The Inherently Ideological Evaluation of the GM Bailout
Megan McArdle has done consistently excellent reported pieces on the GM bailout, and her recent evaluation of its net effect on the U.S. Treasury is no exception. Her bottom line is that the deal caused U.S. taxpayers to:
burn $10-20 billion in order to give the company another shot at life. To put that in perspective, GM had about 75,000 hourly workers before the bankruptcy. We could have given each of them a cool $250,000 and still come out well ahead compared to the ultimate cost of the bailout including the tax breaks
This is in line with the Obama administration’s $14 billion estimate of the net cost to the Treasury, as reported in the Wall Street Journal. If anything, I think this understates the case on the direct costs, because it does not consider other direct transfers of economic value like the government support for Delphi that inflated the value of the asset that GM sold to create a big chunk of their headline profits this past quarter, green car development subsidies, and uncompensated interest costs on the government investment.
But no matter what realistic direct bailout costs you estimate, the objection of bailout defenders is that it is dwarfed by the other receipts or avoided expenditures created by the bailout. According to the Wall Street Journal, this is exactly the defense offered by the Obama administration:
The White House report said the money invested in GM and Chrysler ultimately saved the government tens of billions of dollars in direct and indirect costs, including the cost of unemployment insurance and lost tax receipts that the government would have incurred had the big Detroit auto makers collapsed.
There is a lot to this point, but it’s not really so simple. You can’t compare all of these net tax receipts (or more broadly, economic activity) to what would happen in “the world as it is today, minus GM.”
First, in the event of a bankruptcy, you don’t burn down the factories, erase all the source code on all the hard disks, make it illegal to use the brand name Chevrolet, and execute all of the employees. Others take ownership of the assets, and the employees go on with their lives. Some of these assets will be put to use generating revenues, profits and taxes, and some of these former employees will get jobs or start businesses, and generate revenues, profits and taxes. In order to measure the effect of the bailout over, say, five or ten years, you have to compare the actual taxes collected to what would happened over this same period in the counterfactual case where the bankruptcy was allowed to proceed. What owners would have bought the factories and IP assets, and what would they have done with them? What businesses would the former employees have started? Who would have moved to Arizona and retired? What new industry clusters will evolve in Arizona because of this transfer of people?
Second. some of the profit GM makes today would have been made by other companies that picked up some of the slack if the company lost market share after a bankruptcy. They would pay taxes on these profits, and as far as government receipts are concerned, money is money. How would auto industry structure evolve over time given whatever changes happened to the assets currently owned by the legal entity GM, or the employees currently paid by it?
Anybody who tells you they can answer these question reliably is full of it.
And that doesn’t even start to get to the really long-run considerations of what effects this has on rule of law and moral hazard (or if you want to make the case for the bailout, social solidarity and degradation of the working class).
I hold the belief, quite strongly, that the net effect of the GM bailout will be negative. More precisely, I hold the belief that over a series of many such decisions, a mindset that would have been stringent enough not to have sanctioned the GM bailout is likely to lead to better overall economic outcomes for America. This belief is ideological – not in the sense that I just hold it for inexplicable reasons that cannot ever be changed by empirical analysis – but in the sense that I don’t believe that human beings currently have the capability to conduct the kind of analysis that should convince a rational observer to change his mind about the GM bailout in isolation from a more profound paradigm-shift-like change in his beliefs about the world.
The GM bailout is not an isolated case of this problem. And as I’ve argued many times, impressive-sounding empirical analysis is typically insufficient to measure the effect of important economic interventions like the stimulus program. If you can’t even measure what effect already-executed programs have had, how likely is it that you can predict the effects of future programs?
Acceptance of this degree of ignorance doesn’t cut equally against all ideological positions. It leads naturally to a call for decentralized decision-making, experiments, and entrepreneurial groping toward knowledge.
(Cross-posted to The Corner)
1) I suspect that the “bailout defenders” who estimate tax losses in the event of a GM bankruptcy are actually aware that assets can be bought out of a bankruptcy and that unemployed workers can sometimes find new jobs, and that their estimates take that into account. (One is reminded of the global warming skeptics who will confidently tell you that what climate scientists “forget” is that ice floats in water. Really, they’re on top of that phenomenon.)
