“…the art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”
Peter Schiff has said about this whole GM bailout debacle, “Why would we want to prop this company up? So they can go on losing billions more? Why not just let them fail? We need an automobile industry in this country and I’d like to have one but we don’t need GM and we don’t need Ford and Chrysler, these guys have run the industry into the ground.”
And why not let them fail? GM has lost nearly $30 billion this year and it’s share price is down 80 per cent from where it was in January. They’re not competitive and they’re not producing the quality of cars that some of the other major companies are. And now they’re asking for $15 billion dollars from the US government, which would have to come from taxpayers or from the Fed’s printing press, in which case it would eventually impact taxpayers dollars anyway in the form of inflation.
The economist point of view usually runs contrary to conventional wisdom, so it’s a tough side to argue. But I’ll try.
This idea that we need to prop up GM to save jobs is a variation on the Broken Window fallacy. If you’re not familiar with Frédéric Bastiat’s parable of the broken window, here is an ultra-simplified version of it: “Let’s go downtown and break all the windows in the bank. That way, we’ll create new jobs for window makers. The window makers will get paid to replace the bank’s windows, and then use the money they made to spend on other products and it’ll filter out and be a gain for the economy as a whole.”
This is, of course, total nonsense. Destruction never benefits society. The owner of the bank needs to pay for the new windows and he’s been robbed of his ability to use that money elsewhere. He may have wanted to spend that money on new shoes and a new suit. So the shoe maker and the tailor actually lose out because of the broken windows. That is the unseen effect.
The essay that the broken window fallacy comes from is called “The Seen and Unseen”. The idea of unseen factors is a recurring theme in economics. The unseen part of the equation is often the most important part, and the fact that it’s unseen leads people to misinterpret the situation. The unseen part of the GM bailout is the future use of the $15 billion dollars that gets taken away from taxpayers. If taxpayers had that extra money they could have spent it on maybe a new phone, for example, and the sum result of many people buying a new phone could have lead to an advancement in technology in that field, which would create jobs.
So by bailing out a failing company, we’re not saving jobs. It may appear superficially that we are, but all we’re really doing is helping those particular jobs at the expense of some future jobs that otherwise would have been created. Just like by breaking the banks windows, we’re helping the glass makers at the expense of the shoe maker and the tailor.