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