Economics

Does History Favor Government Rescue of GM & Chrysler?

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Writing in The Washington Monthly, Phillip ("We need more babies!") Longman says the gummint should rescue Detroit because it did such a good job in the past with Harley-Davidson, the airlines, and other industries. The starring role in this passion play of resurrection and redemption goes to the railroad industry, whose history Longman recapitulates in heroic Progressive rhetoric:

[Woodrow] Wilson faced a simple choice: fix the railroads or lose the war. This was the climax of the Progressive era, and Wilson knew just what to do. Converting many experienced rail managers into modestly paid government bureaucrats, he set them to work in his newly formed U.S. Railroad Administration. After dividing the nation's rail network into seven regions, they quickly fixed its many choke points and other sources of inefficiency. The USRA designed and commissioned the construction of 2,000 steam locomotives, in six standard sizes with interchangeable parts, which vastly cut repair costs. USRA bureaucrats also added 100,000 new standardized freight cars to the nation's fleet, placed embargoes on shippers who ordered more cars than they could use, and sped up and rationalized the logistics of train movements in a way that previously competing private railroads could not do.

This is the great narrative of left-leaning historians—that robber barons and tycoons were hemmed in by selfless government actions that brought some measure of rationality, planning, and sense to the hurly-burly of laissez-faire. It's a nice story but like most fairy tales is simple fiction.

Since the end of the 19th century, the railroads, like most other "important" industries, were massively regulated by state and federal governments. As the socialist historian Gabriel Kolko has shown, this regulation came about not because of pitchfork-weilding, salt-of-the-earth farmers and their handmaidens in legislatures and Congress, but because of the railroad tycoons themselves. They lobbied for and created the regulation as a way of securing their spoils in the marketplace. At various points and under changed circumstances (recession, depression, war, the rise of alternative shipping methods such as trucking, etc.) the regulation became a collar. Which is something Longman seems to acknowledge:

With no apparent sense of irony, the USRA also reversed many of the government regulations that had contributed to the industry's failure.

Something similar happened during the Conrail period in the '70s (another great government success, says Longman), which ended not with government ownership but something very different:

The most dramatic policy change came with the enactment of the Staggers Act, signed into law by President Jimmy Carter in 1980, which, for the first time in nearly a century, allowed railroads to set their own rates according to market conditions—a prohibition that had been hobbling their ability to compete with trucks and barges.

Longman notes with approval that the government shoveled money at the airlines after the 9/11 attacks, omitting the fact that the airlines (still heavily regulated in many ways; just try to buy a true majority stake in a U.S. airline if you're a furriner) were pushing for subsidies before that time. More important, however, is his acknowledgement that even when individual airlines go out of business, air travel manages to survive:

More recently, in the aftermath of 9/11, Congress granted airlines $5 billion in direct compensation for lost business and up to $10 billion in loan guarantees, again in exchange for stock warrants. That wasn't enough to save many individual airlines from having to undergo restructuring plans imposed by bankruptcy judges, but when Americans took to the air again they found the industry intact and offering plenty of flights. Moreover, by February 2007, airline stocks had recovered enough that the Treasury was able to sell its warrants for a net profit of $119 million, with no loans left outstanding.

Airlines, like car manufacturers or individual railroads, come and go all the time. Have you driven a Duesenberg lately? Probably not, but the fortunes of any given firm, or even the domestic ownerhsip of a given industry, is not important. If the industry is providing a good or service that makes economic sense, someone will provide it, assuming the government allows it.

He's right that every loan or loan guarantee that the government has given over the years hasn't been a deadweight loss. But that begs the question of whether the government is the only, much less the smartest, investor. Assume Chrylser had gone belly up 25 years ago, rather than (as is likely) in 2009? Would you not be driving a car? Would its employees not have found work with whatever compnay bought up its production capacity (or in a new industry)? As we ponder the wholesale buying up of companies and economic sectors by the government, it's useful not to forget that the pressures on government are very different than the pressures on private businesses. And one clearly peforms better over the long run.

Whole Wash Monthly piece here.

Speaking of Detroit, watch this video for a primer on why the feds should not be bailing out the Big 2.5 automakers.

 

 

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36 responses to “Does History Favor Government Rescue of GM & Chrysler?

