Today in a surprisingly honest article by CNN, it was announced that Obama will not bail out Detroit because a) he can’t and b) it’s not a good idea. In the article, it is admitted the Obama does not have the power in this case to do a bailout. The difference, as explained by CNN, is that back in the auto bailout days, the president (and his predecessors) had money from the Troubled Asset Relief Program (TARP) at his disposal, free of the whims of congress. In essence, one man was given the authority to determine who the winners would be and who the losers would be. And a big hint: it wasn’t a meritocratic decision by a long shot.
The article then goes on to explain why a Detroit bankruptcy is necessary. To do that, it first had to establish why the automakers were bailed out. The argument put forth by top economic advisor Jared Bernstein is that a lack of bailout would lead to the liquidation of GM and Chrysler that would have “rippled into bankruptcies and job losses across the rest of the auto industry and the U.S. manufacturing base.” Right away, there is an obvious hole in the thinking. Why would the rest of the automobile industry see bankruptcy if their competitors went out of business? Wouldn’t the bankruptcy of GM and Chrysler mean more business for Ford? Clearly, the argumentation is lacking.
However, aside from this contradiction, there is a more fundamental question that needs to be asked. Why does manufacturing exist in the first place? It certainly isn’t manufacturing for manufacturing’s sake. The truth is that we make cars because people want cars. Therefore, there is no reason why GM and Chrysler have to exist per se. In fact, their bankruptcies are evidence that the there is overproduction of cars and insufficient demand. If people don’t want as many cars as the market is supplying, then why do we as a nation insist that cars should be produced? Surely, our resources could be better used satisfying real demand. The argument the goes that it is not the cars themselves that is important, but jobs that are made in the process that are valuable. Without these precious jobs, there would be fewer consumer dollars, and with fewer consumer dollars, more businesses will bankrupt, and with bankruptcy comes even fewer consumer dollars. The problem with this line of reasoning is that it presupposes that jobs lost in manufacturing will not be made up elsewhere. It has been the age old task of entrepreneurs to find out what the consumer wanted, before the consumer himself knew, and to capitalize on this. Therefore, with money not spent bailing out GM, the economy’s entrepreneurs would be going out finding opportunities that satisfied real consumer wants. In such a way, they would be employing the same labor as GM would have been, except this time, in ventures that the marketplace actually desires. The people actually getting laid off due to bankruptcy would go through real suffering, and society has a moral obligation to ease this pain, but it is wholly illegitimate to argue that a bailout saved jobs on net. At best, it diverted them, and at worst, it even destroyed them.
Now, let’s take the argument put forth on why the automakers were bailed out for good economics for a moment and see why Detroit is different. Although Bernstein was so gracious as to give reasons why the 2008 bailout was in order, while addressing Detroit, the most they can give is “That was the case then. I don’t think this is that’s the case here.” The fact that such a line of reasoning passes as an informed opinion is stunning. Such an argument, only backed by assertion is something you would expect from a friendly debate amongst underinformed college students, not something you want to hear from one of the supposed top authorities in economics.To be clear, I am absolutely in agreement here with the president that Detroit does not deserve a bailout. The last thing we need is to divert money away from productive enterprise into a failed an inefficient municipality, but when I see the president making a decision that will affect the lives of thousands if not millions of people, I hope to see better justification than “I don’t think this is the case here.”