2) Drilling down on that issue a bit: it is certainly possible that factories would be bought out of the bankruptcy and that workers would be re-employed. It is also possible that factories can just sit there crumbling for decades, and unemployed workers can just drift into poverty. (Example: Detroit.) And who is going to buy the Chevrolet brand name? SnorgTees? To be sure, it’s not all or nothing, but there would be substantial losses in a liquidation.
3) The contention that government should not take action unless the benefits of that action can be precisely measured is itself an ideological principle, not a neutral principle. (This is a principle for which JM has advocated in the context of global warming, to the effect that “yes, global warming is real, and yes, a carbon tax would reduce GHG emissions, but we shouldn’t enact a carbon tax because we can’t precisely calculate what it should be.”)
4) There are perhaps some good arguments for this principle, but it is not a principle that people generally apply to other kinds of serious decisions. (“Yes, Junior, you could probably make more money in your career if you went to college, but maybe you wouldn’t, and in any event you can’t calculate precisely how much more you might make, so you shouldn’t go.”)
— alkali · Jun 2, 01:35 PM · #
Acceptance of this degree of ignorance doesn’t cut equally against all ideological positions. It leads naturally to a call for decentralized decision-making, experiments, and entrepreneurial groping toward knowledge.
I’ve had said this in this space and elsewhere, and I have said it to you, Megan, Peter, and others: saying “we should have epistemological humility, and therefore should do precisely what my ideology tells us to do” is neither responsible nor credible, Jim.
— Freddie · Jun 2, 03:00 PM · #
“It leads naturally to a call for decentralized decision-making, experiments, and entrepreneurial groping toward knowledge.”
And how does any of that deal with a problem like GM or the financial catastrophe that enabled it? Wouldn’t a regime of strictly enforced government regulation be essential to ensure that mistakes, corruption and business cycle excesses don’t outstrip such willfully limited tools for dealing with them?
Mike
— MBunge · Jun 2, 03:30 PM · #
Freddie:
I don’t think you’re being fair to Jim. He’s probably right that his version of epistemic humility does lead logically to certain ideological outcomes – maybe you can get from epistemic humility to Soviet-style central planning, but I don’t see how.
But I think what needs to be acknowledged is that if epistemic humility on a Manzi scale leads to a particular ideology, it’s an ideology of radical decentralization. I suspect it leads to the conclusion that large states as such – certainly as large as the United States, probably anything bigger than Ireland or Singapore – should be broken up into smaller units.
Preservation of that kind of decentralization would, in turn, require a pretty zealous effort to limit outsider access into the small-scale decisionmaking unit, because otherwise non-state entities like large multinational corporations become the real decisionmakers, and if they are large enough they will not behave in the way Jim wants them to.
— Noah Millman · Jun 2, 03:35 PM · #
Noah,
Sorry, posted and then saw your reply to Freddie.
I think in a Kantian world of perpetual commercial peace, that is exactly what we would see. An important balancing consideration in the world of human beings with irrational (that’s not used normatively here) attachments and urges is to have sufficient scale to defend against armed aggression.
Best,
Jim
— Jim Manzi · Jun 2, 03:47 PM · #
Freddie,
Imagine two worlds.
World 1: The world we live in, in which we accept argunedo that we cannot reliably measure and predict the impacts of things like the stimulus program or the GM bailout.
World 2: The world we live, but we have the capacity to reliably measure and predict the actual impacts of things like the stimulus program or the GM bailout.
What key differences, if any, do you think a rational government should take to how it makes decisions about these kinds of issues in these two different worlds?
Best,
Jim
— Jim Manzi · Jun 2, 03:49 PM · #
Continuing my thought to respond to MBunge:
So far as I know, there are only three responses to the growth of oppressive or stultifying centralized authority. One is to leave: strike out for the frontier, where there is no such authority. That was once a very viable option. It is decreasingly so because of human population growth and technological advances.
