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Milton Friedman and Auto Bailouts
Last night, restless because of a cold and bummed by reports about the auto bailout, I picked up my copy of Bright Promises, Dismal Performance, a collection of Milton Friedman's old Newsweek columns. I was drawn to one in particular, a September 10, 1979 piece on the prospect of an auto bailout, titled, "Chrysler: Are Jobs the Issue?" This part jumped out at me as especially relevant today:
Bailing out Chrysler will not change the total amount of capital available to the economy. But it will divert capital to Chrysler from other more productive uses.
Bailing out Chrysler would simply preserve unproductive jobs at the expense of productive jobs. However, the people who would be denied jobs by a Chrysler bailout do not even know who they are, so they cannot speak out to counter the self-serving claims of the firm's present management.
The private enterprise economic system is often described as a profit system. That is a misnomer. It is a profit and loss system. If anything, the loss part is even more vital than the profit part. That is where it differs most from a government-controlled system. A private enterprise that fails to use its resources effectively loses money and is forced to change its ways. A government enterprise that fails to use its resources effectively is in a very different position.
Comments
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james23| 12.9.08 @ 8:44AM
Odd then that Friedman supports a bailout for all three auto companies this year.
Bob| 12.9.08 @ 9:11AM
Did you notice that the Chrysler bailout worked that time and returned a profit to the government? I'm not one of those people who believe that the availability of capital to a particular country is a constant and hence, do not buy into fully supply side theories.
The arguments most relevant to the bailout from my perspective are those that deal with the competitive framework. Most countries, these days, protect their manufacturing base because that is one of the most effective ways to distribute capital to the populous. They have seen what happens in the U.S. when manufacturing is allowed to leave a country -- you get an increasing disparity between the rich and poor which eventually leads to a less stable society. Therefore, our other country competition is injecting capital into their auto companies. For us to maintain the manufacturing base we have, that needs to be done.
However, the auto companies really can't restructure properly, and that's the issue. All of those legal contracts they have with dealers, unions, suppliers, etc., have to be completely rewritten. The only method we have to do that is Chapter 11.
Therefore, I would agree with the premise of a government bailout ONLY if all contracts they currently have were nullified and they could shed half of their dealers and limit severely what the unions get in terms of benefits. That will not happen.
Some say that bankruptcy will ruin the market for them. Perhaps in the short term it will, but longer term, a stronger company with a more rational and competitive structure will allow them to spend more money on R&D;and build the market.
Therefore, instead of bailing out these companies, especially Chrysler who has a rich parent, I would let them fail, restructure, and then use government funding to guarantee the products that are sold so people who buy these products don't worry about maintaining or servicing them in the future.
Hunter Baker| 12.9.08 @ 9:38AM
James23, I'm pretty sure Milton Friedman has passed, sir. I wish he were still around to dispense his sage advice.
Austin Scott| 12.9.08 @ 10:04AM
Very odd indeed, though impressively active for a man who died on November 16 2006.
jnip| 12.9.08 @ 10:21AM
James23 probably means Thomas Friedman.
Ron| 12.9.08 @ 11:25AM
Thomas Friedman is a much different person than Milton was. LOL!
I'm against all bail outs because the Government then feels it can dictate who should run the company and what the company should produce.
There have been a lot of car produced in the name of government that have been real stinkers. The Russian Zil and Volga come to mind.
J. Reif| 12.9.08 @ 2:37PM
Thomas Friedman is a loud-mouthed tool who thinks he's smarter than God. Milton Friedman was a highly intelligent, thoughtful, academic economist who earned the right to publicly espouse his opinion and only did so thoughtfully. Two very different people, indeed.
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