Sunday, February 26, 2012

Sunday NYT: The Republican Party, Sex , and Autos

Interesting stuff in the Sunday NYT. On the editorial page, A Million Jobs, concerning the GM/Chrysler bailout. One could make the case that this was just an efficient reorganization that used the power of the government effectively. In any bailout, we should be worried about moral hazard, but in this case maybe the alternative was a private sector "reorganization," under which some organizational capital was lost forever. And you could add in Krugman's complementarity arguments. What do you think? Give me a counter-argument.

On another matter, not unrelated, is Maureen Dowd's column. I enjoy her column, though I don't always agree. She's good when confronting the Roman Catholic Church. I love this quote:
“Republicans being against sex is not good,” the G.O.P. strategist Alex Castellanos told me mournfully. “Sex is popular.”

Later on:
Their [Republicans'] jitters increased exponentially as they watched Mitt belly-flop in his hometown on Friday, giving a dreadful rehash of his economic ideas in a virtually empty Ford Field in Detroit, babbling again about the “right height” of Michigan trees and blurting out that Ann “drives a couple of Cadillacs.”
It looks like Romney will win the nomination, but he is going south (and that's not to Alabama or some such) with regard to November. I think his biggest problem is that he would probably score zero on this test.


  1. Any blood kept off of the floor was political rather than economic. In the worst-case scenario of liquidation, jobs and suppliers would have realigned with surviving manufacturers and while this would have been painful in the short-term, barring demand issues the industry would have recouped sans-GM. The domestic vs. import issue was a canard; Toyota is as much an American manufacturer as GM. Other than their diverging degrees of success, the chief distinction between these two (and generally between GM and its competitors) is union clout.

    The value of an unprofitable company's "organizational capital" is questionable. Regardless, there was a real and substantial loss of bondholders' capital, and the repercussions of the subordination of senior debt will be felt the next time GM is in bad straights, and needs to roll over or issue new bonds. Pension issues remain unresolved and margins low in spite of the economic recovery, and they remain as vulnerable to crisis as previously. A company brought back to health, or a money pit?

    Even were the NYT right, a policy can be efficacious and still be bad. The true costs of the bailout are not yet known, and in all likelihood they never will be. The market reacts and people choose an interpretation that suits them. But on the margin political economy has become less economical and more political, and I for one do not have enough faith in our politics or our politicians to regard this as a good thing.

  2. Mitt Romney's many faceted awkwardness notwithstanding, lots of the current GM/Chrysler cheerleading seems to be based on a bit too much post hoc ergo propter hoc analysis. Yes, "One could make the case that this was just an efficient reorganization that used the power of the government effectively." But one could also make the case that Detroit's Chapter 11 reorganization could have been carried out in a far more efficient and legal (e.g., wrt to use of TARP funds and treatment of debt holders) manner. Appropriately filtering out the hyperbole, the following offers an outline of a non-liquidation reorganization alternative:

    On Mitt's many troubles, I doubt that his patrician upbringing (as measured by the Murray test) per se is the cause; FDR would also have scored 0 on the Murray test, and he had none of Mitt's problems. Christopher Caldwell's discussion of the Republican battle between its Rotary Club and Burger King wings, from the Feb. 24 issue of the FINANCIAL TIMES, is pretty instructive, IMO, on the state of things Mitt.

    1. There is a set of important and interesting issues here, relating to the role of the government in designing bankruptcy law, and in executing bailouts. Maybe if the legal structure is set up properly, the government should never bail anyone out. There is a macro literature (Rios-Rull, Corbae, Chatterjee, Athreya), that gets into the insurance effects of bankruptcy law, but I think they ignore the moral hazard, for the most part.

    2. Phil Rothman offers a link to an article "appropriately filtering out the hyperbole." Here's how the article concludes:

      "The Obama administration's economic policy, therefore, returns us to the thinking of the 1950s and '60s — to an economy in which big business, big labor, and big government are tied together in a relationship of mutual succor and support." Was U.S. economic performance in the 1950s and 60s so bad?

      "The auto bailouts exemplify this new reality. Sold as a means of revitalizing the economy, they are in fact a means of transforming the relationship between the state and the market in a way that empowers large players at the cost of economic growth. The overall effect of such state capitalism is a kind of controlled stasis, in which the preservation of old jobs takes priority over the creation of new ones. Managed decline, rather than dynamic growth, is the defining feature of the Obama economy."

      The analysis leading to this conclusion supposes that an orthodox Chapter 11 reorganization would have been a piece of cake. After all, many companies have done it. Of course, few, if any, were as large as GM, none had GM's magnitude of pension and heath care obligations, few, if any, had GM's ramifying supply chain, and none were undertaken during the middle of the biggest financial crisis since the 1930s.

      It's easy to forget the sense of continuing catastrophe that pervaded the financial crisis. I don't know whether some other approach would have produced a more efficient GM (which seems to be doing reasonably well at the moment) but if GM had failed, the consequences would have been felt far and wide. And this aspect is the one that needs good modeling.

    3. Perhaps this filtering will help Greg Hill:

      1. As a firm in "financial distress," GM was arguably a good candidate (but Chrysler less so) for Chp. 11 reorganization, not liquidation.

      2. TARP funds, with statutory approval from Congress, could have been used to provide "debtor in possession" financing.

      3. With less direct political involvement, the restructuring could have left (at least) GM with a more efficient array of dealerships and lower-cost supply relationships.

      This is what I had in mind, sans the hyperbolic overreach in the piece I linked to. Perhaps the literature Steve referred to provides a framework in which one can examine the proposition that GM was too big to reorganize in this manner.

    4. Yes, that's a good bit of filtering. With respect to (3), three points:

      1. Given the massive pecuniary externalities in the event of a GM failure, which included threats to the solvency of the Pension Guarantee Corp, a potential increase in Medicare costs, and, if I may be permitted an old-fashioned Keynesian point, the risk of self-reinforcing declines in income and expenditure, there seemed to be a strong case for the government’s involvement.

      2. Given the risks of a GM failure, it seems “penny wise, but pound foolish” to pursue an alternative that might have left GM with “a more efficient array of dealerships and lower-cost supply relationships.”

      3. As someone who is more convinced by (3) than I am, are you at all surprised by the recent (but by no means permanent) success of GM?

    5. Greg: I'm concerned that continued exchange via this route will generate a negative externality for readers of Steve's blog. That said, I'd be happy to discuss things more directly. If you're interested, please send me an e-mail address at which I can contact you; my e-mail address can be found through the link above to my website.

  3. The Wall Street Journal also had an Editorial:

  4. "She's good when confronting the Roman Catholic Church."

    How brave of MoDo to risk being burned at the stake.

    "“Republicans being against sex is not good,” the G.O.P. strategist Alex Castellanos told me mournfully. “Sex is popular.”"

    This is acutely embarrassing for me. I wish that I'd known that Republicans were against sex before I registered to vote.

  5. "I think his biggest problem is that he would probably score zero on this test."

    Do you think that is a good thing or a bad thing, Steve? Personally, I think that you are correct in your assessment. Nonetheless, I don't see any good reason why somebody who scores zero on that test should be excluded from the presidency.

    1. I'm half joking on that one. The test has some silly elements to it, and I'm not sure the guy who constructed it actually understands low-income people. But the test also extracts some information that I think is useful. It certainly got me thinking about the issues.

  6. I'd like to know your input on the following discussion on EJMR. Specifically poster 9129 seems very knowledgeable on NM literature and its future. What do you think about his/her comments?

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