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.