• A few things you might not know about rail travel: “Automobiles in intercity travel are as energy efficient as Amtrak. Cars are getting more energy efficient, while boosting Amtrak trains to higher speeds will make them less energy efficient.” The list goes on…

• Quiz Time! Which was the only country in the 27-nation European Union to register economic growth without going through a recession last year? The answer might surprise you.

• Unionized teachers refuse to work 25 minutes more a day, so Rhode Island town fires all of them.

• Arnold Kling on Haiti, poverty, and capitalism.

• Podcast: This is what happens to American jobs when you have one of the highest corporate tax rates in the world.

Thursday Links is a post from Cato @ Liberty - Cato Institute Blog

In response to the large recalls affecting several Toyota models, Transportation Secretary Ray LaHood yesterday advised Americans to “stop driving” their Toyotas. In testimony before the House Appropriations subcommittee on transportation, LaHood said:

My advice to anyone who owns one of these vehicles is stop driving it, and take it to the Toyota dealership because they believe they have the fix for it.

Later in the day, he elaborated:

I want to encourage owners of any recalled Toyota models to contact their local dealer and get their vehicles fixed as soon as possible. NHTSA will continue to hold Toyota’s feet to the fire to make sure that they are doing everything they have promised to make their vehicles safe. We will continue to investigate all possible causes of these safety issues.

As Transportation Secretary in an administration that is politically vested in the success of General Motors (recall how taxpayers were forced to take a 60% stake in GM for $50 billion+), was LaHood exploiting an opportunity to tip the scales further in GM’s favor? I guess we’ll never know for sure, but as long as GM remains nationalized, any comments by administration officials on matters affecting the auto industry should be viewed skeptically and through this prism, as they can irresponsibly move markets.

Raising an Eyebrow at LaHood’s Toyota Remarks is a post from Cato @ Liberty - Cato Institute Blog

Perhaps I am a little confused, but didn’t the Obama Administration tell the American public only months ago that TARP was turning a profit?   But now the same administration is proposing to assess a fee on banks to cover losses from the TARP. Maybe President Obama is coming around to the realization that the TARP has indeed been a loser for the taxpayer. He appears, however, to be missing the critical reason why: the bailouts of the auto companies and AIG, all non-banks. This is to say nothing of the bailout of Fannie Mae and Freddie Mac, whose losses will far exceed those from the TARP. Where is the plan to re-coup losses from Fannie and Freddie? Or a plan to re-coup our rescue of the autos?

If the effort is really about deficit reduction, then it completely misses the mark.  Any serious deficit reduction plan has to start with Medicare and Social Security.  Assessing bank fees is nothing more than a rounding error in terms of the deficit.  Let’s put aside the politics and get serious about both fixing our financial system and bringing our fiscal house into order.  The problem driving our deficits is not a lack of revenues, aside from effects of the recession, revenues have remained stable as a percent of GDP, the problem is runaway spending.

The bank tax would also miss what one has to guess is Obama’s target, the bank CEOs.  Econ 101 tells us (maybe the President can ask Larry Summers for some tutoring) corporations do not bear the incidence of taxes, their consumers and shareholders do.   So the real outcome of this proposed tax would be to increase consumer banking costs while reducing the value of bank equity, all at a time when banks are already under-capitalized.

Obama Bank Tax Is Misguided is a post from Cato @ Liberty - Cato Institute Blog

The bad news this morning on the impact of both the federal stimulus and the Cash for Clunkers program should not come as a surprise to anyone who has paid attention to the history of government intervention in the economy.

New data that the jobs created by the stimulus have been overstated by thousands is compelling, but it’s really a secondary issue. The primary issue is that the government cannot “create” anything without hurting something else. To “create” jobs, the government must first extract wealth from the economy via taxation, or raise the money by issuing debt. Regardless of whether the burden is borne by present or future taxpayers, the result is the same: job creation and economic growth are inhibited.

At the same time the government is taking undeserved credit for “creating jobs,” a new analysis of the Cash for Clunkers program by Edmunds.com shows that most cars bought with taxpayer help would have been purchased anyhow. The same analysis finds the post-Clunker car sales would have been higher in the absence of the program, which proves that the program merely altered the timing of auto purchases.

Once again, the government claims to have “created” economic growth, but the reality is that Cash for Clunkers had no positive long-term effect and actually destroyed wealth in the process.

Right now businesses and entrepreneurs are hesitant to make investments or add new workers because they’re worried about what Washington’s interventions could mean for their bottom lines. The potential for higher taxes, health care mandates, and costly climate change legislation are all being cited by businesspeople as reasons why further investment or hiring is on hold. Unless this “regime uncertainty” subsides, the U.S. economy could be in for sluggish growth for a long time to come.

For more on the topic of regime uncertainty and economic growth, please see the Downsizing Government blog.

Feds Giveth Jobs & Cars, Then Taketh Away Again is a post from Cato @ Liberty - Cato Institute Blog

If you worry about the abuse of executive power and declining respect among elected officials for the rule of law, you should watch this eloquent illumination of what really went down in the Chrysler bankruptcy earlier this year. The speaker is Richard Mourdock, Treasurer of the state of Indiana. The setting is a Cato Institute policy forum on October 15 about the “sordid details of the Bush/Obama auto industry intervention.”

As state treasurer, Mourdock is the person responsible for investment decisions concerning Indiana’s state employee pension funds, some of which owned a small share of Chrysler’s $6.9 billion in secured debt and some of which opposed the administration’s offer of $.29 on the dollar for that debt. Though these small secured holders were publicly castigated by President Obama as “unpatriotic” and unwilling to sacrifice for the greater good, Mourdock led the effort to stop the “sale” of Chrysler all the way to the U.S. Supreme Court.

