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Autoblog’s Make-Work Bias And The Truth About The GM Bailout Or TL;DR

Posted in auto industry, Chrysler, Detroit, Ford, GM, Guide, History, Politics by Vito Rispo | November 14th, 2008 | 9 Responses |

The debate over the Detroit bailout is all over the automotive blogs – every armchair pundit and auto enthusiast has their own opinion. I’ve written about it twice already (here and here). So it’s not unexpected to read 30 posts a day about the same issue. What did surprise me is how wrong so many of them are.

Autoblog, one of the big’ems in the autoblogosphere, recently published this small post indicting those of us who would dare question the GM bailout. They’re frighteningly incorrect.

Admittedly, this econ stuff is starting to get old, I’ve already written about the economics of the GM bailout and GM’s broken window fallacy; but more importantly, the bailout is essentially an unstoppable force. Still, I can’t let Autoblog get away with such heavy wrongness. They’re a blog of influence, they’re opinion formers, and I can’t just let them sully the minds of you poor, innocent internetters. Something must be done to stop Autoblog’s brutal reign of misinformation.

So I’m going to address the post, point by point. Enjoy:

The post in question is called Those cheering for Detroit’s demise may want to reconsider.

Many analysts and commentators have seemingly been cheering for the imminent demise of the Detroit-based automakers.

Right off the bat, Autoblog misunderstands the motivation of those of us against the bailout. The implication here is that us horrible free marketeers are smoking our fat cigars and guffawing heartily at the misfortunes of the common man. Not true, pinko, I don’t smoke at all. The idea isn’t that we want GM to fail because they made bad business decisions, like some kind of twisted intellectual revenge, the idea is that letting GM fail is good for the economy.

We all want the same things, every political ideology wants a healthy economy and happiness all around, it’s just that some people understand economics and some don’t. Unfortunately, it’s the default human view to not understand economics. In his book “The Mind of the Market”, Michael Shermer talks about how humans are hard-wired to mistrust the free market and favor jobs over productivity and ‘the seen’ over ‘the unseen’. Bryan Caplan talks about the same things in his book, “The Myth of the Rational Voter”, and he even has a name for it:

“Saving labor, producing more goods with fewer man-hours, is widely perceived not as progress but as a danger. I call this the make-work bias, a tendency to underestimate the economic benefits of conserving labor. Where non-economists see the destruction of jobs, economists see the essence of economic growth: the production of more with less.”

Caplan calls it the make-work bias. Good to know. The point is, economics is counter-intuitive, and our brains are naturally built to get it wrong. We’re not cheering anyone’s demise, we’re cheering the productivity of the economy.

Something that needs to be realized amidst all this talk of low-interest loans and bailout money is how interconnected the auto industry is and how it affects our economy as a whole

True. Every part of the economy is connected to every other part, that much is obvious. But the idea that Autoblog draws from that, that allowing GM to fail will somehow hurt the rest of the economy, is where they get it wrong. Yes, the economy is interconnected, and yes, without a bailout, GM will fail, but that doesn’t mean the economy as a whole will suffer. Businesses fail all the time, it’s a good thing; it’s the result of consumers deciding what they want to buy. If GM were allowed to fail, all those resources and jobs would migrate to productive areas of the economy that need them, it’d be a very good thing.

It’s been estimated that if General Motors fails, it will quickly cost the United States anywhere from 2.5-3 million jobs. Beyond the people directly employed by the automakers are direct suppliers and their sub-suppliers, many of which have been on the brink for years already. In addition, there are the tens of thousands of small and large businesses in Michigan communities and elsewhere whose existence depends on patronage from the people working in auto factories.

And there is it, the classic “broken window” reasoning, although slightly backward. The broken window fallacy basically says: “Let’s go break some windows downtown, and that will give jobs to window repairmen, and construction workers, and garbage men who get to clean it up, and truck drivers who get to deliver the new windows, etc etc; and it will benefit the economy”.

Sounds logical, right? Except that it’s completely wrong. Instead of paying for broken windows, the owners of those buildings might have wanted to buy a new car, or a new cell phone, and now they can’t; now they’re forced to buy new windows. By breaking the windows and transferring wealth to window repairmen, you took money from automaker or the cell phone maker, or whomever the money would have gone to if the windows were never broken. That is the unseen effect.

