Saving the auto-industry in the US

A couple of reports this week-end on Bloomberg start to make people realize that there's more than bottomless hole for the US Government to throw money: there's the financial industry, the housing industry which is now really some sort of hedge-fund industry with Freddie and Fannie being in the middle and finally, the 3rd place on the podium: the auto-industry.
March 19 (Bloomberg) -- U.S. auto suppliers will get as much as $5 billion in U.S. Treasury aid to avoid a collapse that would cripple the domestic industry, including federally funded General Motors Corp. and Chrysler LLC.
“This is not going to save every supplier because there is still a significant amount of overcapacity, but if we can protect those suppliers that are in this situation because of the difficult market environment, that’s the key,” said Wall, the CSM analyst.

Senator Carl Levin, a Michigan Democrat, called Treasury’s action “good news,” saying a strong supplier base is critical to maintaining a domestic auto industry.
GM and Chrysler, which are operating on $17.4 billion in government loans, are seeking as much as $21.6 billion in additional aid.

March 21 (Bloomberg) -- General Motors Corp. and Chrysler LLC may need “considerably” more than the $21.6 billion in aid they requested, which was based on optimistic recovery plans, said Steven Rattner, the Treasury’s chief auto adviser.

President Barack Obama’s auto task force is assessing proposals from GM and Chrysler to decide whether to recommend U.S. assistance or tip the carmakers into bankruptcy. Rattner made the comments yesterday on Bloomberg Television’s “Political Capital with Al Hunt,” airing this weekend.
I would to emphasize these facts:
  • US automakers have been consistently losing money for the past 5-6 years, while the economy was "booming". How do you expect that a single injection of money will avoid the collapse?
  • US automakers have been unable to produce cars that people actually want to buy, for the past 5-6 years. Capitalism, Darwinism, expects these companies to just shut down. But yet again, even if you give them money, how do you expect them to be able to reverse course within a couple of months while they have failed to so for many years in a row?
  • US automakers are now burning government funds instead of their own personal money (and that of the shareholders). So what is the incentive for them here? What do they have to lose? This is the very definition of the planed economy that was tried in USSR. We all the know what happened to them, because it's history, and we all know what will happen to the US carmakers, because it's never different this time.
  • Not so many people in the mainstream media dared to say that the auto-makers would come back and ask for more money, but many non-Keynesian bloggers did....
Finally, I wanted to share this quote with you — just try to guess what X represents:
The lobbies of Congress are crowded with representatives of the X industry. The X industry is sick. The X industry is dying. It must be saved. It can be saved only by a tariff, by higher prices, or by a subsidy. If it is allowed to die, workers will be thrown on the streets. Their landlords, grocers, butchers, clothing stores, and local motion picture theaters will lose business and depression will spread in ever-widening circles. But if industry X by prompt action of Congress is saved — ah then! it will buy equipment from other industries ; more men will be employed; they will give more business to the butchers, bakers, and neon-light makers and then it is prosperity that will spread in ever-widening circles.
Economics in One Lesson, Henry Hazlitt, 1946. Henry Hazlitt is a great economist of the Austrian School of Economics and has written this great yet very simple book which I recommend to everybody wanting to understand the way of thinking in Austrian Economics.

Here's an excerpt from the conclusion:
But the result of this subsidy is not merely that there has been a transfer of wealth or income, or that other industries have shrunk in the aggregate as much as industry X has expanded. The result is also that capital and labor are driven out of industries in which they are more efficiently employed to be diverted to an industry in which they are less efficiently employed. Less wealth is created. The average standard of living is lowered compared with what it would have been.

You can buy the book for $12 at the Mises.org institute, read it online here. I've also found an old scanned version here.

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