The Auto Bailout—No Bargain—Still Costing Money

https://grantcoulson.files.wordpress.com/2014/04/incentiveseverywherepicturecorrect1.jpg?w=444&h=288

     Do not think about, write about or deal with  human behavior without determining the effects of incentives. It’s not their money, of course they’ll waste it.

     Wherein we see that the government was busy saving jobs which paid much more than the salaries and wages of those who paid for the saving. In government circles, this is known as good economics.

National Post

The bailout’s legacy

On Monday, Finance Minister Joe Oliver announced that the federal government is selling its remaining stake in General Motors for an estimated $3.2 billion. Now that Canadian taxpayers will no longer be shareholders of large North American car companies, we can ask the question: was it all worth it?

Unfortunately for the Canadian public, the answer is a resounding “no.” In purely financial terms, the federal and Ontario governments lost a chunk of money on this deal — about $3.5 billion in total. Of course, that doesn’t begin to count the true cost. For starters, all of the roughly $14 billion in federal and provincial funds used to bail out Big Auto was borrowed. At an average effective interest rate of about 2.5 per cent, that $3.5-billion loss alone will cost us approximately $87.5 million a year to service.

But even if the state had made money, the question would still be: what else could have been done with that money, either in public or private hands? Economists call this the opportunity cost. To take a simple example, as FP’s Terence Corcoran has pointed out, a $10-billion investment on the Toronto stock market in the spring of 2009 would have earned a return of $9 billion by now. Obviously we’re not advocating the government invest in the TSX. But suppose, instead of siphoning billions of dollars from the credit markets to shower on failing automobile companies, the same money had been left in private hands, to be directed to firms that were growing instead of shrinking. Suppose, too, the capital all that public subsidy had kept locked up in the auto sector had been freed to do likewise. Now you start to see the real cost of the bailout: the investment in other firms and other sectors that never took place.

In the press release announcing the GM sale, the government gives the standard talking point that the bailout saved 52,000 direct and indirect jobs. But that number assumes that in the absence of the bailout, all of those jobs would simply have disappeared; that had the corporate entities known as GM and Chrysler gone out of the business of making cars, their place would have been taken by … nothing. The remaining car makers, rather than snap up the shuttered factories or expand their own, would have sat on their hands, leaving the share of the market that GM and Chrysler held, all those millions of car buyers, unserved. It’s preposterous.

And of course, the job “saving” argument assumes those jobs are indeed saved. Between 2009 (when the auto industry was bailed out) and 2013, GM and Chrysler shed approximately 3,000 jobs in this country. The headlines, meanwhile, are filled with speculation on whether the existing auto plants will remain, usually accompanied by demands for further subsidy. But even if we assume every one of those 52,000 jobs was indeed “saved,” that’s only the gross figure: it again doesn’t count the opportunity cost — the jobs that might have been created at other firms or in other sectors, but weren’t.

But leave that aside. Taking the government’s number of 52,000 jobs at face value, and taking the cost of the bailout at just the $3.5 billion net loss, that works out to $67,308 for each job “saved.” According to figures from the job-hunting website workopolis.com, the average salary in Ontario (where a majority of auto-sector workers are employed) is $49,088, while the average Canadian salary in the manufacturing industry is $54,256. The government could have just hired all 52,000 for a year and still come out ahead. Or, at still less cost, it could have financed retraining programs to help auto workers find employment in sectors that have better long-term prospects.

The sale of the remaining shares in GM may help the government balance the budget in the short term. But the legacy of the bailout, financial and economic, will be with us for years to come.

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   Once again, the government solved a problem which would have solved itself and all it cost the taxpayers was a lot of money they could have used productively. If the government continues to help us, we’ll soon be helpless.

     Of course, the government helped the North American auto industry for years by high protective tariffs whereby we paid higher prices for superior Japanese cars. If Chrysler and GM had made better cars and been financially more responsible, the bailout would have been unnecessary.

Government Job or Respect–Which’ll It Be?
Cheerio and ttfn,
Grant Coulson, Ph.D.
Author, “Days of Songs and Mirrors: A Jacobite in the ‘45.”
Cui Bono–Cherchez les Contingencies

 

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