Thread: Fantastic article on the auto bailout

Ron Paul on the auto bailout. To be accurate, it was written in regards to the Chrysler bailout of 1979, but you can change a few numbers and change "Chrysler" to "big 3" and it's just as applicable today.

Before the U.S. House of Representatives, November 21, 1979
Although I was not in Congress when either the Lockheed or the New York City bailouts were enacted, I would have opposed both of those actions, as well as the proposed action regarding Chrysler, for many of the same reasons. Let me explain those reasons.

In a nation that is sinking in a sea of debt, it is irresponsible for this Congress to be considering a measure that would add billions to that debt. The expansion of credit is one of the primary forms of inflation. It is not merely inflationary in its effects; it is inflation itself. If this $1.5 billion is created by the federal government, it will ripple and percolate through our banking system, and because of our fractional reserve system, the ultimate growth in the money supply will be far more than $1.5 billion. The standard multiplier is six; that means an infusion of $1.5 billion will eventually result in a $9 billion increase in the money supply. In his testimony before the House Banking Committee, the former Chairman of the Council of Economic Advisers, Alan Greenspan, stated that

Loan guarantees, insofar as the issue of inflation is concerned, are virtually indistinguishable from on-budget financing, and that the major cause of inflation into this country has been an excessive amount of credit preemption, largely in the area of guarantees, which . . . has created excessive monetary growth and is the base of inflation in the system.

A vote for the Chrysler bailout is, simply put, a vote for further inflation.

Some may argue that the inflation is necessary in order to avoid unemployment, echoing the now repudiated idea of A.W. Phillips, that less inflation means more unemployment and vice versa. The past few years of our experience with inflation and unemployment should convince everyone that high inflation and high unemployment can exist side-by-side. I believe the connection is even closer: Inflation causes unemployment – perhaps not immediately, but in the longer run – and we are now in the longer run of our past inflationary policies. It follows that a vote for aid to Chrysler, because it is a vote for inflation, is also a vote for more unemployment.

Such unemployment may not be obvious, but it will nonetheless be real. One of the things that bothers me most about this entire discussion is that it centers around only what is obvious. Saving 100,000 jobs at Chrysler is obvious; losing 100,000 jobs, one by one around the country is not obvious, but they will nonetheless be lost, should aid to Chrysler pass.

Let me explain why I believe this to be so. If this aid takes the form of loan guarantees rather than direct loans (and, I add parenthetically, that over $1 billion of the New York City loan guarantees has been converted into direct federal loans by the Federal Financing Bank) it will be tantamount to an allocation of credit to Chrysler. That means that Chrysler will get capital that would have gone to other more efficient and more profitable businesses. Because this capital will be diverted by these loan guarantees to a less efficient business, it is highly probable that more jobs will be lost through invisible unemployment than would be were Chrysler to fail. I hasten to point out that this will result in all the increased costs to the government that the proponents of the bailout so loudly declare they wish to avoid. Of course, the costs will not all be centered in Michigan; unemployment checks, welfare checks, food stamp benefits will increase nationwide, in big and small towns, urban centers and rural America. Rather than a few localities suffering noticeably; many will suffer almost invisibly. Workers who have nothing to do with Chrysler will lose their jobs or pay the taxes and higher prices caused by this bailout. The average industrial worker earns half of what the average Chrysler workers earns, and under the UAW contract, the Chrysler workers will be receiving a $500 million pay and benefits rise over the next three years. I have always thought that businesses in trouble cut costs; the Chrysler workers will receive far more in wage increases alone over the next ten years than this bailout amounts to. That (and other facts) would indicate to me that the Chrysler workers have not made any sacrifices and that they hope, through federal aid, to maintain their relatively high wages at the expense of the lower-paid workers in this country. We are being asked to shift the burden from the relatively well-off workers at Chrysler to the relatively worse-off workers throughout America. A Chrysler bailout will be a shifting of burdens that should be borne by those involved.

