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Thursday, December 18, 2008

Obligitory Bailout Post

I find most talks of a bailout by government to be almost physically painful, so I try to avoid listening to them, but that is almost impossible. It seems that I've heard every argument as to the effectiveness of an auto bailout, but it's been a while since I've heard one that actually makes sense to me.

A subsidy should be used in the case of a positive externality, but we are not dealing with a market failure here. It is a government failure. The reason the auto industry is in such dire straits (and not just regular straits) is because of heavy regulation in that sector. The requirements that American cars are forced to meet due to rent-seeking by environmentalists and other groups are what is making it so difficult to compete. I don't think a subsidy is going to do anything except encourage moral hazard, which is where insuring against something bad makes that bad thing more likely to happen. If we continue to give money to failing enterprises, it will encourage more enterprises to fail. Instead, if the regulation were removed from the industry, the source of government failure would be gone and the market would correct itself.

There is also the issue of how morally right it is to borrow so heavily from the future to pay for the past. I agree with Thomas Jefferson.

"I sincerely believe... that the principle of spending money to be paid by posterity under the name of funding is but swindling futurity on a large scale." --Thomas Jefferson to John Taylor, 1816.

If we bail out the auto industry, that is what we are doing. We are borrowing against the future, and what are we going to do when that bill comes due? Why, we could borrow some more, or maybe print it, of course. But those are short-term solutions and they create problems of their own. I think it would be better to suck it up and let what needs to fail, fail. It's better than having it fail later once it's grown into an even worse mess that our children won't be able to do anything about.

For an example of just how well this works out, take a look at Japan. Who else is looking forward to our own "lost decade"? I know I am.

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