Mourdock’s presentation gives a flavor for the tactics employed by the  Obama administration to “encourage” senior, priority creditors to back off their claims so that chosen parties could take priority—tactics that included backroom reminders that some of those creditors had received and might seek more TARP funding, threats of bringing the full weight and measure of the White House press office to bear down on dissenters, public condemnation, and other forms of arm-twisting most Americans would find unseemly for a U.S. presidential administration.

At the Cato event, Mr. Mourdock was joined by University of Pennsylvania Law School professor and corporate law expert David Skeel, who demonstrated quite clearly that the “sale” of Chrysler, as orchestrated by the Obama administration under cover of Chapter 11 bankruptcy reorganization, was indeed a sham sale. Skeel’s presentation begins at 20:15 of this video.

If you want to have a better sense of what’s going on in Washington (or to affirm your worries), I recommend you watch Mourdock here, listen to Mourdock here, read the Indiana Pensioners’ petition for Writ of Certiorari (appeal to the Supreme Court), and read the Cato Institute’s amicus brief in support of the Indiana pensioners here.

The Real Story Behind the Chrysler Bankruptcy is a post from Cato @ Liberty - Cato Institute Blog

The U.S. sustainability standard currently requires ethanol production to emit at least 20% less CO₂ than the gasoline it is assumed to replace. In a new study, authors Harry de Gorter and David R. Just argue that sustainability standards for ethanol are, by definition, illogical and ineffective. Moreover, say de Gorter and Just, those standards divert attention from the contradictions and inefficiencies of ethanol import tariffs, tax credits, mandates, and subsidies, all of which exist whether ethanol is sustainable or not.

New Paper: Why Sustainability Standards for Biofuel Production Make Little Economic Sense is a post from Cato @ Liberty - Cato Institute Blog

Despite the controversy that seems to color all portrayals of U.S. trade with China, the bilateral relationship has held up remarkably well, to the benefit of both countries. But, as I explain in this hot-off-the-presses Free Trade Bulletin, things could go south quickly if President Obama grants the wish of the United Steelworkers union to impose import restrictions on Chinese-produced passenger tires.

Under a special U.S. statute that applies only to China, the president can authorize import restrictions in cases where a domestic industry is found to be suffering from “market disruption” on account of increased imports from China. The U.S. International Trade Commission already rendered that conclusion in the tires case and recommended that the president impose duties of 55 percent. Though duties might benefit the USW, which represents fewer than half of all U.S. tire production workers, the restrictions would be immensely costly to almost every other interest in the tire supply chain, including distributors, wholesalers, retailers, downstream industrial users, and consumers — especially lower income consumers.  Such a decision would amount to a crystal clear U.S. disavowal of its pledge to the G-20 to avoid new invocations of protectionism, just one week ahead of the G-20 summit in Pittsburgh.

The stakes are particularly high in the tires case because the president has the discretion to reject the tariff recommendations altogether, which is exactly what President Bush did on all four occasions when the ITC recommended restrictions under this statute during his administration. Unlike antidumping and countervailing duty restrictions, which run on statutory autopilot without requiring the president’s attention or consent, Section 421 explicitly requires the attention and participation of the U.S. president. The Chinese will view restrictions in this case, then, as a personal directive of President Obama, and the consequences for bilateral relations could be severe.

Please read the paper and circulate liberally.

New Cato Paper Warns of the Consequences of Restrictions on Chinese Tires is a post from Cato @ Liberty - Cato Institute Blog

Will the President raise taxes on new tires?

President Obama will need to decide any day now whether to impose tariffs on lower-end automobile tires imported from China. As my colleague Dan Ikenson has ably argued, the decision will tell us much about whether the president believes trade policy should serve the general interest of all Americans, or whether it is simply a political tool to satisfy key constituencies.

Neglected in the news coverage of the pending decision is the impact it could have on consumers. The imported tires targeted by this Section 421 case are of the cheaper variety, the kind that low-income Americans would buy to keep their cars on the road during a recession. If the president decides to impose tariffs, his union supporters will cheer, but “working families’ will find it more difficult to keep their cars running safely.

A central theme of my new Cato book, Mad about Trade: Why Main Street America Should Embrace Globalization, is that import competition is a working family’s best friend, especially imports from China. As I write in an excerpt published in today’s Washington Examiner,

Imports from China have delivered lower prices on goods that matter most to the poor, helping to offset other forces in our economy that tend to widen income inequality. …

Imposing steep tariffs on imports from China would, of course, hurt producers and workers in China, but it would also punish millions of American consumers through higher prices for shoes, clothing, toys, sporting goods, bicycles, TVs, radios, stereos, and personal and laptop computers.

We will see shortly if President Obama will punish low-income Americans who drive.

A Flat Tire for Low-Income Drivers? is a post from Cato @ Liberty - Cato Institute Blog

Reports the Washington Post:

The federal government is unlikely to recoup all of the billions of dollars that it has invested in General Motors and Chrysler, according to a new congressional oversight report assessing the automakers’ rescue.

The report said that a $5.4 billion portion of the $10.5 billion owed by Chrysler is “highly unlikely” to be repaid, while full recovery of the $50 billion sunk into GM would require the company’s stock to reach unprecedented heights.

“Although taxpayers may recover some portion of their investment in Chrysler and GM, it is unlikely they will recover the entire amount,” according to the report, which is scheduled to be released Wednesday.

Well, it’s only money.  And with the taxpayers facing more than $100 trillion worth of unfunded liabilities, what’s a few more wasted dollars?!

