With every New York Times column, it’s getting harder and harder to differentiate Princeton economist Paul Krugman from an unabashed political hack.Â Certainly Krugman has always played the role as champion of the Democratic Party, but this latest attempt to defend President Obama takes the cake.Â This week’s crime in unsound economics?Â Offering nothing but praise for the bailout of General Motors and Chrysler.Â Krugman writes:
The case for this bailout â€” which Mr. Daniels has denounced as â€œcrony capitalismâ€ â€” rested crucially on the notion that the survival of any one firm in the industry depended on the survival of the broader industry â€œecologyâ€ created by the cluster of producers and suppliers in Americaâ€™s industrial heartland. If G.M. and Chrysler had been allowed to go under, they would probably have taken much of the supply chain with them â€” and Ford would have gone the same way.
Fortunately, the Obama administration didnâ€™t let that happen, and the unemployment rate in Michigan, which hit 14.1 percent as the bailout was going into effect, is now down to a still-terrible-but-much-better 9.3 percent.
So how many jobs did the bailout really save?Â Paul Roderick Gregory at Forbes estimates around 4,000. Â Obama and the White House claim at least 1 million jobs saved.Â Somehow I doubt their sincerity on such a rosy number.Â Whatever the number of jobs supposedly saved, the cost to taxpayers has been an estimated loss of $14 billion according to Obama’s ex-Auto czar.Â What’s $14 billion among friends?Â And by friends, I am of course referring to the United Auto Workers whose price tag has been satisfied in return for some much needed votes come this November.
What Krugman doesn’t, or won’t mention, is the real reason GM and Chrysler survived- that is a successful bankruptcy process.Â There is absolutely no reason in the world to believe that had Uncle Sam not come to the rescue with a sack of taxpayer dollars, that GM and Chrysler would have ceased to be auto companies today.Â Â Markets have tendency to self correct when push comes to shove.
Yet even the bankruptcy procedure initiated by the Obama administration wreaked of favoritism.Â From David Skeel, law professor at the University of Pennsylvania, writing in the Wall Street Journal:
But the “sale” also ensured that Chrysler’s unionized retirees would receive a big recovery on their $10 billion claimâ€”a $4.6 billion promissory note and 55% of Chrysler’s stockâ€”even though they were lower priority creditors.
If other bidders were given a legitimate opportunity to top the $2 billion of government money on offer, this might have been a legitimate transaction. But they weren’t. A bid wouldn’t count as “qualified” unless it had the same strings as the government bidâ€”a sizeable payment to union retirees and full payment of trade debt. If a bidder wanted to offer $2.5 billion for Chrysler’s Jeep division, he was out of luck.
Basically, if private creditors looking to use their own funds wanted to save either auto company, they had to appease the UAW’s retirement fund.Â Funny how bailouts, financed by money not belonging to bureaucrats, work.
Krugman goes on to cast a blanket over capitalism itself as being wholly reliant of government to exist.
But the current Republican worldview has no room for such considerations. From the G.O.P.â€™s perspective, itâ€™s all about the heroic entrepreneur, the John Galt, I mean Steve Jobs-type â€œjob creatorâ€ who showers benefits on the rest of us and who must, of course, be rewarded with tax rates lower than those paid by many middle-class workers.
Unfortunately for Mr. Keynesian, capitalism does not exist in a vacuum of rugged individualists in a constant state of ruthless competition.Â Certainly producers fighting for market share and profits are great in terms of seeking innovative ways to lower costs for consumers.Â But markets are always the product of social cooperation no matter how reclusive or self reliant an entrepreneur wishes to be.Â Just like in tango, it takes two in order to offer remuneration for a consensual transaction.
The idea that free market types remain entranced with the fantastical entrepreneur as the building blocks for a productive economy is a blatant smear on Krugman’s part.Â No surprise from him there.Â What he fails to specify is that every participant in the complex system known as the market acts as an entrepreneur in forecasting their own financial conditions.Â Steve Jobs and the teenager at McDonald’s both make subjective decisions based on their own ability to satisfy demand.Â Capitalism is a function of economic actors collaborating en masse in the constant pursuit of improving their own standards of living.Â Starkly dividing a free economy’s success by individual or collective factors is pure demagoguery.
Not only does Krugman disingenuously define a system of free enterprise, but he fails in accounting for the unseen consequences and price of the bailout.Â While to shallow eyes it may seem like the bailout saved the auto industry, it merely papered over some losses for the sake of buying votes.Â The ultimate price paid won’t be the bill forced on the balance sheets of taxpayers but the perpetuated system of cronyism and corporatism that is has become the Obama legacy.Â Bankruptcy ends up not being a process to fear but embrace as it serves as a clearing mechanism for inefficient production.Â Like investor Peter Schiff notes, “Bankruptcy is a good thing. It’s the way the market cleanses the economy of companies that shouldn’t be there.”Â Krugman not acknowledging this phenomena speaks volumes on his credibility.