poll that showed that 68 percent of listeners agreed with him.
Quotes from Daniel Mitchell pulled from the debate:

  • Consumers, acting in the marketplace, should determine which companies succeed or fail. Business success should not depend on which companies can hire the slickest lobbyists.
  • Every dollar the taxpayers send to Detroit will be one less dollar that will be available in the productive sector of the economy. This means fewer jobs in other industries, fewer jobs in the service sector, and fewer jobs in all other fields.
  • A federal bailout deprives other sectors of the economy of resources. Moreover, a bailout delays the much-needed restructuring of the US auto industry, much as handouts to the proverbial worthless brother-in-law enables him to continue sitting on the couch all day instead of putting his life back in order.
  • Foreign companies with plants in America are much more successful. It baffles me that politicians want to reward incompetence. Actually, it’s not that surprising. Detroit probably spends a lot more on lobbyists. Too bad they don’t put an equal amount of time and effort into improving their goods and services.
  • I don’t care if the bailout is profitable for government. The economic damage occurs because politicians interfere in the allocation of resources. Government intervention is a big reason why European welfare states grow slower, have higher unemployment, and lower living standards than America. We should not emulate nations such as France and Germany.
  • Five years ago, a merger of GM and Chrysler would probably be killed by the antitrust bureaucrats. Now the politicians want to subsidize the merger?!?
  • Bankruptcy almost surely will make consumers a bit more wary, but a bailout ensures that the auto companies won’t change the bad policies that got them in trouble. Better to restructure now. You don’t cure an alcoholic by giving him more to drink.

You can follow the entire debate here.

Does Harper Support Regulation of Gambling and Financial Services?

My post yesterday regarding Members of Congress who voted to exempt financial derivatives from state gambling laws created a firestorm of controversy. Well, two people asked me about it, anyway …

(A new post on the presidential candidates who didn’t help create our economic problems is available for your perusal, by the way.)

“Why would a libertarian think it’s bad to exempt anyone from regulation? Do you support gambling laws? Do you support financial services regulation?”

These are all fair questions, given my objection to preempting state gambling laws in this case. So let me expand on this observation from my earlier post:

Many gambling laws are nanny-statism, of course, but if they’re going to go away, they should be repealed by the legislatures that wrote them. This federal preemption gave special permission to certain parts of the financial services industry to run a huge gambling operation masquerading as a market in real assets.

I’m quite a bit less a fan of preemption than many of my colleagues. There are fair-minded people who believe that national markets call for national regulatory regimes to replace the states’. As commerce has become national, the Commerce Clause has become a grant of authority to regulate national markets, they appear to believe.

I’m not convinced. Given the nation’s experience under the Articles of Confederation, the Commerce Clause was included in the Constitution to prevent states from regulating parochially - that is, for the benefit of local interests over out-of-staters. The Constitution gave Congress authority to regulate commerce “among the states” - which, if words have meaning, is something narrower than just regulating all commerce.

So when state gambling laws interfere with an interest capturing the sympathy of a majority in Washington, D.C., that doesn’t necessarily empower Congress to withdraw state authority. Congress is supposed to prevent only state parochialism, not every bad idea coming out of a state legislature.

If we are to have a healthy political economy, debates about state gambling regulations should be taken to each state that enacted them. The merits of freedom and personal responsibility should be made clear there so they win majorities once again.

The alternative preferred by many is a shortcut: trumping states by moving power to the federal level. This is not a felicitous trend, and its end-point - a remote national government with plenary power - is not good for liberty.

Gambling regulation is nanny-statism, but I wouldn’t go and kick the legs out from under state anti-gambling regulation through federal preemption - especially not for one narrow part of the financial services industry. This is not a game, where any loss for regulation is a gain for liberty.

If responsibility for self-protection against gambling is going to be restored to people in a given state, the legislature of that state should repeal the anti-gambling laws, signaling people that they are once again responsible for themselves. What happened here was that Congress trumped state power and withdrew the protection of state anti-gambling regulation without signaling to anyone that there were risks to be encountered. What looked like asset-based financial services to all but a few was in fact gambling.

