On Pencils and the Auto Bailout(s)
November 14, 2008 Corporatism

In today’s news Congress is inching ever so closer to providing a $25 billion emergency loan package for bail out the “Big 3” American auto-manufacturers. This is not the first time they have done it.

Let’s abstract from the fact that the auto-industry has been bailed out more than once (high oil prices require federal help, competition from Japanese carmakers require federal help, lack of interest by Americans in buying American cars now requires federal help … I can’t even imagine what reasons can be conjured up for the next fleecing of the taxpayers), I wish to focus on the particular claim that American auto-makers need to be bailed out because (1) They represent a large portion of American employment, and letting them fail would devastate the labor market; and (2) They are the essence of “Americana” and it would be “irresponsible” to let them fail.

Point 1: The American Auto Industry needs help because over 800,000 people work in companies that supply parts and services to carmakers, and a total of approximately 1 million people work in the automotive sector.

  • For reference, this entire industry employs fewer workers than a single firm in America does – Walmart. In fact, it employs HALF as many workers as does Walmart.
  • There are 145 million people employed in America.
  • There are a huge number of sectors that employ more Americans than the automotive sector (see table B-1. For example, the subsectors of heavy and civil engineering construction workers exceeds the size of the auto sector, but so too does metal fabricators, machinery fabricators, computer and electronic producers, chemical manufacturers, food manufacturers, and many subsectors of comparable size such as paper producers, printers, plastic production, furniture production, “miscellaneous” manufacturing, and mining.
  • The first two points though are really non-sequiturs, and not necessary for my argument … I just put them there to place this issue in context. But the third starts to tell the story. Why autos? In a slowdown, the workers in virtually all of the above subsectors of the economy are going to be experiencing a hard time – and based on the size of the auto and related sectors alone, there is absolutely no justification to bail out this sector because it is somehow such a large part of the American economy that we would all be doomed without it. Simply, the automotive industry is nowhere near the largest industry in this country.
  • Those that do cite automotive employment as a justification are pulling a fast-one on you. Only half of the cars sold in America are sold by American car companies. More important, a huge number of foreign cars are produced right here in America. Those employment numbers cited by Congress and lobbyists for the unions and American companies themselves include all of the jobs at foreign manufacturing plants and the suppliers they are tied in with that are located here in America, in places like Georgetown, KY (Toyotas) and Kia plants in Georgia and Hyundai plants in Alabama and …I can’t find employment numbers for all of these insourced jobs, but surely they are in the hundreds of thousands.
  • But all of this still misses the salient point.  The production of ANY one good or service here in America or just about anywhere in the world for that matter, requires the cooperation and work of millions of other workers to get it done. As Leonard Read famously describes in I, Pencil (one of my top 5 all time favorite economics pieces)

I, Pencil, simple though I appear to be, merit your wonder and awe, a claim I shall attempt to prove … Simple? Yet, not a single person on the face of this earth knows how to make me. This sounds fantastic, doesn’t it? Especially when it is realized that there are about one and one-half billion of my kind produced in the U.S.A. each year. …I, Pencil, am a complex combination of miracles: a tree, zinc, copper, graphite, and so on. But to these miracles which manifest themselves in Nature an even more extraordinary miracle has been added: the configuration of creative human energies-millions of tiny know-hows configurating naturally and spontaneously in response to human necessity and desire and in the absence of any human master-minding! Since only God can make a tree, I insist that only God could make me. Man can no more direct these millions of know-hows to bring me into being than he can put molecules together to create a tree.

