Omakase

Friday, July 25, 2008

Oh, this is scary (Obama policy)

Sen. Obama announced a plan to funnel $25B in low-interest loans to US automakers. Yes, the automakers are in sad shape, and yes, thousands of voters (errr....jobs) are in jeopardy, but this is just a downright bad idea, and more importantly, if this is representative of Obama's administration, we would be taking a seriously wrong turn towards national industrial policy, and state primacy over commerce.

My objection isn't the amount of money involved - through leverage, the cost of the $25B program is only $4B, which really isn't much money in government terms (though, keep in mind, the combined market cap of Ford & GM is only $18B - maybe the government should just buy these two companies?)

What really irks me are two things:

1) the activist notion of the Obama policy that government can and should influence business outcomes. There's a plethora of evidence that government activism is at best a zero-sum exercise. (Which reminds me: why should we want the governement to provide healthcare?) Why would business ever benefit from the participation (read: invasion) of government? How can politicizing commerce be a positive?

Worse, this smacks of industrial policy - in a nutshell, the notion that government can/should pick commercial winners. This was most readily used by Japan during the 1980's, and for a while, pundits thought it might be "Japan Inc.'s" secret to success. Suffice to say, the last ~15 years of Japanese recession have debunked industrial policy as value-creating.

2) that political policies should enforce the status quo. The current crisis - and resulting Obama auto loans - are the latest chapter in a 30+ year long decline of the US auto industry. The problems in the auto industry run deep. They are structural, and based on 30 years of history, not on the verge of being solved. The Obama loans are bandaids, and would likely just prolong the problems of the industry.

There are few industries beyond the auto industry in such dire need for change, and while the loans could fund the development of a few new models, the loans would just continue the status quo. This is quite odd for someone who's political message is change.

Project the Obama policy forward, and before you know it, there'll be another industry in bad shape, and in line for loans and federal oversight. (My early guess here is the pharmaceutical industry.) Eventually, government participation reduces business performance to mean, and ultimate business success or failure has more to do with the discretion of the government, and less about innovation and hard work.

2 comments:

Anonymous said...

I believe that no-bid contracts and truckloads of greenbacks in Iran constitutes the same thing, only without oversight and accountability. So, I disagree with you mightily.

Kevin said...

On the bright side it isn't the subsidies that other companies get.

The Cato Institute, a libertarian think-thank, did a study on the subject. What they found is simply mind-boggling. They calculated that the US spent between $30 to $60 billion (with a 'b') a year safeguarding oil supplies in the Middle East during the 1990s, even though its imports from that region totaled only about $10 billion a year during that period. A more comprehensive study that includes the Strategic Petroleum Reserve and other oil protection services (the coast guard is clearing shipping lanes and doing navigational support to oil tankers, etc) shows that actual subsidies to Big Oil are between $78 to $158 billion (again, with a 'b') per year.
Treehugger.com

One can argue that crucial, overseas business must be protected, but I don't think it should be free. Couple that with reduced tax rate oil companies get (in the 90s it was 11% vs the average 18%, not sure if that's still the norm), then low interest loans aren't a big deal as long as they are paid back.

Of course, your argument targets the policy side of things. In the above situation, the US acts to protect a vested interest. Does the US have a similar interest in one of our last remaining industrial businesses? My problem with the auto makers, the health care system, and the whole lot of publicly traded companies is that they are short term, capitalist thinkers. They are concerned with increasing profits, not the consumer. They aren't even thinking about this year's profits as this quarter is more important. Ford is now switching over to make small cars -- not when the writing was on the wall, but only after the profits in the truck market plunged.

Of course, this type of thinking is required when the stock market is controlled by short term thinking profiteers who don't produce anything of value.

Questions: should US companies be working for profits or the betterment of our society? Is that socialist thinking? Is it impossible to have profits and not gouge the customer? Are customers willing to pay more because of easily accessible credit?

Correct me if I'm wrong, but the pharmaceutical companies seem to use the American consumer to pay for their R&D. Why should we pay more than Canada or other developed nations? Why should our government prevent us from buying drugs from cheaper (legal) entities? Why should our government not follow Canada's lead and work out deals for all Americans (I know it does for certain groups...)?

On the flip side, is it too politically disastrous to actually attempt to fix any of the problems? Ron Paul has the right goals, but he hasn't mentioned anything about how to achieve them in a sensible way.

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