So Much for Making Money on the Bailout is a post from Cato @ Liberty - Cato Institute Blog

A news story from today in a slightly alternate universe:

Jobless Rate at 26-Year High

Employers kept slashing jobs at a furious pace in June as the unemployment rate edged ever closer to double-digit levels, undermining signs of progress in the economy, and making clear that the job market remains in terrible shape.

The number of jobs on employers’ payrolls fell by 467,000, the Labor Department said. That is many more jobs than were shed in May and far worse than the 350,000 job losses that economists were forecasting.

Job losses peaked in January and had declined every month until June. The steep losses show that even as there are signs that total economic activity may level off or begin growing later this year, the nation’s employers are still pulling back.

White House press secretary Robert Gibbs said, “President Obama proposed a $787 billion stimulus program to get this country moving again. He tried to save the jobs at GM and Chrysler. But the do-nothing Republicans filibustered and blocked that progressive legislation, and these are the results.”

House Speaker Nancy Pelosi said at a press conference, “We begged President Bush to save Fannie Mae, Merrill Lynch, Bank of America, AIG, the rest of Wall Street, the banks, and the automobile industry. We begged him to spend $700 billion of taxpayers’ money to bail out America’s great companies. We begged him to ignore the deficit and spend more money we don’t have. But did he listen? No, he just sat there wearing his Adam Smith tie and refused to spend even a single trillion to save jobs. And now unemployment is at 9.5 percent. I hope he’s happy.”

Democrats on Capitol Hill agreed that the “do-nothing” response to the financial crisis had led to rising unemployment and a sluggish economy. If the Bush and Obama administrations had been willing to invest in American companies, run the deficit up to $1.8 trillion, and talk about all sorts of new taxes, regulations, and spending programs, then certainly the economy would be recovering by now, they said.

The Failure of Do-Nothing Policies is a post from Cato @ Liberty - Cato Institute Blog

The president and his appointees have expressed their hope that Government Motors will eventually pay back taxpayers for their “forced investment” in the company.  But there aren’t many cases of this sort of lemon socialism actually paying off.

Now most everyone connected with GM is admitting the same thing.  Reports the Washington Post:

If a new General Motors emerges from bankruptcy as planned, U.S. financial aid for the company will expand to nearly $50 billion, but neither the government nor the company is forecasting how much of the public money will be repaid.

It’s sure to be a stretch. For the United States to fully recover its investment, the value of General Motors stock will have to reach levels it has never before attained.

“I’m not going to predict it — that’s not my job today,” GM chief executive Fritz Henderson said in a recent interview.

“I don’t know how much we’re going to recover,” a senior Obama administration official said as the company headed into bankruptcy last month.

This uncertainty stems from the difficulty in valuing the 60 percent GM stake that the United States will receive in exchange for the public investment. The government also gets preferred shares and other compensation.

The stake will be worth enough to fully cover the government’s direct investment only if GM’s stock rises above $68 billion. Even at its recent 2000 peak, GM’s stock was worth only $56 billion.

“I don’t see GM hitting those benchmarks in a very long time,” said Maryann Keller, a veteran automotive analyst and author of “Rude Awakening: The Rise, Fall, and Struggle for Recovery of General Motors,” which was published in 1989.

She noted that global competition will continue to squeeze American automakers. Though the world’s factories can produce about 100 million vehicles a year, demand for them only stands at about 55 million, and the gap will push prices and profits down, she said.

“It’s very unlikely” that the government will recover its money, said David Whiston, auto equities analyst at Morningstar. “GM will be a smaller company after the bankruptcy and there are going to be more foreign automakers entering the market that will make GM’s efforts more difficult.”

Oh, well.  As they say, it’s only money!

Don’t Count on Getting Your “Investment” Back from Government Motors is a post from Cato @ Liberty - Cato Institute Blog

This morning, the U.S. International Trade Commission issued an affirmative determination in a so-called “Section 421” or “China-Specific Safeguard” case that imports of consumer tires from China are causing market disruption in the United States. That may sound like just another day in Washington, but the decision could very well be the catalyst for the most consequential event in trade policy since the Bush steel tariffs of 2002. It will certainly force a defining moment for a president who has preferred obfuscation to clear direction on trade policy.

Under the statute (which became U.S. law as a condition of China’s accession to the World Trade Organization in 2001), the ITC has 20 days to provide remedial recommendations to the president and the U.S. trade representative. Those recommendations are likely to include quotas, tariffs, or some combination that will ultimately curtail the supply and raise the prices of all tires in the United States — not just those imported from China. However, the president has the discretion to deny import “relief” if he determines that such restrictions would have an adverse impact on the U.S. economy that is clearly greater than its benefits, or if he determines that such relief would cause serious harm to the national security of the United States.

I will forego my own explanation as to why restrictions would have an adverse impact that is clearly greater than its benefits, and instead give you the statement of the U.S. Tire Industry Association, which represents “all segments of the tire industry, including those that manufacture, repair, recycle, sell, service or use new or retreaded tires, and also those suppliers or individuals who furnish equipment, material or services to the industry.” Suffice it to say that no producers of tires in the United States supported this petition, so it is not a matter of U.S. tire producers against Chinese tire producers. It is really nothing more than a matter of a U.S. union objecting to management’s decision to produce its lowest grade (lowest quality, lowest priced, lowest profit margin) tires abroad. Yet the consequences of trade restraints could affect interests across and throughout the economy, particularly if China responds in kind.

During the Bush administration, there were six Section 421 cases filed by domestic parties, four of which were found by the ITC to warrant import relief. In each of those four cases, President Bush exercised his discretion to deny relief. The tires case is a test case for President Obama. Will 421 fly under this president? Or will it remain the dead letter that petitioners considered it to be under President Bush?

