Friday, December 19, 2008

Bush Crowding Out

President Bush does like to stick by his word, as we have seen.
“I've abandoned free-market principles to save the free-market system ... I feel a sense of obligation to my successor to make sure there is not a, you know, a huge economic crisis,"
Less then a week after making this statement to CNN, the Bush administration offered $17.4 billion in taxpayer earnings to GM and Chrysler, in order to prop up companies that are producing items that currently no consumers wants, and have not wanted for some time.

In April 2008, before the government begin handing out money, Honda's sales were up 4.2% and Nissan's were up 3.6% yet Detroit's big three car companies sale's were down 10.4% (HT: International Herald Tribune)

The opportunity cost here is seen in two major areas. First, that $17.4 billion could still be in the hands of taxpayers, encouraging spending. Secondly, these companies are putting capital to use in inefficient ways. Should they be allowed to go bankrupt, the capital would be allocated, by the invisible hand of the market, to much more efficient sources. This would in-turn create more jobs then are being protected.
"If we were to allow the free market to take its course now, it would almost certainly lead to disorderly bankruptcy and liquidation for the automakers,"
Too bad President Bush did not see this quote as a good thing.
(minus "disorderly," but bankruptcy is a government regulation, if it was "disorderly" would a better fix be to adjust the regulation, as opposed to throwing money at companies?)

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