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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

Paul Krugman on Bailing Out GM and Chrysler



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Paul Krugman makes two arguments in his latest column. Rather hilariously, he has managed to turn a column about America’s modest manufacturing comeback into a conservative-bashing exercise:

 

First, what’s driving the turnaround in our manufacturing trade? The main answer is that the U.S. dollar has fallen against other currencies, helping give U.S.-based manufacturing a cost advantage. A weaker dollar, it turns out, was just what U.S. industry needed.

Yet the Federal Reserve finds itself under intense pressure from the right to make the dollar stronger, not weaker. A few months ago, Paul Ryan, the chairman of the House Budget Committee, berated Ben Bernanke for failing to tighten monetary policy, declaring: “There is nothing more insidious that a country can do to its citizens than debase its currency.” If Mr. Bernanke had given in to that kind of pressure, manufacturing would have continued its relentless decline.

While a weaker U.S. dollar is certainly part of the picture, Krugman ignores the changing cost structure in China. Fortunately, the Boston Consulting Group report he cites does not make the same mistake:

 

After adjustments are made to account for American workers’ relatively higher productivity, wage rates in Chinese cities such as Shanghai and Tianjin are expected to be about only 30 percent cheaper than rates in low-cost U.S. states. And since wage rates account for 20 to 30 percent of a product’s total cost, manufacturing in China will be only 10 to 15 percent cheaper than in the U.S.—even before inventory and shipping costs are considered. After those costs are factored in, the total cost advantage will drop to single digits or be erased entirely, Sirkin said.

Products that require less labor and are churned out in modest volumes, such as household appliances and construction equipment, are most likely to shift to U.S. production. Goods that are labor-intensive and produced in high volumes, such as textiles, apparel, and TVs, will likely continue to be made overseas. [Emphasis added]

BCG makes it clear that a stronger RMB, and by implication a weaker dollar, is part of the picture. But the underlying changes in cost structure are presumably worth mentioning. Alas, conservatives can’t be blamed for rigid labor market policies in China. 

Back to Paul Krugman:

 

And then there’s the matter of the auto industry, which probably would have imploded if President Obama hadn’t stepped in to rescue General Motors and Chrysler. For those companies would almost surely have gone into liquidation, closing all their factories. And this liquidation would have undermined the rest of America’s auto industry, as essential suppliers went under, too. Hundreds of thousands of jobs were at stake.

Yet Mr. Obama was fiercely denounced for taking action. One Republican congressman declared the auto rescue part of the administration’s “war on capitalism.” Another insisted that when government gets involved in a company, “the disaster that follows is predictable.” Not so much, it turns out.

Notice the confidence with which Krugman states that the auto industry “probably would have imploded.” We’ve been asked to make a number of heroic assumptions: 

(1) Had GM and Chrysler gone into restructuring, Krugman is suggesting that both of them would have ceased operating. I find that unlikely. And had one of the two gone under, the remaining entity might have been in a stronger position, as many believe that the global automobile industry suffers from excess capacity.

(2) Another assumption is that no one would have put this idle capacity to use — that somehow hundreds of millions of dollars worth of capital, and hundreds of thousands of trained, capable workers, would not have been repurposed by another multinational auto manufacturer or a domestic start-up. 

As global demand has recovered, so has the demand for automobiles. GM has decent exposure in China, and a number of valuable, productive manufacturing facilities. Short-term dislocation aside, it is easy to imagine that the U.S. automobile industry would have survived, albeit in a somewhat different firm.

I will say this: the auto bailout created a windfall for investors. The federal government offered GM extremely cheap financing. This is not in itself a disaster. Rather, it is a slow-motion process in which an ever-larger share of our economy is politicized, undermining faith in the federal government as an honest broker. That is the disaster, and it really is pretty predictable. We can still keep it from materializing, but not if we buy into the myth that the death of Chrysler and a fair restructuring of GM in which the UAW had to make bigger concessions, or a scenario in which leaner firms picked both companies clean of productive assets and put them to better use, would have been a Biblical disaster. 



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