A second is to fight for local control of anything you can come up with – militias, schools, currency, religion, you name it. And to fight against authority: against standing armies, against the Supreme Court, against both the central bank and the private banking system. Accept that potentially oppressive local despotism, as well as vulnerability to outside invasion, are the prices you pay for local independence; that while your own little community may well fail, the human race as a whole will do better with a zillion little experimenting communities than under the harmonizing oppression of central authority. This has historically been the “conservative” response to centralism, though it doesn’t have much to do with the way the modern conservative movement operates.
A third is to try to create a counterbalancing set of authorities. Accept the existence of big business – but fight to create big labor and big government to balance them. Accept the existence of big government – but create big national interest groups to fight for one’s own class or demographic interest at the imperial center. Accept the existence of large standing armies – but create international institutions to limit the applicability of armed force as the solution to inter-state conflict. This has historically been the “progressive” response to centralism.
You’re basically asking a progressive question: if you oppose centralized regulatory efforts, aren’t you allowing raping and pillaging of the commons by large, centralized private entities? If you have a national banking system, don’t you need a strong national regulatory authority to keep it in check?
I agree with you. But there is also the option of saying: we shouldn’t have a national banking system, because the gains to efficiency from reduced transaction costs in such a system are more than offset by the combination of loss of local independence (and the ability to experiment that goes with it) and the need to regulate large private banking enterprises (which entrenches central authority, with further negative consequences for local independence). Not to mention that the regulatory function may not be possible – both because we lack the knowledge to perform it properly, and because it will inevitably be coopted by the very entities the progressive seeks to regulate. (I suspect Jim would make both of those arguments.)
In our world, though, an advocate for local control and experimentation like Jim is faced with a difficult political choice. Because “break up the United States into more manageable units” is not a politically viable option. And if the political argument is between, say, a left-winger who wants the Federal Reserve to target a higher rate of inflation to bring down unemployment and a right-winger who wants the Federal Reserve to keep inflation at zero so as to preserve the “value of money” (which is in the interests of asset-owners), what should someone who believes the Federal Reserve cannot do its job well whatever job we give it be arguing? Similarly, if the debate is between “we have to bail out the banks but we should let GM go bankrupt” and “bail out GM because you bailed out the banks and you just can’t blatantly favor bankers over auto workers like that,” what should someone who believes we shouldn’t have bailed out the banks be arguing?
Jim is not a natural radical. That’s another aspect of his epistemic humility. But epistemic humility on his scale leads to radical conclusions. So what he winds up doing is arguing incrementally against proposals that seem to be based on faulty centralist assumptions and epistemic hubris. Which, in turn, means taking a lot of positions that, to a progressive, mostly appear to be supporting overweening private interests.
— Noah Millman · Jun 2, 03:56 PM · #
Jim:
But the question is what scale that is. It’s not at all obvious that the optimal scale is “big as you like.” Imperial China and Imperial Rome were both exceptionally large and didn’t do terribly good jobs, at the end of the day, at defending their populations against armed aggression.
And, actually, the question would not merely be “what is the optimal scale for defense against armed aggression” but rather: at what scale do the costs due to centralization outweigh the benefits of greater defensibility?
If you really believe in the enormous value of small-scale experimentation, it seems to me you should find that optimal scale to be considerably smaller than the current size of the United States, particularly given the exceptionally favorable geography that the United States enjoys.
This is largely an abstract argument, of course. But George Kennan argued late in life that the best way to preserve the United States was to break it up into at least ten smaller countries. I think it’s a stretch to call Kennan a naive believer in perpetual commercial peace.
— Noah Millman · Jun 2, 04:07 PM · #
I suspect that the “bailout defenders” who estimate tax losses in the event of a GM bankruptcy are actually aware that assets can be bought out of a bankruptcy and that unemployed workers can sometimes find new jobs, and that their estimates take that into account. (One is reminded of the global warming skeptics who will confidently tell you that what climate scientists “forget” is that ice floats in water. Really, they’re on top of that phenomenon.)
I, too, think the defenders of bailouts were on top of this. That’s why they worked so hard at pretending they didn’t understand, and why they worked so hard to keep us from having an honest and open discussion of it at the time.
— The Reticulator · Jun 2, 04:35 PM · #
JM: “Imagine two worlds. World 1: The world we live in, in which we accept arguendo that we cannot reliably measure and predict the impacts of things like the stimulus program or the GM bailout.”
