Breathtaking Capital Destruction

I missed this excellent Lynne Kiesling post in my roundup. Lynne, who has forgotten more about regulation than I will ever learn, cites these “extremely disturbing facts” from David Yermack’s excellent WSJ piece:

  • GM and Ford are two companies that made the most money-losing investments in the 1980s; between them they “destroyed $110 billion in capital” in the decade, according to an analysis from the careful and renowned economist Michael Jensen.
  • Over the most recent decade, “the capital destruction by GM has been breathtaking,” $182 billion, and Yermack estimates that the aggregate capital investment in GM and Ford since 1980 has let to a net reduction in capital of $465 billion.
  • This is what I find particularly disturbing: with that $465 billion, “GM and Ford could have closed their own facilities and acquired all of the shares of Honda, Toyota, Nissan, and Volkswagen.”
  • “When a company makes money-losing investments, the cost falls upon all of society.” This observation means that we have already reduced our future economic well-being by $465 billion by his calculations, due to the persistence of these firms and their poor business decisions.

This is what I’m talking about. There is a reason firms like this need to go out of business: human welfare.

What about Felix Salmon’s argument that in the current credit environment, regular bankruptcy won’t work out, and so the government should put up some money to help finance the reallocation of GM’s assets? Sure. The important thing to me isn’t that the government does nothing, but that it doesn’t unustly and irrationally throw fresh wads of taxpayer money at the world champions of “capital destruction.” Felix links approvingly to Ryan Avent’s suggestion:

If Congress can pass a special, tailor-made rescue bill for the automakers, then certainly it can also pass a special, tailor-made bankruptcy bill for them.

This, too, would be a carnival for egregious favor-seeking, but if existing bankruptcy law is insufficient in the current climate (and I don’t feel like I know that, but it’s certainly plausible),  then this may make the most sense. The important thing to me is that capital and productive assets find their way to their most productive uses, and in a way that sustains a general structure of institutions that facilitates efficiency and welfare improvements in a stable way over the long run.

Author: Will Wilkinson

Vice President for Research at the Niskanen Center