Arnold Kling  

Another Stake in the Taxpayers' Heart

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Don Boudreaux writes,


Detroit auto executives advocate "government getting a stake in the auto companies that would allow taxpayers to share in future gains if they recover" ...

I remind these executives that each American is already perfectly free and able, with no action from government, to "get a stake" in these companies. Of course, few Americans now choose to do so - a fact that reflects the considered judgment of millions of people that these companies are unworthy recipients of investment funds.

This is an example where pure libertarianism gets you quickly to the right answer. Lose the "we," and instead ask, would I undertake this policy myself? That is, would I lend money to the auto makers? If the answer is that I wouldn't, then the implication is that "we" shouldn't.

The same reasoning applies to giving money to financial firms. I wouldn't, therefore we shouldn't.

Picture everyone in Congress who voted for TARP standing on a street corner in a Santa suit, ringing a bell, and asking for donations to pay for the rescues of AIG, Citigroup, and so forth. In a libertarian society, that is what they would have to do in order to fund the bailouts.

If that image doesn't move you in a libertarian direction, then nothing will.


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COMMENTS (15 to date)
david writes:

If you stood at a street corner begging for donations for roads, defence, or any sort of public good, you wouldn't get anything either.

This is an example where pure libertarianism makes you quickly miss the point of the Detroit exec's argument. They're saying that a massive coordinated investment would be a produce a net benefit to taxpayers in general. Now they might not be right about that, but they are also saying nothing about the individual potential investor and taxpayer. Stay away from the aggregation fallacies, please.

kazander writes:

Professor Kling,

I don't know that I would ultimately disagree with you, but the manner in which you present the above argument seems to leave it quite open to the charge that you commit the fallacy of composition.

The Sheep Nazi writes:

GM and Chrysler are public goods? Raids on the treasury are investments? Methinks Arnold's not the one who needs to clean up his logic here.

Perry writes:

Dear "David";

You might not get donations for roads, but you might succeed in charging tolls on them. You might not succeed in getting donations for common security infrastructure, but you might succeed in getting paid for it.

The whole point is that the bailout proponents claim that although this is a wonderful and profitable enterprise, no one will invest in it on their own -- which is of course casts doubt on the claim that it would ever return a profit.

In a reasonable society, that would leave the proposers of the scheme with no alternative but to beg because the scheme is foolish. Ours is not, however, a reasonable society.

Kurbla writes:

If you lose that "we," you get tragedy of the commons. It explains why people wouldn't invest in some profitable enterprise. I do not know whether US auto industry is of that sort, but it is not impossible.

Hugo Pottisch writes:

GM is a company and not a public good. Its goal is to produce products that customers want at a profit. GM is one in millions such companies in the US.

Statistically speaking - it would make more sense to give a 24 billion cash gift to all troubled companies in the US, or at least a random sample. At least then - you have a better chance of spreading the risk. You might also have a much higher chance of hitting one or more blockbusters. even better - give the cash gift to well-performing companies instead of shaky ones? or even much betterer, merely lower the corporate tax a bit? timing wouldn't be so bad?

but this is all nonsense day dreaming anyway. in reality, the church.. eh.. government has nothing to.. eh should not be involved in bailing out random companies during hard times. especially no companies that are not being supported from the consumer and investors side and that are not mission critical to the economy or society (but rather a burden).

GM is not the international financially crisis where if liquidity ends.. suddenly other industries can't pay wages etc.

toyota will still sell cars, even if GM perishes?

a santa at Xmas at the street corner would be the only way how GM could get something from my purse voluntarily. it would be charity because I would feel the pain of the GM workers at Xmas. But I would not accept the government pouring money into a random, private black hole unless they at least explain first: why them and not us or some other random stranger. No - i am for the separation of church and state!

Grant writes:

In Libertopia, presumably funds based on assurance contracts could attempt to raise the money needed for bailouts. I'm not saying it would work, of course...

Greg Ransom writes:

The first day of the TARP proposal I myself proposed that Paulson, Bush, and the members of Congress stake their own money on the outcome.

As it turns out, it looks like Paulson only has an upside play on this one.

Socialized risks, privatized gains ...

Marc writes:

The auto makers' logic is actually misleading some of you guys. Take a minute to look up the defining characteristics of a "public good" and then try to think how the Big Three could possibly fall into this category.

Troy Camplin writes:

I'm with you. If the people in Congress are so keen on our buying "a stake" in these companies, why don't they buy a stake in the companies themselves? Let's look at their portfolios.

We all know what this is: an attempt at further partial-nationalization of the economy. If Hugo Chavez had a sense of humor, he'd be laughing so hard right now it'd kill him.

Maniel writes:

There might be a role for government if the goal were a create new national transportation system. The national system of railroads (Manifest Destiny), the Interstate Highway System, and space travel (such as it is) owe their existence in large part to government. When dealing with large systems, there is a need for a "system engineer."

A new mass-transit system - say an automobile / rail hybrid - would need a new type of car, one adapted (standardized) to the specifications of the system. A transformation in this direction - to save fuel, promote safety, save the environment, etc. - would require fresh ideas from the auto industry. High risk? You betcha. High payoff? I think so.

Digging the debt hole deeper will not save the "big" three; transformation might.

Larry writes:

Offtopic, but I had to share this. From today's NYT, an op-ed by MIT economist Jonathan Gruber:

"one of the most effective ways to spend would be to give states money to enroll more people in Medicaid and the State Children’s Health Insurance Plan. This would free up state money for rebuilding roads and bridges and other public works projects — spending that could create jobs."

This doesn't pass logic 101. States have no chance on their own to increase their Medicaid and SCHIP enrollments. Thus, giving them money to do so "frees up" exactly $0 for public works. Maybe MIT needs a few layoffs.

Joe Teicher writes:

If I could borrow seemingly infinite 10-year money at 2.6% I might not be doing what the government is doing right now, but I would be borrowing as much as I could to lend as much as I could at higher interest rates. That's how you get rich.

Another Larry writes:

Larry said that "States have no chance on their own to increase their Medicaid and SCHIP enrollments." I forecast Medicaid expenditures for a state government. I can assure you that states can and do affect Medicaid and SCHIP enrollments.

brian writes:

The Big Three are clearly not a public good, and they shouldn't be bailed out. Their problems are not a lack of liquidity; they are problems with the management. It's a deep problem that would best be dealt with by letting them go bankrupt and being bought out.

I'm not so sure you can make the same argument for large financial firms though. First, there are contagion effects that need to be considered. Second, problems in the banks are not necessarily deep-seated problems with management. Often the problem is lack of liquidity, in which case a bailout prevents a good firm from going under. The argument that the market will keep this from happening ignores information problems that prevent investors from correctly ascertaining the quality of a firm. Further, even if a smart investor could discover that a firm has good management, if the market is afraid enough and panics, the firm might go bankrupt anyway, making the smart investor lose all his money.

In short, the problems with auto companies are ones that bail-outs won't fix. However, bail-outs may help keep good banks alive. Thus, the two issues can't be conflated.

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