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Wednesday, May 6, 2009

Government Motors: Redux

With all of the hype about Swine Flu coming into this country through infected Mexicans slipping over the border, one forgets that a worse malady, the “British Disease,” is being promoted by the Obama administration as an economic cure.  If there ever an occasion to call out, “Not so fast, my friend,” it is this one.

In the years after World War II, the British government went on a binge of nationalization, and after the economy became even more tenuous and less competitive, the government nationalized failing firms, an action dubbed “lemon socialism.”  Now, one would think that with this sorry example being available, U.S. policymakers might try to refrain from allowing the British Disease to slip into our body politic, but apparently arrogance is overshadowing good sense and the understanding of history.

The latest government caper is the attempt to nationalize General Motors and Chrysler, with the government taking large ownership shares in each company, along with the United Autoworkers.  Taking up the rear are the people who actually lent money to those companies and who now are being given the back of the hand.  When some Chrysler bondholders recently balked at the government’s “permitting” them to gain about 30 cents on the dollar, President Obama denounced them as “speculators” and worse. Even though Chrysler right now is in bankruptcy court, I suspect we are looking at a fixed outcome based on what the government wants.

For all of the talk of calamity if GM and Chrysler shut down for good in a Chapter 7 bankruptcy (which the government will not permit to occur, unfortunately), we have to remember that the losses being sustained by these two companies mean one thing and one thing only: their continued existence in their present state is destroying wealth.  That makes the economy worse not better.

Supporters point to the millions of people employed in the GM and Chrysler production and sales chains and then claim that if the companies went under, the job losses would be “devastating.”  That is true, but only partly true.  The job losses would be devastating to those individuals and regions connected to those companies.

However, the net effects of a shutdown of these firms would be positive, and they would be realized at various margins throughout the economy.  Contrary to Paul Krugman’s “Depression Economics” view that an economy gains when government “stimulates” the use of “idle or underutilized resources,” in truth, the Law of Scarcity does not disappear.  There is a reason as to why these resources are “underutilized,” and it has nothing to do with an alleged fall in “aggregate demand.”

Instead, it has everything to do with the fact that American consumers prefer the vehicles made by GM’s and Chrysler’s competitors.  Furthermore, the extravagant labor packages that these companies had with the UAW highlights the further irony: the two entities that had the most to do with the demise of the domestic auto industry, government and labor unions, now are taking charge of GM and Chrysler.

Obviously, the only way that these companies can survive now is through massive taxpayer subsidies, which further will destroy wealth and make our economy worse off.  I cannot imagine the government permitting GM and Chrysler’s competitors to go unmolested, so look for all sorts of contrived action against the U.S. subsidiaries of foreign companies such as government probes and union-organizing attempts.  The last thing a government firm is going to tolerate is competition, and honest competition at that.

Thus one charitably can say that this new edition of Government Motors is going to be an economic disaster.  The venture will destroy wealth and make it even harder for people who are not politically connected to make a decent living.  It certainly is not a recipe for economic recovery, but somehow, I doubt that the powers that be in Washington really care.  They are going to have their very own “lemons” as socialist play toys.  O joy.

  • Dr. William Anderson is Professor of Economics at Frostburg State University. He holds a Ph.D in Economics from Auburn University. He is a member of the FEE Faculty Network.