The stakes are much higher for Obama than they were for Bush because the unions (the United Steel Workers union is the petitioner in the tires case) and the Chinese both feel more emboldened in their positions now. Bush didn’t win the near-unanimous support of organized labor in his elections, nor did he promise to get tough on Chinese trade practices, as Obama did.

Instead, Bush set the precedent of denying relief. And he did it four times. So, the Chinese see this firmly as a matter of presidential discretion — unlike antidumping or countervailing duties, which run on statutory auto pilot without requiring the president’s attention or consent. In other words, although there are over 50 outstanding U.S. antidumping and countervailing duty orders against various Chinese products, none of them is considered to reflect the direct wishes of the U.S. president, and thus don’t rise to the level of a potentially explosive trade dispute. But trade restraints under the 421 will no doubt be considered by the Chinese to be a directive of the U.S. president, thus the offense taken and the consequences wrought could be profound.

The good news is that President Obama will finally be forced to take a stand — to match his words and deeds. After a campaign in which trade was disparaged, President Obama’s first 100 days were characterized by a conciliatory tone and some enlightened actions. He told the Mexican president and the Canadian prime minister that he no longer wanted to reopen NAFTA. He spoke out against the most protectionist provisions of the Buy American language in the so-called stimulus bill. He repudiated protectionism and pledged to avoid new protectionist measures at the G-20 and before other international gatherings. His Treasury Department declined to label China a currency manipulator. And his trade representative set about articulating a pro-trade agenda, including support for a push to pass pending bilateral trade agreements and concluding the Doha Round.

But there’s been very little follow through and trade partners are beginning to doubt his sincerity. Efforts to schedule votes on pending trade agreements have been shunted aside as too controversial to happen before health care reform legislation. In the meantime, imports are being turned away from U.S. procurement projects on account of some mindless Buy American caveats and overzealous interpretation of other Buy American rules by project administrators, which is inciting copycat rules in Canada and China.

The time has come for the president to stop wavering and to take decisive actions on trade policy. Of course, he will have until September 17 to render his decision about whether to grant or deny relief in the tires case. Between now and then he should conclude that trade restrictions are not the appropriate course — that among other problems, they will also undermine his economic and diplomatic objectives. And while he’s denying relief, he should take some advice from Scott Lincicome and me to speak the truth about trade to those constituencies who will feel betrayed. Directly and honestly making the case for trade to those who doubt is more durable than rationalizing each pro-trade decision, which has been the norm for too long in Washington. Besides, the polls show that Americans have already turned the corner and are moving away from their misguided flirtation with protectionism. That may help inspire an uncommitted president to take the baton.

High Noon for U.S. Trade Policy is a post from Cato @ Liberty - Cato Institute Blog

Here’s an idea that should be killed in the crib: scanning automobiles for up-to-date insurance.

Says Gizmodo (via ars technica and the Chicago Sun-Times):

The system is anticipated to raise yearly earnings “well in excess” of $100 million (possibly even double that figure or more), with InsureNet taking a modest 30% for their services. Of course, all of this cash would be contingent on uninsured drivers actually paying their fines.

There will be thousands more reasons like this put forward for mass public surveillance. The answer should almost always be no because of the accumulations of data about law-abiding citizens such programs would collect in government (and government-contractor) databases.

Social Control as a Profit Center is a post from Cato @ Liberty - Cato Institute Blog

There are lots of reasons Washington should not bail out the automakers.  Whatever the justification for saving financial institutions — the “lifeblood” of the economy, etc., etc. — saving selected industrial enterprises is lemon socialism at its worst.  The idea that the federal government will be able to engineer an economic turnaround is, well, the sort of economic fantasy that unfortunately dominates Capitol Hill these days.

One obvious problem is that legislators now have a great excuse to micromanage the automakers.  And they have already started.  After all, if the taxpayers are providing subsidies, don’t they deserve to have dealerships, lots of dealerships, just down the street?  That’s what our Congresscritters seem to think.

Observes Stephen Chapman of the Chicago Tribune:

The Edsel was one of the biggest flops in the history of car making. Introduced with great fanfare by Ford in 1958, it had terrible sales and was junked after only three years. But if Congress had been running Ford, the Edsel would still be on the market.

That became clear last week, when Democrats as well as Republicans expressed horror at the notion that bankrupt companies with plummeting sales would need fewer retail sales outlets. At a Senate Commerce Committee hearing, Chairman Jay Rockefeller, D-W.Va., led the way, asserting, “I honestly don’t believe that companies should be allowed to take taxpayer funds for a bailout and then leave it to local dealers and their customers to fend for themselves.”

Supporters of free markets can be grateful to Rockefeller for showing one more reason government shouldn’t rescue unsuccessful companies. As it happens, taxpayers are less likely to get their money back if the automakers are barred from paring dealerships. Protecting those dealers merely means putting someone else at risk, and that someone has been sleeping in your bed.

The Constitution guarantees West Virginia two senators, and Rockefeller seems to think it also guarantees the state a fixed supply of car sellers. “Chrysler is eliminating 40 percent of its dealerships in my state,” he fumed, “and I have heard that GM will eliminate more than 30 percent.” This development raises the ghastly prospect that “some consumers in West Virginia will have to travel much farther distances to get their cars serviced under warranty.”

Dealers were on hand to join the chorus. “To be arbitrarily closed with no compensation is wasteful and devastating,” said Russell Whatley, owner of a Chrysler outlet in Mineral Wells, Texas.

Lemon socialism mixed with pork barrel politics!  Could it get any worse?  Don’t ask: after all, this is Washington, D.C.

