Yglesias On Detroit

As a rule, I think when Matt and I agree on economic policy, there’s a pretty good chance it’s due to non-ideological overlap in our understanding of how economies work. Except fot the “socialistic hubris” in thinking there is an accurate and effective way for the government to estimate and price carbon externalities, I agree with every word of this:

A lot of this talk has an air of socialistic hubris about it. If this line of thinking were correct and the primary impediment to the production of technological miracles was a lack of government leverage, then state-owned enterprises would have been a smashing success. In reality, outside of a relatively narrow range of utility-type activities, they’ve been flops. If the negative externalities associated with carbon emissions were correctly priced, I’m quite sure that would lead people in various places to develop lower emissions cars. But is just sort of pointing at GM’s engineers and telling them “make low-emissions cars!” really going to lead to the intended result?

… Let me further add that the risk here, as I see it, isn’t that we’re going to waste too much money on a Detroit bailout. Rather, the risk is that we’re going to slide into a situation where big swathes of the economy are dominated by zombie firms. If firms with unviable business models are prevented from failing, then other more successful firms can’t arise or expand to fill the niche and the whole sector goes dysfunctional employing tons of labor and resources but not creating real value.

And then you have other sectors that are being productive but that are burdened with taxes that are being used to prop up sectors that aren’t creating value. Then, even if we manage to halt the slide into recession we’ll have created a situation in which it’s difficult to return again to growth. By contrast, even the total liquidation (as opposed to reorganization under chapter 11) of one or more of the “big three” wouldn’t cause all the resources as the liquidated firm to vanish. Rather, if GM vanished from the earth that would be an opportunity for the other car companies and whichever of them is best-situated to expand to fill the market share void left by GM could profitably some of the capital and labor currently in use. But if a dead firm is kept on life support, that weakens all its competitors’ positions without offering any promise of resurrection.

This is basic economic literacy. Some people seem to think it’s callous to note that people will be made even worse off by trying to prop up failing firms. But if you actually care about people, if you’re actually not callous, you’ll bother to find out how things work. This is not an ideological issue. My friend at the Center for American Progress is simply correct about the facts.

Author: Will Wilkinson

Vice President for Research at the Niskanen Center