The Bailouts at Ten: I Told You So

By Kevin D. Williamson

Wednesday, November 28, 2018

General Motors just shared some very bad news: It is closing five factories in the United States and Canada, eliminating 15 percent of its work force (and 25 percent of its executives), and getting out of the passenger-car business almost entirely to focus on SUVs and trucks. President Donald Trump threw a fit, but GM shrugged him off. The facts are the facts.

What did U.S. taxpayers get for their $11.2 billion bailout of GM? About ten years of business-as-usual, and one very expensive lesson.

Bailouts don’t work.

Never mind the moral hazard, the rent-seeking, the cronyism and the favoritism, and all of the inevitable corruption that inevitably accompanies multibillion-dollar sweetheart deals between Big Business and Big Government. Set aside the ethical questions entirely and focus on the mechanics: Businesses such as GM get into trouble not because of one-time events in the wider economic environment, but because they are so weak as businesses that they cannot weather one-time events in the wider economic environment. GM’s sedan business is weak because GM’s sedans are weak: Virtually all of the best-selling sedans in the United States are made by Toyota, Honda, and Nissan. The lower and middle sections of the market are dominated by Asia, and the high end of the market by Europe: Mercedes, Audi, BMW. GM can’t compete with the Honda Civic at its price point or with the Audi A7 at its price point. Consumers like what they like, and they aren’t buying what GM is selling. It isn’t winning in the dino-juice-powered market, in the electric-car market, or in the hybrid market, either: GM is not exactly what you would call a nimble corporation.

So, things are grim for GM.

On the car front, anyway. GM has a much healthier business selling trucks and SUVs, a business that it now will focus its resources on — as it should have done long ago. Why didn’t it do that?

In part, because we — you and me, suckers — paid them not to. We were told that we simply must bail out General Motors during the financial crisis because if we failed to, that would lead to a bloodbath of job losses and cascading business failures. But the job losses were always going to come: Paying people to build things that consumers don’t really want isn’t a sustainable business model. That’s a reality you cannot bail your way out of.

The U.S. government was buffaloed into the bailouts. The so-called experts argued that if GM went down, it was going to take the whole U.S. automobile industry with it, that its failure would do such violence to the supply chain and automotive ecosystem that it had to be prevented at practically any cost. That alone should have been reason enough to liquidate GM rather than reorganize in bankruptcy what we were just informed is a systemic threat to the stability of the U.S. economy.

But the U.S. automobile industry was never going to fail in toto. The unprofitable parts were. There are billions and billions of dollars to be made selling Americans pickup trucks and SUVs, and GM knows how to do that. And if GM doesn’t do it, somebody else will. We’ve already seen that as U.S. automakers wind down their passenger-car businesses: Soon, you won’t be able to buy a Ford sedan in the United States, but you can do yourself a favor and buy a Toyota Camry, instead. “But what about our jobs?” the so-called nationalists demand. The Toyota Camry is made in Kentucky, which, last time I checked, was still in the Union.

The same thing holds true, broadly, of the banks we bailed out. The “Too Big To Fail” institutions are bigger than ever as regulatory pressure and ordinary competition encourage consolidation in the financial-services sector. Does anybody really think that the practice of lending money for interest — a business model old enough to have a Biblical injunction against it — was going to stop if we let a half-dozen banks reap what they sowed? Of course there would have been disruption. Here’s a safe bet: There’s going to be disruption, still, because — focus on this, now — we didn’t solve the problem. Bailouts don’t solve problems. Bailouts at best delay the day of reckoning.

Subsidies eventually run dry. Surely this has occurred to Jeff Bezos and his team at Amazon. If New York City and Washington only made sense as new corporate homes because of a few billion dollars in subsidies (amounting to something like 2 percent of Jeff Bezos’s personal net worth), then it would be the height of stupidity to build permanent facilities there in return for a one-time offer of largely fixed benefits. Of course, Bezos et al. are not above picking up free money if it’s just lying around. Maybe they should be: If the world’s richest man can’t afford to exercise some leadership, then who can?

