Two thoughts about the bailout

In the last few days the frenzy about bailing out the big 3 has reached a fever pitch. As I noted a few days ago I have very little confidence that people like Barney Frank, who helped to get us into the soup on mortgage issues, has any idea about how to solve the problems for autos.

#1 – Government Corporations are an oxymoron
Think of well run government enterprises. Hard isn’t it. We have such sterling examples such as the US Post Office (who stays alive by having a government monopoly on some types of traffic and still cannot turn a decent return), or Amtrak (enough said), or Fannie and Freddie.

I tremble at the notion of having a car czar. The car czar promises to be no more successful than the energy czar or the drug czar. Drugs, transportation, and mail delivery have good examples of competition which is constantly working to improve their system while the government managed enterprise looks and feels like a horse and buggy operation.

#2 – The most ingenious argument for a bailout.
Some have suggested that if we allow the companies to go into bankruptcy (or reorganization) that people will not buy their products. It is suggested that individuals will not buy something that lasts for a number of years when they know that the company that brought it to you may not be around. That is ingenious, but wrong. Here are a couple of counter-arguments.

First, if the uncertainty of the industry is so great as to inhibit purchases, then why will some federal loans make that situation any better. We are told that GM will run out of cash without the infusion – but the solution is less than half a loaf. So why would we assume that they will not eventually be back for the whole package? If the problem is uncertainty, why not use some of the money to guarantee warranty programs? The answer is that the private markets are fully capable of producing risk control mechanisms like that without the help of the government. But that is not what the auto makers are after.

Second, if the problem for the auto companies is a slowdown in consumption, then why not try to solve the problem where it is supposed to be? Why not establish a program which would give an equivalent amount of money to individual consumers through a one time tax abatement or some other mechanism which would encourage them to consume? The answer is that Congress cannot figure a way to not aid the healthy parts of the American auto industry at the same time. Those rebates might well go to the automakers, who have lowered their cost structures, rather than to the legacy companies who happen to have been started in the US.