The more we hear about the government’s ever-changing $700 billion Troubled Assets Relief Program, the more it sounds like a trem de alegria leaving the station. Literally “train of happiness,” this is an episodic phenomenon in Brazilian politics where getting family and friends on the government payroll seems to be lawmakers’ primary activity.
Brazil’s presidents and finance ministers struggle to limit already-inflated civil service numbers. But then they need some bill passed, and legislators see an opportunity to load it up with new government jobs. They create a train that everyone can jump onto.
Similar things happen here. Remember David Stockman, Reagan’s first director of the Office of Management and Budget, who complained, “the hogs were really feeding,” as special-interest lobbyists loaded tax-reform bills with special provisions.
Now, as legendary comedian Jimmy Durante would have said, “everybody wants to get into the act.” Flailing insurance giant AIG is getting even more money. Mortgage giant Fannie Mae wants more. The U.S. automakers want big loans and capital injections.
Financial firms like GMAC that long gloried in their exemptions from banking regulations now clamor to create bank holding companies so they have greater access to Federal Reserve lending. Well-off retirees want exemptions from long-established rules for tax-subsidized retirement accounts like IRAs.
Is any of this a good idea in the view of economists? If not, are there better things that government could do?
The quick answer from economists is that, in general, government handing money to companies that have screwed up their business is a bad idea. It usually wastes resources and hurts society.
That said, in serious financial crises, there is a legitimate need for a “lender of last resort” that can inject money into financial institutions to prevent a chaotic collapse of the credit and payments system. The Fed is best in filling this role. Indeed, the occasional need for such a last-resort lender is one of the reasons nations need central banks.
Moreover, for the majority of economists who accept John Maynard Keynes’ argument that governments should act to limit recessions, big increases in spending by the Treasury are important.
The question is what we spend it on. To most economists, pumping money into financial markets is a necessary evil that protects society as a whole.
Pumping money into U.S. auto companies, however, is not a good idea for many reasons. Detroit automakers are like alcoholics that have repeatedly spurned opportunities to recover.
It’s not that the whole U.S. auto industry is sick. There are solvent companies with efficient, profitable plants that employ tens of thousands. But those companies — Toyota, Nissan, Honda and others — have their headquarters in Asia, and their plants are located in states like Tennessee.
Yes, auto sales are slumping, particularly for Big Three models. But the U.S. economy will go on and Americans will continue to buy millions of cars each year over the long run.
It is far from clear that putting taxpayer money into GM and Chrysler would do anything other than prolong their agony, wasting real and financial resources in the process.
Rather than maintain life support for failing companies and for management that has screwed up again and again, it would be better to spend the money on the employees who will be hurt as the domestic-owned industry is restructured.
There is a procedure for such restructuring. It is called bankruptcy. Yes, GM and Chrysler declaring bankruptcy would cause large economic problems. But that does not mean all their plants and employees would never produce anything again.
Some factories would be shuttered and eventually torn down. But others would re-open under different organization and ownership. Dealers would sell cars and parts manufacturers would have customers. And, over time, many thousands of workers would have good jobs.
In the short term, they will suffer. So will many other people losing jobs across the economy. All of these people should get substantial help during this transition. An extra $100 billion for extended unemployment and retraining benefits would do more for our society in the long run than probably doomed efforts to keep Detroit carmakers afloat indefinitely.
“Train of happiness” politics poses the principal problem. If some $150 billion is going into AIG, a company most people never heard of before this year, it is hard to say no to well-known companies with their hands out.
It is a tragedy that all this is happening during a presidential transition. George Bush is an amputee duck and Barack Obama won’t have a team up and running for at least three months. Prospects for sound policy are not good.
© 2008 Edward Lotterman
Chanarambie Consulting, Inc.