  1. I expect the Honda Corvette will still be made in Bowling Green.

  2. Wilson faced a simple choice: fix the railroads or lose the war.

    A war we had no business being involved in in the first place?

  3. I’m not really into WW1, but I thought the British blockade was starving Germany into submission before the U.S. even got involved.

    And Wilson was a tool.

  4. One failing of the left and of many libertarians is thinking that the 19th century was all free market goodness. The states played a very strong role in regulation back then. At the time, one of the very powerful weapons they had was in being able to yank corporate charters. Back then, corporations were supposed to stick to the purpose outlined in their charter and had to operate in the public interest.

  5. The railroads were not only heavily regulated, but widely cited as an example of why competition was bad and industry needed to be managed by the Best Men. According to Ron Chernow, who IIRC provided a lot of quotes to back it up, J.P. Morgan was quite clear that competition was no way to run a market. Those were the days when tycoons still talked about essences: competition, good or bad?

    At least nobody admits in public that they’re opposed to competition anymore. That’s a slight improvement, right?

  6. I expect the Honda Corvette will still be made in Bowling Green.

    But it will drive like a Honda.

  7. But it will drive like a Honda.

    As long as it drives like a Honda NSX, I’m all for it.

    If those guys think Wilson knew how to run a railroad, what must they think about Sherman?

  8. Hey, did Honda discontinue the NSX?

  9. History proves two things.

    People are always coming up with new and innovative ways to fuck up.

    Once discovered, each way to fuck up will be repeated endlessly.

  10. ProL-

    Yes; the fools.

    “Damn you! Damn you all to HELL!”

  11. I loved the NSX! Damn it! I saw a “Honda” NSX when I was in Malaysia. I particularly coveted that. It would’ve been so cool to have driven around in a Honda NSX here, telling people, “No, it’s just a Honda.”

  12. The only thing history has taught me is that people tend to repeat the same mistakes over and over and over and over . . .

  13. Pro Lib,

    You want this then right? Link

  14. The government didn’t bail out Packard, Studebaker, Kaiser-Frazier, Willys, Crosley, Hupmobile, Graham-Paige, Pierce, Marmon, Tucker, Powell, DeLorean, Bricklin, Duesenberg, Cord, Auburn… need I go on?

  15. Libertarian Guy,

    That’s the sort of thinking that got us into this mess! We need government regulation and bailouts to keep business risk from becoming systemic risk thereby stabilizing society.

  16. If intervention-by-random-panicky-flailing on the part of a group of government officials who couldn’t turn a profit with a lemonade stand doesn’t qualify as “systemic risk” nothing does.

  17. That’s the sort of thinking that got us into this mess! We need government regulation and bailouts to keep business risk from becoming systemic risk thereby stabilizing society.

    Unfortunately he’s right. This free market that we’ve been living in the last decade has led to these problems and we must do what we can to make sure this incredible level of suffering is never seen again.

  18. Reinmoose,

    Well done sir.

  19. Naga,

    Yeah. I saw a Smart Car on the interstate today. Pathetic. I think it would’ve been in the bay with a strong breeze (my commute is over Tampa Bay).

    Speaking of cars I covet, the Gibbs Aquada is particularly enticing. I’d like to commute in that, waving at all the people backed up on the bridges.

  20. Pro Lib,

    Oh! I’ve seen one! It’s like that V-12 Mercedes around the coast over here. You can’t help but notice it. But I wonder . . . would wearing flip flops be practical in such a machine . . . (ponders)

  21. Pro Lib,

    I want that damn i-Real. I would LOVE being the douchebag that took that bad boy on I-10!

  22. I like this:

    The USRA designed and commissioned the construction of 2,000 steam locomotives, in six standard sizes with interchangeable parts, which vastly cut repair costs.

    On sale now! At your friendly local Government Motors Dealer

    “Please fill out this Customer Needs Profile, and submit it with your tax identification information; we should be contacting you within six months to notify you of your vehicle allotment status, and your vehicle class designation.”

    Customer satisfaction? Fuck the customer. We’re the government, and we know what you need.

  23. If the government take-over of the railroads was so great in WWI, why didn’t Roosevelt’s brain trusters take them over for WWII? When the railroads got their property back after WWI they found the physical plant in terrible shape – deferred maintenance, etc. “Renters” never show the same consideration for property as owners. The privately owned and operated railroads in WWII ran circles around what had been accomplished in WWI, even given the larger drain on manpower and virtual inability to get new locomotives.