Should You Vote on Keeping Your Local Car Dealership? is a post from Cato @ Liberty - Cato Institute Blog

Obama Speaks to the Muslim World

In Cairo on Thursday, President Obama asked for a “new beginning between the United States and Muslims around the world,” and spoke at some length on the Israeli-Palestinian conflict, Iran, Iraq, and Afghanistan. Cato scholar Christopher Preble comments, “At times, it sounded like a state of the union address, with a litany of promises intended to appeal to particular interest groups. …That said, I thought the president hit the essential points without overpromising.”

Preble goes on to say:

He did not ignore that which divides the United States from the world at large, and many Muslims in particular, nor was he afraid to address squarely the lies and distortions — including the implication that 9/11 never happened, or was not the product of al Qaeda — that have made the situation worse than it should be. He stressed the common interests that should draw people to support U.S. policies rather than oppose them: these include our opposition to the use of violence against innocents; our support for democracy and self-government; and our hostility toward racial, ethnic or religious intolerance. All good.

David Boaz contends that there are a number of other nations the president could have chosen to deliver his address:

Americans forget that the Muslim world and the Arab world are not synonymous. In fact, only 15 to 20 percent of Muslims live in Arab countries, barely more than the number in Indonesia alone and far fewer than the number in the Indian subcontinent. It seems to me that Obama would be better off delivering his message to the Muslim world somewhere closer to where most Muslims live. Perhaps even in his own childhood home of Indonesia.

Not only are there more Muslims in Asia than in the Middle East, the Muslim countries of south and southeast Asia have done a better job of integrating Islam and modern democratic capitalism…. Egypt is a fine place for a speech on the Arab-Israeli conflict. But in Indonesia, Malaysia, India, or Pakistan he could give a speech on America and the Muslim world surrounded by rival political leaders in a democratic country and by internationally recognized business leaders. It would be good for the president to draw attention to this more moderate version of Islam.

Tiananmen Square: 20 Years Later

It has been 20 years since the tragic deaths of pro-democracy protesters in Tiananmen Square in June 1989, and 30 years since Deng Xiaoping embarked on economic reform in China. Cato scholar James A. Dorn comments, “After 20 years China has made substantial economic progress, but the ghosts of Tiananmen are restless and will continue to be so until the Goddess of Liberty is restored.”

In Thursday’s Cato Daily Podcast, Dorn discusses the perception of human rights in China since the Tiananmen Square massacre, saying that many young people are beginning to accept the existence of human rights independent of the state.

A few days before the anniversary, social media Web sites like Twitter and YouTube were blocked in China. Cato scholar Jim Harper says that it’s going to take a lot more than tanks to shut down the message of freedom in today’s online world:

In 1989, when a nascent pro-democracy movement wanted to communicate its vitality and prepare to take on the state, meeting en masse was vital. But that made it fairly easy for the CCP to roll in and crush the dream of democracy.

Twenty years later, the Internet is the place where mass movements for liberty can take root. While the CCP is attempting to use the electronic equivalent of an armored division to prevent change, reform today is a question of when, not if. Shutting down open dialogue will only slow the democratic transition to freedom, which the Chinese government cannot ultimately prevent.

Taxpayers Acquire Failing Auto Company

After billions of dollars were spent over the course of two presidential administrations to keep General Motors afloat, the American car company filed for bankruptcy this week anyway.

Last year Cato trade expert Daniel J. Ikenson appeared on dozens of radio and television programs and wrote op-eds in newspapers and magazines explaining why automakers should file for bankruptcy—before spending billions in taxpayer dollars.

Which leaves Ikenson asking one very important question: “What was the point of that?”

In November, GM turned to the federal government for a bailout loan — the one final alternative to bankruptcy. After a lot of discussion and some rich debate, Congress voted against a bailout, seemingly foreclosing all options except bankruptcy. But before GM could avail itself of bankruptcy protection, President Bush took the fateful decision of circumventing Congress and diverting $15.4 billion from Troubled Asset Relief Program funds to GM (in the chummy spirit of avoiding tough news around the holidays).

That was the original sin. George W. Bush is very much complicit in the nationalization of GM and the cascade of similar interventions that may follow. Had Bush not funded GM in December (under questionable authority, no less), the company probably would have filed for bankruptcy on Jan. 1, at which point prospective buyers, both foreign and domestic, would have surfaced and made bids for spin-off assets or equity stakes in the “New GM,” just as is happening now.

Meanwhile, the government takeover of GM puts the fate of Ford Motors, a company that didn’t take any bailout money, into question:

Thus, what’s going to happen to Ford? With the public aware that the administration will go to bat for GM, who will want to own Ford stock? Who will lend Ford money (particularly in light of the way GM’s and Chrysler’s bondholders were treated). Who wants to compete against an entity backed by an unrestrained national treasury?

Ultimately, if I’m a member of Ford management or a large shareholder, I’m thinking that my biggest competitors, who’ve made terrible business decisions over the years, just got their debts erased and their downsides covered. Thus, even if my balance sheet is healthy enough to go it alone, why bother? And that calculation presents the specter of another taxpayer bailout to the tunes of tens of billions of dollars, and another government-run auto company.

Week in Review: A Speech in Cairo, an Anniversary in China and a U.S. Bankruptcy is a post from Cato @ Liberty - Cato Institute Blog

GM’s restructuring under Chapter 11 includes plans to sell off the Hummer, Saab, and Saturn brands. Well, just one day after GM’s bankruptcy filing, a Chinese firm has come forward with a $500 million offer to purchase Hummer. The prospective buyer is Sichuan Tengzhong Heavy Industrial Machinery Co Ltd, a manufacturing company in western China, which hopes to become an automaker.

