If ‘bailout’ was the word of 2008 then word of 2009 is shaping up to be ‘mistake’. Or perhaps ‘regret’ depending on your political affiliation. As the world economy begins remains on shaky ground the billions of dollars thrown at GM and other auto companies to help stave off complete collapse is looking less and less like a good investment.
Andrew Coyne wrote a very interesting article in Maclean’s the week of June 15th, We’ll Pay For This Bailout for Years. I’d like to share with you some of his thoughts:
- The governments of Canada and Ontario payed about $9 billion for an 11.7% equity stake in GM, a company that was worth a total of $494US million. Our 11.7% percent of that is worth about about $58US million.
- This year, GM and Chrysler expect to sell about 400,000 cars in Canada. Given that the average price of a new car in Canada is about $32,000, the governments could have simply purchased 400,000 cars at retail value and had some money left over.
- After GM comes out of Chapter 11, it is expected to employ 5,500 Canadian workers (almost all in Ontario). If the governments had not bailed GM out they would have closed their Canadian plants and moved south. Hence, each job saved costs Canadians roughly $2 million dollars.
And you thought textbooks were a bad investment.
Is it wise for Canadian (and US) taxpayers to be buying up these failed companies under the guise of saving jobs? The truth is, the recession is hitting every industry not just the automakers. The reason Ford and GM appear to be the hardest hit is because they were horrendously run companies that had a bad business model or sell a product that consumers actually wanted.
So what other scary stuff is happening in regards to the US bailout? Where to begin.
Most significantly, there has been a dramatic shift in the US towards greater support for unions. More specifically, unions who dropped a significant amount of coin into Obama’s coffers during the election. In the buildup to GM and Chrysler’s bankruptcy the demi-god President overruled financial law that has been documented in the US prior to the constitution and British common-law hundreds of years before it. Historically, when a company declares bankruptcy or liquidates its assets, bondholders are seen as the most secure investors and are ‘paid back’ first, followed by shareholders and other parties.
Not in Obama’s America. Bondholders have been bullied into accepting either pennies on their invested dollars or dividing up 10% of GM equity. Meanwhile the UAW (and its unsecured benefactors) was offered a 55% share of Chysler. You can tell that there’s another election to be won when Obama appears on TV and openly states “I stand with the workers,” garnering even more union support. Lenin would have been proud.
Couple this with the fiercely protectionist ‘Buy American’ clause that seeps throughout the $871US billion stimulus package (its actually much, much bigger than that) and we have what may be the beginnings of the end for international capitalism. But surely there must be someone out there who is resisting the pull towards a more state-run economy. There is, but your never going to believe who.
Chinese Premier, Wen Jiabao, suggested in Davos that OCED countries re-read Adam Smith’s Theory of Moral Sentiments take a few lessons from it. Apparently that’s what the rulers in Beijing are doing.
And they told me quantum mechanics was unorthodox. In an interview with Lionel Barber from the Financial Times, Wen states that:
Without the successful political restructuring, one can’t ensure success in our economic restructuring. The goal in our political restructuring endeavor is to promote socialist democracy, and better ensure people’s rights to democratic election, democratic decision making, democratic management, and democratic supervision.
The society that we desire is one of equity and justice, is one in which people can achieve all round development in a free and equal environment. That is also why I like Adam Smith’s Theory of Moral Sentiments very much.
Full interview here (excellent read).
The father of Western capitalism influencing the economic powers to be in Asia? The influence is immediate and significant.
At China’s annual National People’s Congress the booming nation took a dramatically different approach to their bailout than Americans. Although their bailout package was slightly proportionally higher than the American’s (18% of GDP vs. 15% of GDP) the Chinese plan focuses on the immediate stabilization of the economy, not preventing further mistakes through increased nationalization. The Chinese government is happy to sit back and see how successful their plan is before they commit to more funds. The former Communists seem to have more faith in the power of the free market than the Americans do. The result: China’s growth is expected to shrink to only 7% growth while other economies are in decline (below 0% growth).
And that’s what we should really take away from all of this: despite the strongly positive correlation over the last 20 years between market freedom and economic success, the government is now seen as the friend of the economy instead of the enemy. Obama and Harper’s economics of a more strongly regulated financial sector is juxtaposed by China’s vision of an interventionist, state supported free market.
We should be wary of feelings to run to the government in these hard times. It will only slow the economic recovery bring China closer to global economic dominance. Government takeovers of private business has never worked out and will result in less competitive products and increased waste. The time is now to remember the philosophy that made the US and Western economies strong in the first place.
Obama frequently speaks about rescuing the American dream. In reality it is the American dream that will do the rescuing, if only he allows it the freedom to do so.
A amazing way to look at the monstrous US bailout – here.
Maclean’s – June 15th. Andrew Coyne, We’ll Pay For This Bailout For Years. Link.
Don Coxe – Basic Point Summer Issue: Who Will Really Lead the Global Rescue.
Another take on the Chinese stimulus – here – I disagree with it but there it is.