  • Understanding that the production of anything, even something as simple as a pencil requires the cooperation (and hence, employment) of millions of other people leads us to conclude that a problem in any one industry has an impact on millions of other workers and industries the world over. It is simply not credible to claim that a particular industry needs to be bailed out because it is an intricate part of the web of work we are all doing around the world. We are all parts of this intricate web, no matter how “important” or “mundane” our work appears to be. To make this point clearer, imagine that I was a manufacturer of balloons made from baloney. Clearly these things are useless (maybe it is not that simple). But to produce them, it would require the cooperation of all of the grocers to sell me the baloney, and of all of the pig farmers (is that what is in baloney) and of all the people that make farm implements, and the people who clothe the farmers, and the helium producers, and the people that make the tanks to hold the helium and the people that mine the metal to make the tanks, and the people that make the trucks to transport it, and the people that make the tires to go on the trucks … so therefore we should clearly prop up the baloney balloon industry just to make sure all of the millions of people responsible for the production of baloney balloons can stay employed. This is pure sophistry.
  • But let’s assume that even all 1 million auto workers would be out of work. That of course would never happen – the remaining productive auto makers would make use of the valuable assets – so at worst maybe a quarter would be out of work. How does this “catastrophe” measure up to other catastrophes in the labor market? I think three events are worth recalling.
    • First: the Mariel Boatlift in 1980 represented an influx of 125,000 Cuban immigrants into Miami in a very, very short period of time. You should note that the immigrants were of much lower skills than the Cubans that had arrived before and in the early parts of the Revolution. So, did this influx of newly unemployed, unskilled people devastate South Florida? Of course not. Mr. Card is also not exactly a radical libertarian economist either. Hi found that:
    • The Mariel immigrants increased the Miami labor force by 7%, and the
      percentage increase in labor supply to less-skilled occupations and
      industries was even greater because most of the immigrants were
      relatively unskilled. Nevertheless, the Marie1 influx appears to have had
      virtually no effect on the wages or unemployment rates of less-skilled
      workers, even among Cubans who had immigrated earlier.
    • Second, some years earlier a small event led to a somewhat larger shock of unemployed workers coming back into the United States. In fact, the United States they were coming back to looked a heck of a lot different than the one they left. Oh, there were somewhere around 10 million unemployed soldiers coming home from World War II. And what followed was arguably the 10 best years of economic growth the country has ever seen. (I am not claiming the unemployment caused growth, rather that it did not inhibit it in any way)
    • Third: OK, those might be smallish numbers. But did you know that each and every single year in America over 25 million jobs are destroyed. I’ll repeat that in case you missed it. Every year, we lose a number of jobs representing over one-sixth of the size of the entire labor force. That’s right. It’s just that every year the “economy” creates about 27 million new jobs. On net, then we see about 2 million new opportunities created every year. And that is even before the Lord and Savior decided he can create even more through his waving of his government magic wand.
      • As if losing 25 million jobs each year was not enough, did you also know that in a typical year there are about sixty million total separations of workers from jobs (some of this includes the same worker leaving many jobs, but that reinforces the point I am making). Remember that the entire labor force is about 150 million people. So these separations (either voluntary or involuntary) amount to (gross) 40% of the labor force experiencing some kind of major change in each year.
  • Hopefully the point is obvious by now … but if the typical churn in the labor market does not cause annual disaster after disaster, then what possibly is different about a change in a single sector of the economy that dwarfs the size of these other events? Maybe you would argue that the auto sector is different because it is concentrated in one city and one industry – but what about the Mariel Boatlife example above? Do you want to argue that American auto-workers, who are already skilled and assimilated into American culture, would have a worse time than Cuban immigrants? Or do you wish to argue that the reason to bail out the auto sector is because you fear that Detroit will turn into a dump? Can Detroit can get any worse?

Point #2: We need to protect the auto industry because it is the essence of “Americana”

  • This sounds great, but if you understand the argument above, then the nonsense of this second point follows.  What does it mean to be “American?”  The production of any one American automobile requires the cooperation of millions of workers from around the world, and in a mind-bogglingly large array of industries. The thing about American cars that is particularly American is that despite the silly protectionism our companies lobby for and our politicians grant, that American cars are particularly cosmopolitan.
  • To argue otherwise would also suggest then that we want to throw out of the country any company that produces anything that uses workers or capital sourced from another country. Bye bye Toyota plant in Kentucky. Bye bye to your favorite bookstore, or guitar shop, or shoe store, or supermarket. I have no idea what it means to be “American” other than the fact that it used to be the case that if you were fortunate enough to live under the jurisdiction of what we call the American government, you used to have your property rights protected, you used to be rewarded for taking risks, you used to be penalized for being foolish. I don’t know what else could possibly be “uniquely” American, nor am I sure that it would be important anyway. (more on that in a future post)

In any case, suppose we did not take steps to save Detroit (yet again). Would all of these people be immediately unemployed? Would the billions of dollars worth of capital that is being tied up producing things nobody wants simply disappear? I find that extremely hard to imagine. Bankruptcy proceedings would help expedite the movement of the valuable capital from where it is being wasted (in Detroit) to where it is more valued (I can’t say where, but it is not my business to pick winners, it is up to other entrepreneurs to take those risks).

And I have not seen one shred of evidence why provide assistance to the foreign auto manufacturers should not also be part of that package. If it is true that the auto industry is so valuable, shouldn’t we want to protect firms that insource jobs here? It is peculiar that if the intention is to save the auto industry out of some Taggertian concern over the “national interest” that only some parts of the auto industry are worth saving.

And by the way, there is normally not much of a conflict between Wall Street and Main Street. It is not until your friendly federal government gets in the business of picking winners and handing out favors and bailing out some companies and not others do we start seeing newspaper headlines about the struggle between “Main Street and Wall Street.”  Suddenly a line does get drawn in the sand. The “beneficent” actions of your elected representatives are creating conflicts, both domestically and internationally. Just as no individual person or family attacks other “nations” (it is the individuals that represent you in government that have the guns), no individual person or family on Main Street is ever at odds with an individual person or family from Wall Street. One of their major and coincident goals of people on Main Street and people on Wall Street is for them to find one another in order to cooperate. What do you think the”crisis” is all about? It is about the worry that the problems on Wall Street will trickle down to Main Street.

Stop the sophistry. Have a nice weekend.

"6" Comments
  1. Huzzah!!

  2. Really though? I mean, OVERALL as a part of the economy the auto industry is small, yes. But in certain areas it is huge. Detroit, in fact the entire state of Michigan could collapse. When the steel industries went kaput they were no larger a share of the economy but it was horrible. My family is from Western Pennsilvania, and they made every effort to save the coal miners there. They couldn’t though, and what resulted? 25% unemployment. That’s disgusting. And those jobs weren’t replaced for years, actually, they still haven’t been replaced today. Suicide rates jumped…etc etc.

    So for the entire country is it bad? Maybe not. Is it terrible for specific areas, and for specific people? Yeah, I think so. Sometimes it is good to forget the forest and see the trees.

    Now is the collapse avoidable by anything the government can do, eh, probably not. I don’t think there is anything they can do really, what’s more anything they do will do harm to other people. It is something to be sad about, nonetheless.

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