Not only is the Hummer offer the first bid for a GM asset in bankruptcy, but the bidder is foreign. Not only is the bidder foreign, but Chinese. And not only is the bidder Chinese, but the Hummer was first developed by the U.S. military. Thus, this is certain to be characterized as a national security matter, and the Committee on Foreign Investment in the United States (CFIUS) will have to review the proposal. There should be little doubt that the economic nationalists will be out in full force, warning CFIUS against transferring sensitive technologies to Red China.

Let me offer two quick points, as the bulging veins in my temples pulsate with disdain for official Washington.

First, if this deal is rejected (even if the bidder is scared away by detractors), any remaining credibility to the proposition that the United States will once again become that beacon on a hill, exemplifying for the world the virtues of free markets and limited government, will vanish into the ether. There has been too much U.S. hypocrisy on free trade and cross-border investment and too much double talk about the impropriety of government subsidizing national champions, that another indiscretion in a high profile case will blow open the already-bowing flood gates to economic nationalism worldwide. Considering that U.S. companies sell five times as much stuff to foreigners through their foreign subsidiaries than by exporting from the United States, investment protectionism is as advisable as nationalizing car companies.

Second, the willingness of this Chinese company to purchase Hummer serves as a stark reminder of what could have been. Had George W. Bush not allocated TARP money to GM last December, in circumvention of Congress’s rejection of a bailout, then GM likely would have filed for bankruptcy on January 1. At that point, there would likely have been plenty of offers from foreign and domestic concerns for individual assets to spin off or for equity stakes in the New GM. There would have been plant closures, dealership terminations, and jobs losses, as there is under the nationalization plan anyway. But taxpayers wouldn’t be on the hook for $50+ billion, a sum that is much more likely to grow larger than it is to be repaid. It is also a sum that will serve as the rationalization for further government interventions on GM’s behalf.

GM’s Nationalization and China’s Capitalists is a post from Cato @ Liberty - Cato Institute Blog

The Obama Administration has announced new fuel-economy regulations and emissions rules that will boost the cost of new car by at least $1300. This is probably another nail in the coffin of the American automobile industry, but Jerry Taylor is the guy to provide thoughtful analysis. When I read about the new White House scheme, the first thing that came to my mind was this extremely clever video (yes, I am envious that my videos are not this creative) about the type of car we will all be driving if politicians continue to run amok:

Simultaneously Destroying and Subsidizing the Auto Industry is a post from Cato @ Liberty - Cato Institute Blog

Bloomberg reports:

General Motors Corp., facing a probable bankruptcy filing by June 1, is telling 1,100 “underperforming” U.S. dealers they will be terminated as the automaker starts shrinking its retail network.

Most of the closings will occur by October 2010, and none are happening now, Detroit-based GM said today. The targeted outlets will have until the end of the month to appeal the decisions, GM said, without specifying the stores on the list.

The shutdowns are the biggest U.S. automaker’s first step toward paring domestic dealers to a range of 3,600 to 4,000 from 5,969 by the end of 2010.

To be sure, it is a very sad day for thousands of workers and businesses around the country.  But we’re in the midst of a deep recession, which may be nowhere deeper than in the auto sector.  Demand for cars and light trucks has absolutely tanked, which means the economy has an excess supply of inventory, productive capacity, and retail capacity.

Dealerships are closing, as they should be. Chrysler’s in bankruptcy, as it should be. GM is headed for bankruptcy, as it should be.

But this all should have happened long ago…

…long before President George W. Bush had the chance to circumvent the wishes of Congress to give Chrysler and GM more than $19 billion (not including GMAC) from the TARP allotment,

…long before President Obama had the chance to promise billions more and assume a large operational role for the U.S. government in Chrysler’s and GM’s future operations,

…long before President Obama had the chance to create a huge moral hazard by strong-arming Chrysler’s preferred lenders into taking pennies on their loan dollars, while giving preference to claimants of lesser priority,

…long before Ford, Toyota, Honda, BMW, Kia, and the rest of America’s automobile industry were implicitly taxed by the government’s insistence on preventing two firms from exiting the market or substantially reducing their presence in accordance with established bankruptcy provisions.

And most certainly, long before other businesses in other industries started to get the idea that failure is the new success.

An Overdue Reckoning in the Auto Sector is a post from Cato @ Liberty - Cato Institute Blog

At the New York Times Economix blog, economist Nancy Folbre of the University of Massachusetts writes:

The libertarian Cato Institute often emphasizes the issue of corporate welfare, but it’s remained remarkably quiet so far on the topic of bailouts.

Excuse me?

Since she linked to one of our papers on corporate welfare, we assume she’s visited our site. How, then, could she get such an impression? Cato scholars have been deploring bailouts since last September. (Actually, since the Chrysler bailout of 1979, but we’ll skip forward to the recent avalanche of Bush-Obama bailouts.) Just recently, for instance, in — ahem — the New York Times, senior fellow William Poole implored, “Stop the Bailouts.” I wonder if our commentaries started with my blog post “Bailout Nation?” last September 8? Or maybe with Thomas Humphrey and Richard Timberlake’s “The Imperial Fed,” deploring the Federal Reserve’s help for Bear Stearns, on April 14 of last year?

Cato scholars appeared on more than 90 radio and television programs to criticize the bailouts during the last quarter of 2008. Here’s a video compilation of some of those appearances.

Folbre complains that some people seem more concerned about welfare — TANF, in the latest federal acronym — than about welfare for bankers — TARP. Google says that there are 138 references to TANF over the past 13 years or so on the Cato website, and 231 references to TARP in the past few months.

