Willem Buiter wrote this in The Financial Times on December 4, 2008: “Good economics serves efficiency and fairness. Good politics serves the survival of the incumbent government. Sometimes all these considerations point in the same direction. Sometimes they don’t.”
Mr. Buiter is a professor at the London School of Economics and Political Science. He was commenting on a British government plan to help people stay in their homes when they can’t afford to pay back the money they borrowed to buy them.
Professor Buiter doesn’t like the program because it rewards “those who assumed excessive risks by taking on mortgages they would not be able to afford should they or their partner become unemployed, and without buying mortgage payment protection insurance?” But, he agrees the scheme is good politics. “It is a hand-out to the middle class…whose electoral support is essential if the government is to stay in office.”
Massive Car Company Bailouts
On a very much larger scale, the Canadian and U.S. governments have applied the same thinking as the British government to General Motors and Chrysler.
When the financial crisis hit neither company was able to weather the storm. Free market economics dictates that businesses in this kind of trouble should be allowed to go under. Politics says such an outcome is unthinkable.
About 12,000 people work for General Motors (GM) in Canada, almost all of them in House-of-Commons-seat-rich southern Ontario. For each GM worker another seven or so rely on the company for employment. These include workers in auto-parts factories that supply GM, caterers, bank tellers, and a host of other support services.
By Ontario Premier Dalton McGuinty’s count shutting down GM Canada would mean losing a total of 85,000 jobs. Add Chrysler and the total is more than 140,000 lost jobs. And, those support jobs provide work for yet others. Letting the two car manufacturers go under might cause a cascade of bankruptcies and factory closures on a disastrous scale.
Mr. McGuinty and Prime Minister Stephen Harper looked at those numbers and, between them, put in $10.6 billion of taxpayers’ money to prop up General Motors.
Canadian Auto Bailouts Criticized
Among others, Gwynn Morgan doesn’t like the government bailout. Mr. Morgan is the former head of the energy company Encana. Writing in The Globe and Mail on June 9, 2009, he said: “In December, 2008, the Canadian share of the taxpayer tab for bailing out GM and Chrysler was announced as $3.3 billion. Fast forward to June, 2009, and the number has now mushroomed to $14.4 billion. GM Canada gets the lion’s share at $10.6-billion. The company estimates its work force will shrink by 4,400 over the next five years, which works out to $2.4 million per ‘saved’ job.”
Some believe that once the government started putting money into GM and Chrysler it began a process it won’t be able to end. Before going into bankruptcy protection GM was losing about $100 million a day. Andrew Coyne writing in Maclean’s Magazine (June 9, 2009) doesn’t think the company is suddenly going to become profitable: “All we will get for our money is the right to pour in more in the years to come.”
Another argument against the bailouts is that they reward failure. Conrad Yakabuski, writing in The Globe and Mail, (May 30, 2009) quotes Mark Milke, director of research at the Frontier Centre for Public Policy in Calgary. “You’re not going to save jobs” said Mr. Milke. “All you are going to do is destroy jobs at Ford and Toyota,”
He said the rescues, “are punishing the companies that have actually run their businesses very well.”
Will the Political Calculations Work?
The politics of the strategy may not work either. Canadians in Yarmouth, Nova Scotia or Regina, Saskatchewan might be wondering why their tax dollars are supporting a company whose products they did not want to buy. They might also be asking themselves if it’s fair to put some of their money into shoring up GM’s pension plan. After all, their own retirement savings have been gutted by the financial crisis and nobody is rushing to make up their losses.
