Don Boudreaux on the bailouts of General Motors and Chrysler

See There’s Much More to the Matter.

"Here’s a letter to the Washington Post:

E.J. Dionne insists that the Obama administration’s bailouts of General Motors and Chrysler are evidence that “government works” (“Don’t buy the spin. Government works.” Jan. 22).  Forget that, as Mr. Dionne admits, taxpayers got back only seven out of every eight of the 80 billion dollars of the bailout money, for a return of negative (!) twelve-and-a-half percent.

Instead, recognize that the most serious arguments against bailouts are not the superficial claims that Mr. Dionne quotes from the likes of Mitt Romney and Rush Limbaugh.  The correct economic arguments against bailouts all point more deeply to what is not seen.  Yes, we all see that resources directed to G.M. and Chrysler by the bailouts ensured that these companies survived intact.  No serious person ever doubted this outcome.  But what Mr. Dionne and too many others don’t see are real costs and hidden consequences – costs and consequences that are revealed by asking probing questions.

For example: What would G.M. and Chrysler look like today without the bailouts?  Contrary to Mr. Dionne’s assumption, failure to bail out these companies was not destined to lead to their total demise.  Instead, they would have gotten private funding likely on the condition that they scale down their operations.  Might such reductions in size mean that today these companies would be better able to withstand future financial crises – and, hence, be less likely to ‘need’ bailouts in the future?

Another question: how would the resources commandeered by Uncle Sam for G.M. and Chrysler otherwise have been used?  Mr. Dionne assumes that these resources were and would have remained idle.  But that’s incorrect.  If not directed artificially by government to G.M. and Chrysler, these resources would have been directed naturally by the market to other productive uses.  What goods and services are we Americans today not producing and consuming because of the bailouts?  What jobs do Americans today not have because of the bailouts?

And finally: what expectations did those bailouts create, and what are the consequences of those expectations?  Because large and highly visible firms are now more likely to be bailed out, executives of such firms can be more careless in their decision-making.  The future consequences of such carelessness almost surely include higher costs of production, lower real wages, and a further shifting of executives’ attention away from meeting the demands of consumers spending their own money and toward gratifying the whims of politicians spending other people’s money.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

…..
When it comes to economics, E.J. Dionne is like far too many pundits: he mistakes that which is visibly and vividly in front of his nose for all of economic reality."