Unwittingly Enabling Crony Capitalism
by Don Boudreaux on May 9, 2011
in Crony Capitalism,Myths and Fallacies,Other People's Money,Seen and Unseen
Here’s a letter to the editor of the Washington Post:
You’re right that high-school graduates should know more economics (“Va. high school grads should be economically literate,” May 9). But so, too, should newspaper columnists such as E.J. Dionne who today writes “Far too little attention has been paid to the success of the government’s rescue of the Detroit-based auto companies, and almost no attention has been paid to how completely and utterly wrong bailout opponents were when they insisted it was doomed to failure” (“Rescuing Detroit: No news about government’s good news“).
Mr. Dionne misses two fundamental economic insights: first, nothing is free, and, second, that which is unseen is as real as that which even the most myopic pundits manage to spy.
Economically literate opponents of the Detroit bailout never denied that pumping hundreds of millions of taxpayer dollars into Detroit automakers would restore those companies to health. Instead, they argued, first, that bailing out Detroit takes resources from other valuable uses. Because he doesn’t even recognize that other valuable uses were sacrificed by this bailout, Mr. Dionne offers no reason to think that the value of saving Detroit automakers exceeds the value of what was sacrificed to do so. No legitimate declaration that the bailout is successful is possible, however, without evidence that the value of what was saved exceeds the value of what was sacrificed.
Economically literate bailout opponents argued also that it sets a bad precedent. By signaling to big corporations that government stands ready to pay the tab for the consequences of their poor decisions, big corporations will more likely make poor decisions in the future. It’s far too early for Mr. Dionne to conclude that this prediction is mistaken.
Sincerely,
Donald J. Boudreaux
90 comments…
1 Nick May 9, 2011 at 11:15 am
Or put even more succinctly,
“Every government interference in the economy consists of giving an unearned benefit, extorted by force, to some men at the expense of others.”
– Ayn Rand
cafehayek.com
...I would offer a third concern — that the government has kept hundreds of thousands of skilled workers and billions of dollars of physical assets under the management of the same group that have decidedly underutilized these assets in the past. A bankruptcy without Federal intervention would likely have shifted assets and skilled workers into new companies with different management teams and cultures pursuing different strategies with different information.
I always have trouble explaining this issue to people. Think of a sports team with great players but a lousy coach and management team. Having the government ensure that the lousy management stays in control of the great players is a waste for everyone. I explained it more in depth in this post, where I concluded
A corporation has physical plant (like factories) and workers of various skill levels who have productive potential. These physical and human assets are overlaid with what we generally shortcut as “management” but which includes not just the actual humans currently managing the company but the organization approach, the culture, the management processes, its systems, the traditions, its contracts, its unions, the intellectual property, etc. etc. In fact, by calling all this summed together “management”, we falsely create the impression that it can easily be changed out, by firing the overpaid bums and getting new smarter guys. This is not the case – Just ask Ross Perot. You could fire the top 20 guys at GM and replace them all with the consensus all-brilliant team and I still am not sure they could fix it.
All these management factors, from the managers themselves to process to history to culture could better be called the corporate DNA…
So what if GM dies? Letting the GM’s of the world die is one of the best possible things we can do for our economy and the wealth of our nation. Assuming GM’s DNA has a less than one multiplier, then releasing GM’s assets from GM’s control actually increases value. Talented engineers, after some admittedly painful personal dislocation, find jobs designing things people want and value. Their output has more value, which in the long run helps everyone, including themselves.
The alternative to not letting GM die is, well, Europe (and Japan). A LOT of Europe’s productive assets are locked up in a few very large corporations with close ties to the state which are not allowed to fail, which are subsidized, protected from competition, etc. In conjunction with European laws that limit labor mobility, protecting corporate dinosaurs has locked all of Europe’s most productive human and physical assets into organizations with DNA multipliers less than one.
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