The Congress helped perpetrate a deception about what was going on with financial derivatives - and just because some regulation went under the tires, that isn’t a victory for liberty.

Bailouts: Where Will They End?

“There’s no logical end to it,” Cato Senior Fellow Gerald P. O’Driscoll Jr. said to Neil Cavuto on Fox Business. He’s talking about the incredible expanding bailouts. It started with Bear Stearns in March and then homebuilders in April. Then Fannie Mae and Freddie Mac in September, and after that the deluge. AIG, announced at $85 billion but quietly increased to $123 billion so far, and the $700 billion centerpiece and then money market funds and then bank nationalizations and an increase in the federal guarantee to bank depositors. Where will it stop?

Friday’s papers noted that the head of the FDIC said that the federal government might start guaranteeing home mortgages. On Saturday we learned that insurance companies want to get a piece of the money. Yesterday the Treasury said that automobile companies–which already got their own $25 billion program–might also be eligible for the general “financial rescue plan,” and their success might encourage other industries to try to get in on it.

As I noted before, Congress is talking about “a second economic stimulus package, totaling $50 billion in the form of money for infrastructure projects, relief for state governments struggling with rising Medicaid costs, home heating assistance for the Northeast and upper Midwest, and disaster relief for the Gulf Coast and the Midwestern flood zone.” And Transportation Secretary Mary Peters wants “an $8 billion infusion” for the federal highway trust fund.

Where does all this money come from? The total cost is hard to estimate, because we don’t know how many of these guarantees will actually result in payments. But some analysts are talking about a total bill of $2-3 trillion. Given the underestimate on the cost of the Iraq war, we shouldn’t have confidence in any claims that it will be less. So where does the money come from? Even Obama doesn’t want to raise taxes that much. And if you tax Americans to bail out as many Americans as we’re now talking about helping, eventually you’re going to be taxing people to bail themselves out. In fact, the government is likely to borrow some of the money and have the Federal Reserve create more of it. That process seems to be under way, as Greg Mankiw and Jeff Hummel have discussed. How can that astounding and unprecedented increase in the monetary base not lead to inflation, even hyperinflation? We’ve already decided to tax the prudent and thrifty to bail out the imprudent and irresponsible. Now the prudent may face a danger even worse than taxes: inflation that erodes their hard-earned savings.

Howard Baker famously called Ronald Reagan’s tax cuts a “riverboat gamble.” This is more like a “Celebrity Solstice gamble.”

Members of Congress Who Voted for the Financial Crisis

In late 2000, with the budgeting and spending process in collapse, Congress hurriedly passed a mammoth spending bill called the Consolidated Appropriations Act, 2001. It contained a provision preempting state regulation of financial derivatives under gambling or “bucket shop” laws. The result less than a decade later was the out-of-control market for credit default swaps that has caused so much financial, and perhaps economic, chaos.

One hundred fifty-five members of Congress who voted for the Consolidated Appropriations Act and the preemption of state law are still serving and are up for election next week. Twenty-two senators who stood by as the bill passed by unanimous consent are also up for election Tuesday.

Details are in a blog post entitled “Did Your Representative Cause the Financial Crisis?

Many gambling laws are nanny-statism, of course, but if they’re going to go away, they should be repealed by the legislatures that wrote them. This federal preemption gave special permission to certain parts of the financial services industry to run a huge gambling operation masquerading as a market in real assets.

All this is a good illustration of why it’s harmful for Congress to let the annual budgeting and spending process go off the rails. Maybe voters will hold some of their representatives accountable.

Alan Reynolds’ Critique of Obama and McCain Tax Plans

Peter Ferrara writes that, “Obama’s tax increases will not produce nearly enough revenue to finance all his lavish spending proposals, as shown by a brilliant new paper from Alan Reynolds of the Cato Institute.” Brilliant or not, it’s serious paper I prepared for a Hillsdale College conference, which is now online (at the link to my name).