A politician is a person who says one thing, does the opposite, and fails to acknowledge the contradiction. A leader is a person who does the right thing, no matter the consequences. Every president must decide, on balance, which he will be. When you look back at past presidents, the most successful ones, such as Franklin Roosevelt and Ronald Reagan, often led regardless of the political risks.
The less successful ones, such as Richard Nixon and George W. Bush, operated without any clear compass and sailed with the political winds. Bush, for example, flip-flopped from tax-cutting conservative to prescription-drug peddler, all with an eye towards building a permanent majority (he was right about majority, but he got the party wrong). Let’s assume that most politicians want history to view them as leaders. As Barack Obama is already finding out, it isn’t easy. We are already learning a good deal about his leadership style, and for those hungering for a post-partisan direction, his performance has been disappointing.
Take the proposed bailout of the US auto manufacturers, a policy that has been tirelessly advocated by the President-elect and sadly seems to be gaining support from enough members of both parties to have a chance of passage. Economics 101 suggests the government shouldn’t bail out auto makers. They are saddled with enormously high costs relative to the competition and have been unable to deliver a product attractive enough to earn big markups and make up the difference.
When the manufacturer of a product has trouble in the marketplace, it needs to change its product or its cost structure, and government intervention can only slow the process. The fastest and most efficient path to economic growth is through the reorganization that generally occurs in bankruptcy. So what arguments might cause one to reject the Economics 101 answer? The first is there will be a contagion if the US auto makers enter bankruptcy. They are too big to fail.
This analysis is indefensible. Firms operate in bankruptcy all the time. The airlines seem to do it as a matter of habit. Forcing the unions and auto makers to make tough choices in bankruptcy court isn’t the same as shutting down the factories. Factories usually continue to operate. And if a few plants are shut, it will allocate workers and resources toward more efficient uses. That is a plus, not a minus.
The little guy
The second argument in favour of the bailout is that it serves social justice. In this view, Washington politicians are here to fight for the little guy, and now is their chance. Those poor blue-collar workers in Detroit didn’t have a voice in Washington, and now they do.
This argument is worse than the first. The US auto makers are haemorrhaging money, it’s true, and a big reason they are doing so is they are shovelling it out the door to the workers. Times are tough, and people all over the country have been losing their jobs. When an auto worker at one of the US auto makers who has worked at least 10 years loses his job, he gets a severance payment of $140,000 (Rs70.14 lakh). Most everybody else in the US gets a minimal severance or nothing. And those who don’t lose their jobs are compensated richly. The average cost of an hour of United Auto Workers (UAW) member work is about $73. The average cost for an hour of work for a Honda Motor Co. worker in the US is about $43.
Some of those higher costs are attributable to the great retirement benefits that are provided to UAW members, who on average have a retirement that is about twice as comfy as the typical senior relying upon Social Security.
Even excluding the rich benefits, a typical Chrysler assembly worker had an annual salary of $64,100 (Rs32.11 lakh) in 2006, compared with $49,568 for the average American household. Including benefits, the UAW worker is solidly encamped in the upper third of the income distribution.
Bailout proposals all have the effect of fuelling this gravy train for the auto workers. It is difficult to see how anyone could claim that this serves social justice. If you take general revenue, which is collected from everyone in the US, and transfer it to high-salaried auto workers, then you aren’t serving social justice; you are subverting it.
Why would anyone propose such a thing? It might be that the proponents of the bailout are just mistaken about the first point and believe that bankruptcy is death, that a systemic economic calamity will follow if the auto makers enter Chapter 11. Or they might not have understood the distributional consequences of their actions.
But it seems unlikely that President-elect Obama, surrounded as he is with brilliant economists, could have missed this point. The auto bailout is political payback, pure and simple. After all, the Centre for Responsive Politics reports that organized labour contributed a sum of $58 million during the 2008 election cycle to both parties. Republicans picked up $4.85 million; Democrats got $53 million.
It is clear that unions provide an important political advantage, and rewarding them is good for the Democratic Party even if it isn’t good for the whole. It is great politics to bail out the auto makers. Just don’t mistake it for leadership.
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