  24. Ah yes, Mr. Woodrow “He Kept Us Out of War” Wilson. Easily in the top ten Worst Presidents list.

    The Big Three have been on a slow decline since the 1970s. I see nothing to indicate they’ve changed their ways. A government bailout is simply going to reward them for continued bad behavior. As for government ownership of automakers, look at how poorly the UK government ran British Leyland in the ’70s.

  25. Or from South Park last night…

    Just cut the head off a chicken and let it flop around on a game board. Where it lands = government action/policy/whatever. It can’t be much worse than what they’re doing right now.

  26. I saw a mention of the government’s “success” with Harley-Davidson. Was that ironic/sarcastic? The local Harley dealer here in town went belly-up a few months ago, after what I perceived to be a long slow decline. Then again, a lot of things fail in Santa Cruz that are wildly popular elsewhere in the country. How’s Harley-Davidson doing these days?

  27. How’s Harley-Davidson doing these days?

    I believe they’re cutting production and laying people off.

  28. Longman says the gummint should rescue Detroit because it did such a good job in the past with Harley-Davidson, the airlines, and other industries.

    The H-D tariff didn’t do shit for Harely. What it did do is create a market for 600CC and 700CC rice burners to get under the 750CC cap. Does anyone seriously think that any person who wanted a full fairing’d pocket-rocket was going to say, “nah, I’ll just buy a big-iron cruiser and get a fat, ugly biker mama for the back.”

    Harely rescued itself with better management, dumping AMF and a growing economy in the 80’s that provided suburban yuppies with greater disposable income to afford their over-priced status bikes.

  29. So why is it that you never see a big, burly service-worker type guy with a tatoo that says Suzuki?

  30. Support of Chrysler and GM are pure protectionist plays-that’s all. If Honda, Hyundai, and BMW were American companies, the US government would let GM and Chrysler fail. But they aren’t, so they won’t.

    Aid to AIG and the banks were different-they were to prevent a complete and total meltdown of the global financial system. It was done poorly, IMHO, but it needed to be done. AIG should have been completely nationalized, with the profitable divisions sold and the unwinding of the credit default swap crap backed directly by the Feds instead of the indirect way it’s being done now, which results in bad PR situations like the bonus flap. Aid to banks that were going to survive should have never been given; the banks that were going to fail should have been left to fail and sold to the “winners” through the standard FDIC process.

  31. The government didn’t bail out Packard, Studebaker, Kaiser-Frazier, Willys, Crosley, Hupmobile, Graham-Paige, Pierce, Marmon, Tucker, Powell, DeLorean, Bricklin, Duesenberg, Cord, Auburn… need I go on?

    Total tangent, but I’m curious: If someone wanted to start a new car company using an abandoned brand name, would it be legal?

  32. Mike,

    Trademarks that are abandoned and aren’t in use are free game. The question, of course, is whether all those marks are actually abandoned or not.

  33. There’s Maybach, and Bugatti.

    I’m pretty sure Daimler has always had the rights to the Maybach name. I’m not sure how much work VW had to do to resurrect the Bugatti nameplate.

  34. There’s Maybach, and Bugatti.

    Ah, so there are real examples of revived automobile brand names. The only American names listed above that has cachet for me is Willys. But just plain ol’ Jeep has more cachet.

    Just saw in wikipedia, by the way, that Checker was allowed to go into bankruptcy just two months ago with no press as far as I know. Fire engine manufacturer, American LaFrance, went through bankruptcy a year ago, and came through it with a restructured business plan. Guess they were both too little to bail.

  35. the unwinding of the credit default swap crap backed directly by the Feds instead of the indirect way it’s being done now

    Most of the CDSes should have been declared void, imo.
    People buying insurance on shit they didn’t own? WTF?

    And how can it be systemic risk if we don’t pay people their “winnings” from betting on stuff they didn’t own?

    Pay off the people who had something real insured. The others can go fuck themselves.

  36. “Mike,

    Trademarks that are abandoned and aren’t in use are free game. The question, of course, is whether all those marks are actually abandoned or not.”

    If more than 100 people have heard of it before, chances are someone owns the rights.

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