Most of us have probably heard the joke about the moronic salesman who admitted to losing money on each sale but was hoping to make it up with higher volume.
E.J. Dionne of the Washington Post is taking this financial approach to a new level. His column today asserts the auto bailout was a success and he celebrates the supposed efficiency and competence of big government.
Don’t expect to see a lot of newspapers and Web sites with this headline: “Big Government Bailout Worked.” But it would be entirely accurate. …Far too little attention has been paid to the success of the government’s rescue of the Detroit-based auto companies, and almost no attention has been paid to how completely and utterly wrong bailout opponents were when they insisted it was doomed to failure. …Government failure gets a lot of coverage. That’s useful because government should be held accountable for its mistakes. What’s not okay is that we hear very little when government acts competently and even creatively. For if mistakes teach lessons, successes teach lessons, too.
So was the auto bailout a success? That’s certainly Dionne’s spin. He sets the bar at a very low level. Basically, if GM is still in business and every so often has a profitable quarter, he wants us to believe the bailout was a giant success.
Libertarians, by contrast, set the bar very high. They would say the bailout is a failure, regardless of GM’s status, because it relied on the coercive power of the government to steer capital in ways that reward failure and exacerbate moral hazard.
The average person presumably is more lenient, and will say the bailout is a success if GM returns to profitability, all the taxpayer money is repaid, and the company isn’t relying on special handouts.
By this “average-person” standard, the GM bailout is a failure. Yes, the company is still in business, but only because of huge handouts, special tax treatment, and the ability to screw creditors. In other words, GM is sort of like the ethanol industry, kept afloat with other people’s money. Indeed, GM is even worse since (so far as I know) companies like ADM get handouts and special tax loopholes for ethanol, but don’t have the ability to renege on their debts.
So what does all this mean? Nobody disagrees with the notion that a money-losing company can be kept alive forever so long as politicians are willing to provide sufficient levels of other people’s money. And that certainly is a good description of what’s happened with GM, but Dionne wants us to see this as a remarkable success for the wisdom of government intervention.
But let’s do an experiment. If the GM bailout is a success, what would happen if we replicated that “success” over and over again. If we lose money on each bailout, can we make it up on volume?
In E.J. Dionne’s fantasy world, the answer is yes. In the real world, we become Greece even faster.
For those that want more information, my Cato colleague Dan Ikenson has some good analysis about the auto bailout here and here, and Megan McArdle dissects the profitability argument here. Mickey Kaus is a must-read on these issues. You can find his discussion of GM’s profitability here, and his discussion of the company’s IPO here.