Friday, February 24, 2012

More economic illiteracy from the NY Times

Paul Krugman seems to be in a bi-partisan spirit in his latest column, claiming that Mitt Romney is a "closet Keynesian," and he may be right. I'm not sure that Romney is a closet anything other than a guy who wants to be president, and he has the "presidential looks" that come from Central Casting.

I must admit that Romney's economic leanings don't interest me much and I doubt the guy has any real compass other than one in which the needle points to the White House. So, while Krugman tries to convince readers that Romney is another Keynesian, I have decided to comment on other examples of economic illiteracy that have been appearing on the NYT editorial page.

We have a couple of interesting ones. First, there is a claim that the GM and Chrysler bailouts somehow saved the economy as though it is possible to both dig a hole deeper and simultaneously claim one actually is filling it up. (The piece is by Steve Rattner, an Obama auto adviser, which means we are seeing political spin at its worst.)

Since Krugman is in a bi-partisan spirit, I have decided to go after a couple of Republicans for their op-ed on why the government should require automakers to make cars that can run on a bunch of different fuels, including methanol, which Tom Ridge (who distinguished himself as the first Secretary of the Department of Homeland Security, or should I say our future version of the domestic KGB) and former Bush Transportation Secretary Mary E. Peters have written. Why am I not surprised that the article ignores the simple Law of Opportunity Cost?

Let me first look at the bailout. At the time the Obama administration essentially nationalized GM (and partially-nationalized Chrysler), these companies had balance sheets that were billions of dollars out of whack and were hopelessly in the red. Had Obama not been beholden to the United Auto Workers and forced taxpayers to prop up these firms, both would have gone into Chapter 7 bankruptcy, which means all of the assets of these companies would have been liquidated to pay their creditors.

Rattner is correct that the bailouts did keep other companies tied to GM and Chrysler afloat, but like everyone else who writes for the NYT editorial page, his claim that the bailouts were economically-successful depends entirely upon eliminating the opportunity costs involved. He does that by pointing ONLY to one side of the equation and ignoring the other. It is like saying that if my wife hands me $10 from her purse, the economy is $10 wealthier.

Unfortunately, many people believe that governments create wealth by fiat, which is akin to a doctrine of State Economic Creationism, and Rattner is one of them. I don't blame Obama and his minions for their spin, as politicians are famous for that, but nonetheless economics does not permit us to look ONLY at one side and not the other.

The truth about GM and Chrysler is that there were (and still are) consuming more resources than they produce. That's right, the government could not eliminate that sad fact simply through executive order, no matter what Rattner and Obama might claim. As for the assets of GM and Chrysler, they would not have disappeared; the useful ones would have been sold to other auto companies and the industry could have better restructured.

True, the UAW would have taken a hit, but the only way to defend the bailouts from the UAW perspective is to claim that higher factor prices create more wealth. (That is a favorite tactic of Paul Krugman, by the way, which literally turns economics, opportunity cost, and the history of economic growth on their heads.) In truth, the UAW workers were overpaid relative to the auto industry, yet they were less productive than their counterparts.

For all its claims that it wishes to "protect" consumers, the Obama administration has an odd way of doing so. Consumers had spoken loudly in the case of GM and Chrysler, yet Obama slapped them in the face. However, neither the NYT nor Paul Krugman believe that, in the end, consumers should have any say when it comes to politically-protected firms and politically-protected unions.

(In his Playboy interview, Krugman also repeats the same fallacies that high wages by themselves create wealth. This is another rendition of the wrongheaded belief that governments can order wages to rise, which then creates wealth instead of what really happens: governments destroy wealth.)

As for Ridge and Peters, I have one question: If methanol is such a great idea, and if all it takes is a $100 tweaking to ensure that all cars can be flexible in fuel choices, then why haven't entrepreneurs taken that leap? One can go on about "network costs" and the like, but entrepreneurs created gasoline and diesel networks during the 20th Century without government leading the way.

