More On Arbitrary, Inefficient, And Creative Destruction

I want to return to Krauthammer's post which David Boaz references, because I feel that I can make a clearer point about it:

"First, the arbitrariness. Where do you stop? Once you’ve gone beyond the financial sector, every struggling industry will make a claim on the federal treasury. What are the grounds for saying yes or no?

The criteria will inevitably be arbitrary and political. The money will flow preferentially to industries with lines to Capitol Hill and the White House. To the companies heavily concentrated in the districts of committee chairmen. To clout. Is this not precisely the kind of lobby-driven policymaking that Obama ran against?"

See, what makes him think that time began with the financial sector? It never occurs to him that anything preceded TARP, say. So that, TARP itself appears arbitrary, stupid, and based on cronyism, as I've listed these qualities myself. So, the first question is: Was TARP itself arbitrary? Was it created ex nihilo? Does the word bara figure into its wording? Or is it on a continuum of government actions, and needs to be analyzed as such? It isn't enough to declare, "Let's begin with TARP".

Now, one way to create at least the semblance of a principle out of TARP is to say something like the following: We declare that we will intervene when the financial sector is in trouble, because it's more important than any other sector. Fine. What's the financial sector? How does it work? And you can't mean by it something as vague as that it's banks, loans, etc. How about just giving me your explanation of how Lehman failed, and why the markets reacted as they did. I'm not asking you to blind me with science or be Willem Buiter, but you have to show me at least that you've some real idea of why TARP was necessary and how it was supposed to work. Otherwise, you're not really in a position to judge if it's more important than the automotive industry or not.

My disagreement with Krauthammer is not about the importance of principles and reasons in these decisions to intervene, I simply believe that TARP itself was abitrary, stupid, and reeked of cronyism, or, at the very least, since I'm in the finacial sector, I damn well know how important it is. There's nothing wrong with his worries, only about his analysis of the current crisis.

Consider this post:

"Sunday, October 19, 2008

"It's all very Rube Goldberg-esque,"

A great post by Peter Whoriskey and Zachary A. Goldfarb in the Washington Post called "Financial Rescues Can Set Off New Problems":

"Every action the government takes has cascading effects on the market, and they're not always easy to predict," said Jim Vogel, an analyst at FTN Financial. "The government has to have time to catch up."

Follow the bouncing ball of unintended consequences.

"Further into the future, some economists predict even more profound consequences from today's interventions.

By fostering the belief the government will rush to the rescue whenever a major financial institution begins to falter, federal officials may be creating what many economists call a "moral hazard." That is, those institutions may be more willing to undertake risky investments.

"It's all very Rube Goldberg-esque," said William O'Donnell, the head of U.S. interest rate strategy at UBS, referring to the cartoonist famed for devices that work in indirect and convoluted means. "You're never quite sure what any one action will do."

Really. Who'd of thought it?"

The real question is the following: Given how TARP has been planned, marketed, and implemented, can one make a case for intervening in the automobile industry based on this precedent? I say that there is. I'm not saying that it's conclusive. There are good reasons to oppose it, but the case is far enough along that it needs to be argued out, and there is a viable argument for such intervention. It is not as Krauthammer and Boaz have argued. They haven't risen above the level of worries and nostrums to approach anything amounting to analyis. For example, at least compare this case to other similar government loans.

Okay, here's his second point:

"Second is the sheer inefficiency. Saving Detroit means saving it from bankruptcy. As we have seen with the airlines, bankruptcy can allow operations to continue while helping to shed fatally unsupportable obligations. For Detroit, this means release from ruinous wage deals with their astronomical benefits (the hourly cost of a Big Three worker: $73; of an American worker for Toyota: $48), massive pension obligations and unworkable work rules such as "job banks," a euphemism for paying vast numbers of employees not to work.

The point of the Democratic bailout is to protect the unions by preventing this kind of restructuring. Which will guarantee the continued failure of these companies, but now they will burn tens of billions of taxpayer dollars. It's the ultimate in lemon socialism."

Okay. Here it is clear that some businesses do survive bankruptcy. So, he seems to be claiming that the government intervention will keep the employees from the onerous terms of bankruptcy. This is a factual question. It isn't a question of principle. I have demands that I would include in any government intervention. Absent them, I would agree, they'll have to declare bankruptcy. But that's an argument about the conditions of the bailout, not whether one would favor a bailout or not. So, Krauthammer could be correct, but it's not obviously so.

"Democrats are suggesting, however, an even more ambitious reason to nationalize. Once the government owns Detroit, it can remake it. The euphemism here is "retool" Detroit to make cars for the coming green economy.

Liberals have always wanted the auto companies to produce the kind of cars they insist everyone should drive: small, light, green and cute. Now they will have the power to do it.

In World War II, government had the auto companies turning out tanks. Now they would be made to turn out hybrids. The difference is that, in the middle of a world war, tanks have a buyer. Will hybrids? One of the reasons Detroit is in such difficulty is that consumers have been resisting the smaller, less powerful, less safe cars forced on the industry by fuel-efficiency mandates. Now Detroit would be forced to make even more of them."

Now, I have no idea about this, and neither does he. For all I know, such a plan might work. To argue that it's not possible is beyond his knowledge. Time will tell, but it doesn't seem obviously unworkable, compared, say, to what auto makers have been doing up until the present. An idea stands or falls on its own. To argue otherwise, is poisoning the well, and fallacious. You can't simply say that it some people in congress favor it it's hopeless. Well, you can, but it's fallacious.

"Republican minimalism -- saving the credit-issuing utilities -- certainly risks not doing enough. But the Democratic drift toward massive industrial policy threatens to grow into the guaranteed inefficiencies of command-economy maximalism."

Slippery Slope Arguments are fallacious, as are Historically Inevitable Arguments, otherwise Marx would have actually been a scientist of history, but he wasn't, because there's no such beast.

Finally, one point about Brooks and Creative Destruction. This phrase has as much explanatory power as Effective Regulation. It's what we're looking for. Destruction might or might not turn out to be creative in a particular instance, and that is what actually occurs in the world. By and large, the ebb and flow of businesses does seem to work, but that platutude does excuse one from actually analyzing the case before you.

Some fires are indeed creative destruction, necessary for the proper maintenance of the natural world. Sadly, some are not. To walk to a fire, any fire, and proclaim aloud Creative Destruction, is pretty silly. So is claiming that same nostrum about the death of any particular business. Busineese do not all fail for the same simplistic reasons.