All of those 2.5 to 3 million people; all the assembly workers, accountants, finance experts, and lowly janitors are currently supported by a failed business. If we bail that failed business out, it’s the same thing as breaking all the windows downtown just so we can employ the window repairmen. Frédéric Bastiat wrote the classic “The Seen and Unseen”, where he explains that the seen are the effects on the economy that are obvious, and the unseen are the effects that are not obvious, the things that could happen with money. Autoblog has failed to see Bastiat’s “unseen effects”. Every dollar the taxpayers spend on GM is one less dollar that will be available for productive business. It’ll mean fewer jobs in other industries, fewer jobs in the service sector, and fewer jobs in all other fields.

Yes, it may take some time for all the workers to get new jobs. They will struggle during that time, but they will eventually have better jobs that are more productive, and the resources will move as well, and the economy as a whole will benefit.

Even foreign automakers will feel the pain of Detroit’s demise in a big way. Toyota, Nissan and Honda have all been hammered by the credit crunch in the last couple of months and their sales will likely drop further if people lose their jobs due to the failure of one or more of the Detroit automakers. The suppliers that will surely fail also supply Japanese-, German- and South Korean-owned factories in the U.S., so their collapse will have a huge impact on companies not based in Detroit.

Let me use an analogy: In the 1990’s, Europe had economic policies that were focused mainly on limiting job losses. They actually penalized businesses for firing workers. The net result of those policies was higher unemployment and a lower share of the working-age population employed than in the United States. As it turns out, the anti-job-loss policies make workers expensive to employ. As a result, they reduce new hires by more than they reduce job losses.

My point is, don’t confuse gross job losses with net job losses. To put it even more simply, a country where lots of people are getting fired isn’t a bad thing if more people are getting hired. And jobs here are not scarce. We have plenty of new businesses and plenty of jobs. And one of the beautiful things about the free market is that, where there are people willing to work, businesses will come.

Yes, the Detroit 3 have made a lot of stupid product decisions over the years and wasted a lot of money, but allowing the free market to pull them under will create a ripple effect that reaches more than just the shores of the Detroit River.

This is the sentence that bothers me the most. In it, Autoblog shows a complete lack of understanding of what the free market is. The free market is not a beast that we have to contend with, or a natural element like the weather that we have to “deal” with. The free market is the sum total of all the decisions of all the human beings living in the world. It’s the emergent property of the complex system of all human interaction. When a business fails, it’s because the people decided it should fail, just like when prices go up, it’s because demand increases. The invisible hand that shuts down businesses and sets prices is put in motion by the actions of every person on Earth. It’s a beautiful thing actually, and Autoblog just dismisses it like some unwholesome badness we’d all be better off without. That’s unfortunate.

And let me just nip this argument in the bud before anyone tries it out: The “pragmatism” argument, as if what I’m saying works in theory but not in the practice. Nothing could be farther from the truth. The only thing keeping pundits and politicians gunning for the GM bailout is the unfortunate strangeness of the human brain. They suffer from the “make-work” bias. The tendency for people to equate jobs with economic growth, even if those jobs are downright detrimental to growth, like the jobs at GM. Economists understand that this is the wrong way of looking at things: growth comes from productivity. An great example is the farming industry. Two hundred years ago, 95% of the people in the US were farmers, now 5% are. Farming technology has become more productive, we can get the same amount of food with less work, and that’s a great thing, even though it means less people working in the farming industry. Those many millions of people who are no longer farming are doing some other more productive things now. Those GM jobs, all 2.5 to 3 million of them, stem from an unproductive business, a business that consumers have made clear… isn’t needed. If GM fails, those jobs are free to follow the market to more productive areas and if they do, the economy as a whole benefits.

Now you know, Autoblog. or this is just TL;DR

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9 Responses

  1. Lawrence says:

    Nicely done.

  2. If those jobs go away, they will most likely simply go overseas. The idea that the workers of GM will automatically go to more productive jobs is a pleasant enough myth, but a myth nonetheless.

    When I attended HTUF (Hybrid Truck Users Forum) in 2007, Win Mitchell, in charge of King County (the county that the unincorporated area around Seattle) fleet services, and a man who had kick-started hybrid (diesel-electric) vehicles in the county he serves, and several others, via cooperative, asserted, “If you want hybrids, engage the politicians.”

    True enough, the economies of scale will help new technology, when it kicks in; but private investors are almost always hesistant to invest in new technologies, especially those related to the automotive and truck markets today, in these times of overproduction.

    The government does have a role to play. Of course, that isn’t part of the plan for those who believe solely in the Austrian School of Economics or the ideas of the late Nobel-prize winning economist Milton Freidman.