(Rest of article below)

The Chrysler Bailout by Ron Paul

The bolded portions really stood out as something that we need to understand. We cannot simply throw more money at a few companies to keep them from going under and think we're helping the unemployment problem. If we throw $25B at the big 3, that money will have to come from one of three places:

1) Taxes - Increased taxes would most certainly force business to cut back on their workforce. You may not see it all at once, or coming from one company. But one by one, jobs will be lost. And there will almost certainly be more lost through this than through letting the big 3 fail. The jobs lost at the big 3 cost their employers something like $80/hr.

2) Money creation / inflation - And with inflation (increase in the money supply) comes more expensive goods. This will also lead to business needing to cut back. Direct taxes would actually be preferrable to inflation because inflation is the most regressive tax there is.

3) Borrowing - For every dollar of government debt that is gobbled up, there is a dollar of investment that is lost. Our leaders are constantly moaning about the problem that we do not have enough investment right now, yet they can not seem to figure out why. It's because of not only lower savings rates of Americans (1% now vs. 10% in decades past), but also because much of that savings now goes to buying government debt instead of investments in business, which helps create jobs. So going this route will also lead to lost jobs, and these aren't necessary people being laid off, but also the losses that mount as businesses that normally would have created jobs never get off the ground due to lack of investment.

All three of these options leave us with fewer jobs than when we started, but the bailout still gets support because losing 10 jobs in Springfield MO, 20 jobs in Wichita KS, 15 jobs in Omaha NE, etc. isn't noticable. And it doesn't make for good political talking points like an entire town in Ohio or Michigan being destroyed by the closing of a GM plant.

Our only hope is to let the market correct itself and weed out the malinvestments. It's not going to be pretty, and some people are going to have a rough go for the next few years, but throwing money to keep these people in the same unprofitable company will only have even worse effects.

The rest of the article:

Do we in Congress have the authority, either moral or constitutional, to cause this suffering? I can find no provision in the Constitution authorizing Congress to make loans or loan guarantees to anyone, let alone to major corporations. Nor have I yet seen a valid moral argument concluding that we, as representatives of all the people, have the right to tax the American people – most of whom receive less in wages and benefits than Chrysler workers – to support a multibillion-dollar corporation. What right have we – and I pose a serious question that deserves an answer – what right have we to force the American taxpayers to risk their money in a business venture which private investors dealing in their own funds have judged to be too risky? Chrysler paper is now classified; that means that any private investor who is handling funds for his depositors, shareholders, or clients may be judged as violating his fiduciary responsibilities should he invest in Chrysler. Don’t we have a trust equally important from the American people? Are we not betraying their trust by voting for a Chrysler bailout? I believe so.

Rather than supporting this patchwork and temporary "solution," we should be addressing those factors, over which we have control and for which we are responsible, that have brought Chrysler to the brink of bankruptcy. In his testimony before the House Banking Committee, President Iacocca listed three factors that caused the troubles at Chrysler: (1) government regulations; (2) inflation; and (3) the gasoline allocation system that caused last spring’s gasoline shortages. Please note that all three factors are the responsibility of the Congress. We wrote the regulations or gave some bureaucrats a blank check to write the regulations. We are responsible for inflation through our mismanagement of the monetary system. And we empowered the Department of Energy to create a gasoline allocation system that brilliantly achieved what I had heretofore thought impossible: gasoline shortages in Houston, the oil capital of the United States.

It is our responsibility to diagnose the Chrysler disease accurately. Instead, we are acting like political quacks, prescribing potions to treat symptoms, while the cause of those symptoms rages on unabated. Chrysler is not unique; it is merely the prototype, the harbinger, of crises to come. Dr. Greenspan testified that the most likely sequence of events, in his view, would be federal loan guarantees followed by a Chrysler failure anyway. Unless the disease is correctly diagnosed, the potions we prescribe will kill the patient.