Now she has a legitimate point. Welfare for the rich is at least as bad as welfare for the poor. And as much as welfare for the poor has cost taxpayers, the new welfare for banks, insurance companies, mortgage companies, and automobile industries is costing us more. Samuel Brittan of the Financial Times has written that “reassignment,” an economic policy that changes individuals’ ranking in the hierarchy of incomes, is far more offensive than a policy of redistribution, which in his idealized vision would merely raise the incomes of the poorest members of society. By that standard, taxing some businesses and individuals to subsidize the high incomes of others is certainly offensive. Of course, Brittan underemphasized the harm done by welfare to people who become trapped in dependency. But there’s good reason to oppose both TANF and TARP, and Cato scholars have done both.

Lest the good work of Cato’s New Media Manager Chris Moody go under-utilized, here’s a probably incomplete guide to Cato scholars’ comments on the bailouts of the past few months. (Note that it doesn’t include blog posts, of which there have been many.) Quiet? I don’t think so:

Articles:

September 9, 2008, “Fannie/Freddie Bailout Baloney,” Gerald P. O’Driscoll Jr., New York Post.

September 18, 2008, “Why Bailouts Scare Stocks,” Alan Reynolds, New York Post.

September 17, 2008, “Bailout-Mania,” Jagadeesh Gokhale and Kent Smetters, Forbes.com.

October 1, 2008, “The Bailout’s Essential Brazenness,” Jay Cochran, Cato.org.

October 3, 2008, “The Big Bailout – What’s Next?” Warren Coats, Cato.org

October 13, 2008, “Should Taxpayers Fund the American Dream?,” Daniel J. Mitchell, Los Angeles Times.

October 20, 2008, “Is the Bailout Constitutional?,” Robert A. Levy, Legal Times.

November 11, 2008, “There’s Nothing Wrong with a “Big Two”,” Daniel J. Ikenson, New York Daily News.

November 21, 2008, “Don’t Bail Out the Big Three,” Daniel J. Ikenson, The American.

November 5, 2008, “Is it Constitutional?,” Richard W. Rahn, Washington Times.

December 14, 2008, “Consequences of the Bailout,” Richard W. Rahn, Washington Times.

December 5, 2008, “Bail Out Car Buyers?,” Daniel J. Ikenson, Los Angeles Times.

December 3, 2008, “Big Three Ask for Money — Again,” Daniel J. Ikenson, Los Angeles Times.

December 10, 2008, “Dissecting the Bailout Plan,” Alan Reynolds, Wall Street Journal.

January 14, 2009, “Bailing out the States,” Michael New, Washington Times.

February 28, 2009, “Stop the Bailouts,” William Poole, The New York Times.

Papers:

“Bailout or Bankruptcy?,” by Jeffrey A. Miron (Cato Journal, Winter 2009)

“Freddie Mac and Fannie Mae: An Exit Strategy for the Taxpayer,” by Arnold Kling (September 8, 2008)

“Financial Crisis and Public Policy,” by Jagadeesh Gokhale (March 23, 2009)

“Bright Lines and Bailouts: To Bail or Not To Bail, That Is the Question,” by Vern McKinley and Gary Gegenheimer (April 20, 2009)

On Television and Radio:

Dan Ikenson discusses auto bailout

September 30, 2008 Daniel J. Mitchell discusses the failed bailout on NPR Affiliate KPCC’s “The Patt Morrison Show”

September 29, 2008 Peter Van Doren discusses government bailouts on WTTG FOX 5.

September 29, 2008 Daniel J. Mitchell discusses the failed bailout on NPR Affiliate KPCC’s “The Patt Morrison Show”

September 26, 2008 Jagadeesh Gokhale discusses the bailout on BNN (CANADA)

September 26, 2008 Steve H. Hanke discusses the bailout on BBC Radio’s “Have Your Say”

September 25, 2008 Patrick Basham discusses the bailout on Radio America’s “The Michael Reagan Show”

September 24, 2008 William A. Niskanen discusses government bailouts on WUSA 9

September 24, 2008 William Poole discusses government bailouts on NPR DC Affiliate WAMU’s “The Diane Rehm Show”

September 23, 2008 William A. Niskanen discusses government bailouts on CNBC’s “Closing Bell”

September 23, 2008Bert Ely discusses government bailouts on WOR’s “The John Gambling Show”

September 22, 2008 Daniel J. Mitchell discusses government bailouts on the CBS “Early Show”

September 22, 2008 William Poole discusses government bailouts on Bloomberg Live.

September 22, 2008 William A. Niskanen discusses government bailouts of financial institutions on Bloomberg TV

September 22, 2008 Steve H. Hanke discusses government bailouts of financial institutions on Bloomberg Radio’s “On the Money”

September 19, 2008 Daniel J. Mitchell discusses government bailouts on Federal News Radio

September 18, 2008 Daniel J. Mitchell discusses the AIG bailout on KTAR’s “Ankarlo Mornings”

September 17, 2008 Daniel J. Mitchell discusses the AIG bailout on WTTG FOX 5

September 17, 2008 Daniel J. Mitchell discusses the AIG bailout on FOX’s “America’s Election HQ”

September 10, 2008 Daniel J. Mitchell discusses a proposed bailout for the auto industry on Marketplace Radio.

October 24, 2008 Gerald P. O’Driscoll Jr. discusses the fallout of the bailout on FOX Business Network’s “Cavuto”

October 15, 2008 Daniel J. Mitchell discusses the bailout on Federal News Radio

October 14, 2008 Daniel J. Mitchell discusses the financial crisis on CNN’s “American Morning”

October 14, 2008 Daniel J. Mitchell discusses the banking crisis on BBC World

October 14, 2008 Gerald P. O’Driscoll Jr. discusses the banking crisis on WBAL Radio. (Baltimore, MD)

October 13, 2008 Daniel J. Mitchell discusses the financial crisis on the FOX Business Network

October 9, 2008 Jim Powell discusses the economy on FOX Business

October 9, 2008 Daniel J. Mitchell discusses the current treasury plan on Reuters TV.

