Saturday, 15 November 2008

Creative Destruction

Via Will Wilkinson's blog, this piece by Megan McArdle highlights the underlying problems of bailing out firms - in particular, the proposed bailout of the Big Three automotive manufacturers - which would normally fail in a free market:
"But whatever your feeling about government intervention in the economy, or the correct level of income inequality, I think there's one thing we can all agree on: for the world to get better, things that don't work have to fail. We cannot keep alive every company, every car and every job that someone once liked, because that way lies stagnation and death. Places where production decisions are made based on how much labor they can consume, rather than how much value they can produce, make everyone in society worse off in the long run."
Which is curiously dissonant with her justification for the (ten times larger) bailout of the financial sector:
"In an earlier thread, someone said, roughly, "I don't buy on credit and my company invests on retained earnings. I can sit this out for a couple of months." The problem is, the effects of really rapid contractions don't last a couple of months. They last years. Can your company withstand the bankruptcy of some major clients with large outstanding accounts? How many people will it have to fire if its order book drops 40%? Can it cover its fixed expenses even on half staff?"
As Arnold Kling points out, simply claiming that "finance is weird" hardly suffices to explain the diametric position taken here. If the justification in one case ultimately rests on a pretend measurement of the degree of 'interconnectedness' of a bank, perhaps she ought to be less dismissive of the auto-workers's union President's claim that "the auto industry is the economic driver of our nation." On the other hand, she could bring the clear and compelling logic of her opposition to the auto-industry bailout to argue that bad business investments in the financial sector should be purged, not propped up.

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