1) I take it you mean by here “arguendo” “accept as a given” rather than in the sense “assume arguendo that Mars is inhabited by little green men.”
2) That being said, I don’t accept as a given that we can’t meaningfully predict the results of things like the stimulus program or the GM bailout. We can make assumptions and estimate, we can see if there are upper and lower bounds, we can get a range of possibilities, and we can understand the those results are sensitive to the assumptions. Sometimes we will see that the likely result is unambiguously good or bad; sometimes we will see that the result is likely to be good but there is a chance of a bad result (or vice versa); and sometimes the results will be genuinely ambiguous. But I don’t accept that being unable to calculate the benefit or cost of the GM bailout to the penny means we can never meaningfully predict whether the GM bailout was a good or bad idea.
3) A nice rhetorical response might be, “Well, I’m not saying we need to know to the penny, but is it too much too ask that we know to the nearest billion?” Well, yes, it might well be. Suppose that we do a reasonable calculation that suggests that the GM bailout has a potential net upside of $200b and a potential net downside of -$20b. The fact that we don’t know within $1b or $10b what the result will be is not a compelling argument against the proposal. (If the range were $60b to -$40b, on the other hand, there would be a better argument for prudent restraint.)
4) All of which is to say that whether we can meaningfully predict the results of a particular policy proposal is (i) in part an empirical question that depends on the proposal and the circumstances and (ii) in part an ideological question as to what your standard is for “meaningful” prediction. I don’t buy (at least) the ideological part of your answer to that question.
— alkali · Jun 2, 04:49 PM · #
“So far as I know, there are only three responses to the growth of oppressive or stultifying centralized authority.”
You’re skipping over a big point, there. Not all centralized authority is oppressive or stultifying. I’m not even sure centralized authority is inherently predisposed toward oppression or stultification. Is the modern industrialized world more oppressed or stultified than the Third World? Are Americans in 2011 more oppressed or stultified than Americans in 1971? Were Americans in 1971 more oppressed and stultified than Americans in 1941? Or 1911? If there are differences in levels of oppression and stultification, can they be connected to size of government or level of centralized authority? Would Jim Manzi rather be a white, male business owner having to deal with the centralized authority of 2011 or would he rather be a black woman trying to live in with the results of decentralized authority in Mississippi 1921?
I’m not trying to be a smartass here, but upon what is Manzi’s philosophical/ideological argument based? Is he referencing some historical example that he prefers or some theoretical construct which no society has ever really followed?
Mike
— MBunge · Jun 2, 04:54 PM · #
Wouldn’t a regime of strictly enforced government regulation be essential to ensure that mistakes, corruption and business cycle excesses don’t outstrip such willfully limited tools for dealing with them?
Wow. It’s not just a scary bedtime story. There really are people like that.
— The Reticulator · Jun 3, 08:33 PM · #
As a progressive, I would argue that the GM bailouts, the bank bailouts, and even to some extent TARP represented a failure of nerve by the Left, a failure that has exacted a serious cost. If the Democrats had refused to pass TARP, if they had refused to bail out the banks, if they had let AIG go down the tubes, the world would have faced a real crisis. Without liability insurance that AIG has historically underwritten, for example, the airlines cannot fly. Large areas of the economy would have threatened to grind to a halt.
And then the world’s people would have had to grapple with the trust the so-called “Washington consensus” has encourages us to place in private institutions. Since the 1980s, neo-liberal assumptions have dominated trade and finance: privatization and deregulation have turned into mantras. Americans in particular receive most of their social benefits indirectly, through their jobs. With huge numbers of auto workers and former workers cut off from benefits they depended on by a corporate failure, the argument for public health insurance and public pensions, either on a state level or on a federal level, would have taken place in a context where the public had to face up to the limits of corporations as benefits providers, because millions of people had direct, and harsh, experience with those limits.
For all the talk of epistemic humility, it seems to me that the bailouts actually denied a huge number of people real information, information that they might have used to reevaluate the current economic system. Instead, we got the bail-outs, and I would argue that as a direct result Americans got the tea party.
— John Spragge · Jun 4, 01:13 PM · #