October 9, 2008 Daniel J. Mitchell discusses the bailout on the WIBA’s “Upfront w/Vicki McKenna” (Madison, WI)

October 2, 2008 Daniel J. Mitchell discusses the bailout bill on WRVA’s “Morning Show” (West Virginia)

October 1, 2008 Daniel J. Mitchell discusses the bailout plan on CNBC’s “On the Money.”

October 1, 2008 Daniel J. Mitchell discusses the bailout plan on CNBC’s “Power Lunch”

October 1, 2008 William Poole discusses the bailout on KMOX’s “The Charlie Brennan Show” (St. Louis, MO)

October 1, 2008 Daniel J. Mitchell discusses the failed bailout on WTOP Radio (Washington, D.C.)

Cato and the Bailouts: A Correction for the NY Times ‘Economix’ Blog is a post from Cato @ Liberty - Cato Institute Blog

G-20 Summit Agrees to International Spending Plan

The Washington Post reports, “Leaders from more than 20 major nations including the United States decided Thursday to make available an additional $1 trillion for the world economy through the International Monetary Fund and other institutions as part of a broad package of measures to overcome the global financial crisis.”

Cato scholars Richard W. Rahn, Daniel J. Ikenson and Ian Vásquez commented on the London-based meeting:

Rahn: “President Obama of the U.S. and Prime Minister Brown of the U.K. will be pressing for more so-called stimulus spending by other nations, despite the fact that the historical evidence shows that big increases in government spending are more likely to be damaging and slow down recovery than they are to promote vigorous economic expansion and job creation.”

Vásquez: “The push by some countries for massive increases in spending to address the global financial crisis smacks of political and bureaucratic opportunism. A prime example is Washington’s call to substantially increase the resources of the International Financial Institutions… There is no reason to think that massive increases of the IFIs’ funds will not worsen, rather than improve, their record or the accountability of the aid agencies and borrower governments.”

Ikenson: “Certainly it is crucial to avoid protectionist policies that clog the arteries of economic recovery and help nobody but politicians. But it is also important to keep things in perspective: the world is not on the brink of a global trade war, as some have suggested.”

Ikenson appeared on CNBC this week to push for a reduction of trade barriers in international markets.

With fears mounting over a global shift toward protectionism, Cato senior fellow Tom Palmer and the Atlas Economic Research Foundation are circulating a petition against restrictive trade measures.

Obama Administration Forces Out GM CEO

President Obama took an unprecedented step toward greater control of a private corporation after forcing General Motors CEO  Rick Wagoner to leave the company. The New York Post reports “the administration threatened to withhold bailout money from the company if he didn’t.”

Writing for the Washington Post, trade analyst Dan Ikenson explained why the government is responsible for any GM failure from now on:

President Obama’s newly discovered prudence with taxpayer money and his tough-love approach to GM and Chrysler would both have more credibility if he hadn’t demanded Rick Wagoner’s resignation, as well. By imposing operational conditions normally reserved for boards of directors, the administration is now bound to the infamous “Pottery Barn” rule: you break it, you buy it. If things go further south, the government is now complicit.

Wagoner’s replacement, Fritz Henderson, said Tuesday that after receiving billions of taxpayer dollars, the company is considering bankruptcy as an option. Cato scholars recommended bankruptcy months ago:

Dan Ikenson, November 21, 2008: “Bailing out Detroit is unnecessary. After all, this is why we have the bankruptcy process. If companies in Chapter 11 can be salvaged, a bankruptcy judge will help them find the way. In the case of the Big Three, a bankruptcy process would almost certainly require them to dissolve their current union contracts. Revamping their labor structures is the single most important change that GM, Ford, and Chrysler could make — and yet it is the one change that many pro-bailout Democrats wish to ignore.”

Daniel J. Mitchell, November 13, 2008:  ”Advocates oftentimes admit that bailouts are not good policy, but they invariably argue that short-term considerations should trump long-term sensible policy. Their biggest assertion is that a bailout is necessary to prevent bankruptcy, and that avoiding this result is critical to prevent catastrophe. But Chapter 11 protection may be precisely what is needed to put American auto companies back on the path to profitability. Bankruptcy laws specifically are designed to give companies an opportunity — under court supervision — to reduce costs and streamline operations.”

Dan Ikenson, December 5, 2008: “The best solution is to allow the bankruptcy process to work. It will be needed. There are going to be jobs lost, but there is really nothing policymakers can do about that without exacerbating problems elsewhere. The numbers won’t be as dire as the Big Three have been projecting.”

Cato Links

• Is Portugal an example for the future of drug policy? Cato released a new case study this week by Salon writer Glenn Greenwald entitled, “Drug Decriminalization in Portugal: Lessons for Creating Fair and Successful Drug Policies.”

• As the North Atlantic Treaty Organization celebrates its 60th birthday, there are signs of mounting trouble within the alliance and increasing reasons to doubt the organization’s relevance regarding the foreign policy challenges of the 21st century. In a new study, Cato scholar Ted Galen Carpenter argues that NATO’s time is up.

• Should immigration agents target businesses knowingly hiring illegal immigrants? Cato scholar Jim Harper weighs in on a Fox News debate.

• Cato scholar Gene Healy warns, “Beware of the Cult of Obama,” in this week’s Washington Examiner column.

• Sign up today for  Cato University 2009: Economic Crisis, War, and the Rise of the State.

Week in Review: ‘Saving’ the World, Government Control and Drug Decriminalization is a post from Cato @ Liberty - Cato Institute Blog