Or consider that subsidy from the point of view of Governor Andrew Cuomo and Mayor Bill de Blasio, the Tweedle-Dum and Tweedle-Evil of New York politics. If New York City can only hope to attract a firm like Amazon by essentially bribing (in an entirely legal fashion!) its shareholders, then what does that say about New York City? A New York City with excellent schools, a first-rate mass-transit system, a sensible tax and regulatory environment, and better public sanitation might not have to pay off corporate shareholders — no, that kind of New York City would have the confidence to say: “This is New York. Lots of people want to be here. You’re welcome to join us, and we’ll provide the best municipal services we can, but don’t act like you’re doing us a favor. We were a big deal before you came along, guys.” But fixing the schools and subways is hard work, and doing it economically is even harder. You know what isn’t hard work? Giving somebody else’s money to a third party from whom you want something. That isn’t leadership. It’s cowardice and sloth.

Big Business and Big Government have a lot in common: the challenge of trying to manage complexity through bureaucracy, the deadening mentality and corporate culture of the Organization Man, inertia, internal politics, the agent-principal problem. Sometimes, they deal with those problems in remarkably similar fashion: by convincing us that they are so big and so important that we cannot manage without them. But it is not so. If you can’t get a slick black Cadillac, the hardworking gentlemen in Stuttgart are ready to take care of your big-sedan needs — and their colleagues in Alabama will take care of your little-sedan needs. Elon Musk, even in the middle of what seems to be a very weird and very public episode of some kind, is standing by to sell you what is arguably the best American car ever made, and a million Uber and Lyft drivers are helping many urbanites see that they don’t really need a car at all.

There was moneylending before J. P. Morgan, and there will be moneylending after JPMorgan Chase & Co. And here’s a little something you may not know: “Too Big To Fail” isn’t a problem that crept up on us in 2008 — the Wall Street Journal was writing about the issue as early as 1983, identifying eleven large financial institutions that the federal government would not allow to fail.

Why didn’t we do anything? Nobody wants to rock the boat during the good times, and during the bad times politicians become so fearful of job loss that they will abandon principle and intelligence both (some are less burdened by these than others) to prevent that from happening or to stanch it when it already is under way.

In the short term, that may be good politics. In the long term, it’s bad policy.

Jobs aren’t an end — jobs are a means, the way we get cars made and chickens plucked and code written. It is no fun losing a job, and it can turn your life upside down: I used to be a newspaper editor, which means I oversaw a good deal of downsizing before eventually getting the ax myself. (Fun fact: I once unsuccessfully sought a job that was offered to me about five years later — at about 25 percent of the previous salary. Free markets: They are a b****.) We engage in a great deal of social spending that encourages people not to work when we probably should spend some of that helping people to work, for instance by repacking some unemployment benefits as relocation assistance to help unemployed workers go where the jobs are. But just giving companies money — in the form of bailouts or Amazon-style incentives, which ultimately amount to the same thing — in exchange for their “creating jobs” is a losing proposition. The market decides what jobs are worth doing and at what price — and no politician, even the mayor of New York City, has the power to change that. That’s reality, and reality isn’t optional.

In the decade that has passed since the financial crisis, we haven’t learned anything. The lesson we should have learned — to let business be business and let government be government — seems to be for the moment beyond our political imagination: Left and Right alike are partly or wholly captive to the fantasies of managerial progressivism and neo-mercantilism, with the Left imagining that Washington can intelligently direct energy and labor markets and much of the Right falling in behind protectionism, “managed trade,” and corporate welfare for everybody from Boeing to Foxconn.

Never mind whether that’s right — our self-styled political “realists” don’t worry much about that sort of thing anymore — it won’t get you what you want: a world with all the benefits of economic dynamism and all the comforts of stasis.

As anybody who saw what became of the Chevy Malibu knows in the depths of his heart, GM will always disappoint you — whether you’re in for a few thousand or in for a few billion.