    But economist Paul Krugman just won a Nobel prize and he is one of those for a bailout, albeit with some conditions.

    While no one can predict what life will be like for the General with a bailout, one can say with reasonable certainty that it will be bloody awful in America, especially for anyone associated with the auto industry – even auto journos – if GM goes broke.

    True enough, the British government messed up their auto industry; but as John McCain said, “We’re Americans. Fight.”

    Or as Richard Nixon once said, shortly after he killed the gold standard, “We’re all Keynesians now.”

  3. Vito Rispo says:

    If those jobs go away, they will most likely simply go overseas. The idea that the workers of GM will automatically go to more productive jobs is a pleasant enough myth, but a myth nonetheless.

    And as far as those jobs going overseas, that was partially my point. We outsource lots of different types of jobs in the US, farming jobs, textile jobs. But this idea that there is a shortage of jobs in the US is just not true, all the numbers say otherwise.
    And what are you basing your comment that it’s a myth on? I’m explaining what actually happens in the real world when a business fails. Workers in that business lose their jobs, and what kind of businesses are hiring? Successful ones, ie productive ones. That’s not a myth, thats what actually happens.

    Also, side note: Krugman won the Nobel prize for his work from many years ago when he actually did economics instead of punditry. The prize has nothing to do with his current ideas.

    While no one can predict what life will be like for the General with a bailout, one can say with reasonable certainty that it will be bloody awful in America, especially for anyone associated with the auto industry – even auto journos – if GM goes broke.

    Why? Based on what?
    This attitude is at the center of this whole argument and it misses the point: A bailout will hurt the overall economy by misallocating resources. The economy will be in WORSE shape with the bailout.

    By bailing out GM, it will not make the industry work again, it won’t drive demand from consumers, it won’t guide GM down the path of profitability. The demand just isn’t there. The bailout is akin to forcing taxpayers to support the cassette tape industry because they’re losing ground to the CD industry. The market has spoken, the bailout money will be wasted and it will hurt our economy.

    Let me boil it all down, if you read nothing else, read this:
    Supporters of the bailout seem to think that the economy is like a little league baseball game, with no winners and no losers, and everyone gets a trophy. The fact is, there are winners and there are losers, we can’t have a world where everyone comes out on top. GM has lost, and a bailout for them is subsidizing failure.

    Yes, they have lots of employees, so do BMW and Kia and Honda and Toyota…all of which have plenty of plants in the US and employ US workers and pay US taxes.

    The question that no one is asking: what will the bailout actually do? Will it make GM a better company? Will it make them profitable? Will it make US consumers want to buy more cars? No, no, and no? Then what will it do? Just slow the process of GM’s failure?
    There is simply no good answer to this question.

  4. larry says:

    Another GM bailout would be a huge mistake but it’s just a symptom of the actual problem. What’s the problem?

    “We’re all Keynesians now.”

    It’s pretty obvious that listening to Keynsians like Krugman got us into this situation, why should we keep listening to them?

    “We’re Americans. Fight.”

    Ahh the words of a man who graduated in the bottom 5% of his class.
    I wonder how many times a day John McCain says that to himself when he’s in front of a mirror? I bet it’s over 100.

    DI DI MAU!

  5. dan says:

    I can follow what you’re saying, and your arguments make sense. Except for the sunshiney view that jobs are like ripe apples hanging from the trees, ready for picking, and here I have to agree with Terry. Unemployment is rising in the United States and is forecasted to approach some scary levels. With 2.5 million more jobseekers on the market, do you think that situation will get any better? Yes, quality jobs for productive businesses exist, but not in decent numbers. I’m no economist, but I can see clearly how the free market forces businesses to pare workforces and reduce wages in tough economic times. So dumping all those people onto the unemployment rolls wouldn’t just be bloody, it’d be semi-catastrophic.

    I don’t necessarily support a bailout, but I would like to see people getting down off their ivory towers before lauding the free market as the end-all, be-all solution.

  6. The Center for Automotive Research at the University of Michigan estimates that if the General goes under, it will mean the loss of three million jobs and the loss of $150 billion in tax revenue to the Federal government, over the next three years.

    It is indeed heartening and a sign of the long term good prospects for the auto industry to see Hyundai, Toyota, Honda and others with manufacturing plants in the United States. But those three million jobs aren’t just in General Motors itself, but represent suppliers to the General. If those suppliers go under, it will also affect Hyundai, Toyota, Honda and others. It is one reason the head of Toyota actually offered to do whatever he could – raise prices, send fewer cars to the States – a few years back, to avoid seeing the General go under; when it looked then, as if that might occur.

