Looking forward or paying off prior mistakes

In a piece in the NYT yesterday Tom Friedman argues that the stimulus should concentrate more on encouraging enterprising new ideas than in trying to rescue old ones that are failing. By any standard he has some pretty strong words for the auto industry. At one point he comments "G.M. has become a giant wealth- destruction machine — possibly the biggest in history." That sounds tough but by one estimate it seems accurate. One recent comparison suggested that the value of GM in 1929 (in 2008 dollars) is actually about 25% greater than today. So for holding a stock for 80 years nets a reduction in real terms of 25%. He has similarly harsh comments for Chrysler.

He suggests that rather than spending $20 billion to bail out these companies that the Treasury call the top 20 venture firms and say invest $1 billion each on some new ideas in green technology or in other innovative ideas that look forward rather than backward. While there is a potential risk in the proposal - harkening back to the ideas of industrial policy that were popular when we thought the Japanese economy was one to emulate. It makes a lot more sense than the current auto bailout.

There is a constant tension in public policy debates like this between notions of equity and efficiency. The President's proposals are focused too much on equity - making sure that we reduce the pain of transitions. It is unlikely, even with a new infusion and possibly another - that either of the two ailing big three will ever come back to vibrancy. From my perspective, Friedman's suggestion is a much better idea.