I’m not actually much of a supporter of value debates. If I say that I value freedom, and letting winners win and failures fail is essential to freedom, then I apply it to the auto bailout bill, there are two appropriate debate responses. The first is to demonstrate that the bailout bill somehow is more “freedom preserving” than no bailout bill. The second is to argue that there is something more important than freedom right now, and the bailout bill nets more of that than no bailout. Both of those options suck. The first option devolves into semantics about what “freedom” means. The second option devolves into me not caring about the argument because I disagree that value X is more important than freedom.
Southpol just brought up the idea of dissing an idea by attaching a pejorative label while I was preparing this post. Last week, Yves at Naked Capitalism had a post titled Why is “Nationalization” A Dirty Word in America? Ok, it’s not as cool as arguing “American” vs. “Soviet,” but it’s close enough. It is something worth reading. In the post, there’s an argument that government incompetency isn’t inherent. It’s argued that people in Europe get a lot more bang for their tax buck than we do in the United States, and that some services (like national health care) are worth the expenses to the public. Unfortunately, the argument seems to be that we could favor a government bailout of the auto industry if our government was more competent. I say “unfortunate,” because we clearly don’t have that government.
If we want to argue that the bailout will reduce the severity of the recession, we can focus on limited scenarios. I’ll request that a supporter of the bailout (in principle, you don’t have to support the current bailout) come up with more plausible scenarios than I provide. The research funded by the auto industry hasn’t exactly satisfied that criteria. Still, I’ll start with something contrived. What if the cascade effect of the auto-industry failure might be underestimated on a more local level (even if it is over-estimated on the national/global scale)? The conjecture I’ll make is that there exists a tipping point in a region that once reached, causes civil unrest and catastrophic consequences. My evidence for such a conjecture is the food riots in 34 countries earlier this year, and the Greek riots happening right now. For the sake of argument, we’ll look only at Detroit, and assume that the tipping point is somewhere between current unemployment levels and the unemployment levels that will occur in the absence of a bailout. If it meant preventing the destruction of Detroit due to civil unrest, would you support the bailout plan? No, I have no evidence that such a scenario will happen, nor that it could be avoided by a bailout.
When trading, it’s often best to ignore second-order effects. People seem to assume the existence of far more positive feedback loops than actually exist. Things don’t cascade out of control nearly as often as people believe. The current crisis gets painted like a cascade (from subprime to other mortgages to other credit, etc), but I think the problem was bigger than subprime from the get-go. Clearly the bubble-like returns were not restricted to subprime mortgages. Similarly, when arguing about the auto industry bailout, I think the impacts that can be controlled/mitigated by such targeted legislation is over-estimated. It’s not so much that I doubt the impacts (or even the cascade in this instance), it’s that I doubt they can be prevented by the bailout. I would go so far as to say that the costs will exceed the net benefits over inaction or reaction (I’ll put a pre-packaged bankruptcy in the reaction column).