    The situation with GM has little to do with John Maynard Keynes or Paul Krugman. The current head of the Federal Reserve is not a Keynesian, nor is the current occupant of the White House, not to my knowledge.

    General Motors has almost always operated in its own universe, so to speak; and that’s part of the problem. Various chickens are coming home to roost.

    This is far and away from a Little League game. This is as real as it gets. Any student of the Great Depression understands how bad it can get; and it could happen again. Economics can be cruel, but to compare it to Darwinism, and then extrapolate that as a way for society to deal with those who end up losing their jobs, is the heighth of being callous.

    The old Civilian Conservation Corps, back in the 1930s, saved a lot of people’s lives, not only those who worked for it, but also the families who received money sent home to those, who worked for the CCC. It was required of the people who worked for the CCC, in fact.

    If GM goes under, it is likely that (by then) President Obama might have to do something similar to ensure that people don’t starve to death. There is simply now way the American economy, beleagured as it is with a war in Afghanistan, an occupation of Iraq and all the other problems it has, can provide living wage jobs to the millions who would be unemployed if GM goes under, in enough time, to ensure something other than mass chaos.

    I believe we’re in territory now where none of the old theories apply – repeat, none of them. This is why Ben Bernanke, the head of the Fed and a student of the Great Depression is so frustrated and anxious; nothing seems to be working.

    Maybe you’re right, Vito. I sincerely hope so. It would be nice to think that all those families that would be begging for food at various food banks in Michigan, if GM goes under, could survive until another day.

    Full disclosure: I worked for the senator’s presidential campaign in 2000; however, I voted for someone else this time around. Although considering my vote was made at 715 pm, Pacific Standard Time, it was entirely academic, relative to the presidential campaign.

    In my less than humble opinion, any of the people running for president this time around – Bob Barr, Ralph Nader and the other various alternative party candidates included – would be better than what we have now.

  7. Geoff says:

    No one wants to see people suffer. But whether you think GM should be saved now or not, I’m not sure I’ve heard anyone, including GM brass, say that by receiving money now that the company still would not ultimately fail in just a few more years. In fact, one of the major arguments against GM bankruptcy is that pensions and other secure income would have to be absorbed by taxpayers at a cost of about $12 billion, which is still significantly less than what the company is asking. GM has been dying a slow death for at least 20 years and while I think the U.S. NEEDS domestic manufacturing for jobs, they have been dealing with issues that won’t be solved without an entire reboot of their unions, wages, management and production models. How about, much like the huge public works projects mentioned, the Government put that money and the people who are laid off into the research, infrastructure and production of all the various components needed for the energy plans that get so much attention on this site? Hydrogen/natural gas infrastructure needed for those plans to work.? Start laying pipelines, building fuel stations and at-home fuel units and converting existing vehicles to run off of alternative fuels. Assuming GM was/is doing everything right, propping them up in the short term does not change the fact that no one can buy cars right now anyway. Better to invest in the future of the industry.

  8. Scott says:

    Anyone who believes that bailing out GM will save this company is delusional. Corporations, all of the rights of people with none of the responsibility. GM only exists in its current incarnation because of misguided federal policy in the 1950’s. So many unnecessary roads, (and just think about that bridge to nowhere in Alaska), making auto travel so much more seductive, tearing up cost efficient trolleys and street cars for wonderful polluting buses.

    It is time the citizens of this country wake up , and throw off the shackles of the auto/oil cartel. This vampire is sucking us dry. Why does the US need an auto industry, we eat a lot of banana’s, should we start a banana industry? It is just non-sense. What we need are good fair laws, that protect people, and allow business to flourish. Right now we have neither! What we need are good schools, and some way to provide incentive for people to study, math, chemistry, engineering, etc at a PhD level! Bic is a French company, I haven’t noticed any wild pen shortages, or pen price gouging.

    The GM bailout is the worst of all the old fashioned fear mongering. And the reality of the Bank bailout seems to be much the same.

  9. Andy says:

    Great post and some excellent points. I think the bailout will happen because approximately 10% of US employees are employed in the auto industry or by its suppliers/dealers. Of this, the Big three and their suppliers employ more than 2.5 million people, amounting to nearly 2 percent of the nation’s work force. So by letting them going under or having to undertake massive cost cutting layoffs could result in a sharp spike in US unemployment and further depress consumer spending. It will virtually wipe out the Detroit economy. Politically and ecconomically the government has to act