I would urge this Committee and the whole Senate to act with more deliberation than the House has acted. This form of welfare for corporations must end. Just because it was extended to Lockheed does not mean that it should be extended to Chrysler. Bad precedents should not be followed, and these precedents are particularly bad. Because Lockheed, a large corporation, New York City, the largest city, and now Chrysler, the tenth largest corporation in the country, are the three institutions to which aid has been or will be extended, one can conclude that there is an obvious pattern of discrimination in the action of this Congress.

Last year there were 200,000 bankruptcies in this country, according to U.S. News & World Report. Yet we have selected only the largest for our aid. This is discrimination of the crassest sort. We ignore the smaller victims of this government’s policies simply because they are small. Only the largest, those with the most clout, the most pull, get our attention. This aristocracy of pull is morally indefensible. What answer can be given to the small businessman driven into bankruptcy by government regulations when he asks: "You bailed out Chrysler, why not me?" No justification can be given for this discrimination between the powerful and the powerless, the big and the small.

It is an axiom of our legal system that all citizens are to enjoy the equal protection of the laws. That axiom is violated daily by our tax laws, and now by this proposed corporate welfare plan for Chrysler. Apparently some citizens are more equal than others. That is a notion I reject, and I hope you do, too. I urge you to reject this proposal for all the reasons I have stated.

Frankly, I'm becoming more and more convinced that forcing the big three into Chapter 11 bankruptcy would do wonders to clean up that industry.

So Ron Paul has been bitching and moaning about the same shit for 29 years? Amazing, people still worship him and he has done jack shit to fix a thing.

It is fucking funny, we are so conditioned that we allow trillions to the banks that created this mess, and nothing to the real economy. Do not get me wrong, I hate bailouts, but if we give so much to the banks, why not toss a few crumbs to the auto industry? Hell thats the only manufactures that are left in this country.

I agree michaelr. I dislike any of these bailouts, but how is it that we're fine with $700B to the financial industry, while denying $25B (is that the most recent amount they're throwing around?) to the auto industry? The financial industry produces zero real wealth. They only shift money around. The fact that a quarter of our economy is in the financial sector, it's no wonder we run such high trade deficits. The auto industry at least produces something of value. At least they increase our real wealth, which can be measured in the goods that we produce.

Originally Posted by freethinkr

I agree michaelr. I dislike any of these bailouts, but how is it that we're fine with $700B to the financial industry, while denying $25B (is that the most recent amount they're throwing around?) to the auto industry? The financial industry produces zero real wealth. They only shift money around. The fact that a quarter of our economy is in the financial sector, it's no wonder we run such high trade deficits. The auto industry at least produces something of value. At least they increase our real wealth, which can be measured in the goods that we produce.

Look FreeThink, it to me is evidence that the economy itself is not the issue. Anyway I will green the thread and wish you the best. Have fun!!!!

Rats I must have greened you recently, i owe you and I pay my bills.

Originally Posted by Think for myself

So Ron Paul has been bitching and moaning about the same shit for 29 years? Amazing, people still worship him and he has done jack shit to fix a thing.

What's he supposed to do? Take over the halls of Congress with a shotgun and force them to listen to common sense? Don't mistakenly believe that because he is ignored by corrupt and/or ignorant politicians, he is doing nothing. Also, if you'd like to refute any of his points, feel free to.

Originally Posted by michaelr

Look FreeThink, it to me is evidence that the economy itself is not the issue. Anyway I will green the thread and wish you the best. Have fun!!!!

Yeah, that's true. If we had a treasury secretary who worked for GM instead of Goldman Sachs, I wonder if the bailouts would look different.

Originally Posted by freethinkr

Yeah, that's true. If we had a treasury secretary who worked for GM instead of Goldman Sachs, I wonder if the bailouts would look different.

Well look for more of the same, unfortunately. If we are going to bailout the economy, I would suggest a trickle up approach. Take 2 trillion, divide it by 350~million, and write checks. The mortgages, auto industry and every thing else would benefit. But that wont happen, instead we will reward the crooks, and they will do as they please as Americans go without.