Instead of trying to understand why fuels like methanol are not widely distributed, Ridge and Peters succumb to the wonkishness of central economic planning, as though Washington can guide an entire industry by fiat. Because I am not familiar with much of the regulatory structure in the auto industry, I don't know how the government's current set of rules would affect the building and marketing of cars powered by natural gas or methanol.

For example, do the CAFE mileage standards play a role? What about other rules? I don't know, but more often than not, we find that government regulations often stand in the way of good ideas.

Nonetheless, I don't get that sense with Ridge and Peters. Instead, they see something and create the false notion that government successfully can order something into production without there being terrible economic dislocations.


Major_Freedom said...

However, neither the NYT nor Paul Krugman believe that, in the end, consumers should have any say when it comes to politically-protected firms and politically-protected unions.

This is exactly what characterizes all anti-economics anti-capitalists. They don't want consumers to bankrupt companies, and they want to believe that the true source of value comes from the state.

Anonymous said...

If Ridge and Peters know of this great idea, they should start a business. I bet they won't

ekeyra said...

"I consider myself an ardent capitalist, and well recognize the risks of government intervention, particularly the “moral hazard” of rewarding failure and the scary prospect of politics’ entering private sector decision-making."

Wait for it...

"But when markets fail, as they did for both autos and banks in 2008, government should have the ability — in fact, the obligation — to step in."

obligation... to fix a problem it caused... with the same policies that caused it in the first place...

We have a new champion for the crown of king shithead.

Mike Cheel said...

@ekeyra lol

young austrian said...

a friend of mine describes his philosophical difference with people like these writers in this way:

"They see the essential function of the market in the companies it allows to thrive; i see the central function of the market, that which is most important, in those it brings to fail"

although this certainly overlooks tons of specifics and complications, I think it's a useful point in this context

Anonymous said...

In 1966, I bought my first shares of General Motors Corp. Over the years, I bought more and reinvested all my dividends. The securities became worthless in April of last year, so right now I am deducting my losses from my income tax. At $3,000 per year, I will be 90 years old before I get them all deducted. My question for Professor Anderson is, “Who owned the company?” Are the owners of General Motors the bondholders, management, bargaining unit, board of directors, consumers, taxpayers or was it the stockholders? What was General Motor’s purpose for existence? Was it the benefit of its workers, suppliers, consumers, or was it was to make money for the stockholders? You can argue that under a more normal bankruptcy policy and even liquidation that stockholders would still have ended up with nothing but in light of the success and recovery President Obama is bragging about, I think I would still own something. That they just had the largest profit in their history tells me I got robbed. I mean, not to vent, but what did the Union ever do that they deserved any part of the company? I don’t know how many individual stockholders General Motors had, or if they outnumber union workers; but I can’t see any of them voting Democrat.

Sweaty Federalist said...

I hope Krugman reads your blog.

I've been wrestling with the issue: is Krugman the world's dumbest economist or just a savvy socialist with a mentally deficient fan base?

NormD said...

I think you are wrong on the multi-fuel mandate.

Retrofitting an existing car to multi-fuel would cost thousands, if it is even possible (I doubt it would pass emissions tests). Building multi-fuel into cars at the factory is very cheap.

If multi-fuel cars existed then entrepreneurs could create businesses offering to sell fuels to such cars.

You don't like the gas prices, drive down the street and buy methanol. No methanol station around, buy gas.

The absence of multi-fuel restricts choice.

It seems like a trivial mandate could open a world of competition.

I assume you are against all mandates, but cars are loaded with thousands of dollars of mandated equipment that restrict competition. I just had to pay $2000 for a catalytic converter in CA because Honda has a monopoly.

Why don't libertarians attack these mostly useless mandates?

I guess in your Utopia even seat belts would be optional, but in the real world of car design seat belts are either part of the design or not and if they are, then you are going to be forced to buy them.