With his appearance at a Toledo factory today, President Obama seems to want to make the auto bailout a campaign issue. Let’s welcome that. Americans should understand what transpired.

Fancying himself “Savior of the Auto Industry,” the president deserves credit only for choosing to insulate two companies (and the UAW) from the consequences of their decisions. But with that credit he must accept responsibility for sluggish U.S. business investment, limited job creation, and the anemic economic recovery, which is due in no small measure to the regime uncertainty that descends from his intervention in the auto industry.

The administration suggests that the entire cost of the auto bailout is captured by the outlays that haven’t or won’t be returned. Despite much smaller claims from the administration, that figure will be about $5.5 billion in Chrysler’s case (the administration is overlooking $4 billion written off when New Chrysler emerged from bankruptcy) and somewhere from $7 to $15 billion in GM’s case (depending on average share price for 500 million shares). Should that loss have to be reported to the FEC on a dollar-per-auto-worker-vote basis?

But the costs are much greater than these outlays.

The most compelling objections to the bailout were not rooted in the belief that the government couldn’t use its assumed power to help Chrysler and GM. On the contrary, the most compelling objections were over concerns that the government would do just that. It is the consequences of that intervention — the undermining of the rule of law, the confiscations, the politically driven decisions, and the distortion of market signals — that animated the most serious objections. Ford never publicly objected to the interventions to rescue its rivals. Do you think Ford may feel entitled to a future bailout if needed, having foregone the recent one? Does Ford think it has a pretty good insurance policy if it takes excessive risks that go awry?  This is a cost that’s tough to measure, but an important cost nonetheless.

Any verdict on the outcome of the auto industry intervention must take into account, among other things, the billions of dollars in property confiscated from the auto companies’ debt-holders; the higher risk premium built into U.S. corporate debt as a result; the costs of denying the other, more successful auto producers the spoils of competition (including additional market share and access to the resources misallocated at Chrysler and GM); the costs of rewarding irresponsible actors (like the UAW) by insulating them from the outcomes of what should have been an apolitical bankruptcy proceeding; the effects of GM’s nationalization on production, investment, and public policy decisions; the diminution of U.S. moral authority to counsel foreign governments against market interventions that can adversely affect U.S. businesses competing abroad; and the corrosive impact on America’s institutions of the illegal diversion of TARP funds to achieve politically desirable outcomes.

Let’s make the auto bailout a campaign issue and see if we can’t reconcile all of its costs.

Whitewashing the Auto Bailouts is a post from Cato @ Liberty - Cato Institute Blog

On Monday the Supreme Court released its last orders for the calendar year. Of particular note — apart from the non-release of the long-awaited decision in the Citizens United campaign finance case — the Court dismissed the cert petition in Indiana State Police Pension Trust v. Chrysler LLC as moot and vacated the underlying Second Circuit opinion. While this is not the ideal outcome – particularly for the Indiana creditors — it is in its own way an important decision preserving the integrity of bankruptcy law.

To recap: In January, Chrysler stood on the brink of insolvency. Purporting to act under the Emergency Economic Stabilization Act, the Treasury Department extended the car company a $4 billion loan using funds from the Troubled Asset Relief Program (TARP). Still in a bad financial situation, Chrysler initially proposed an out-of-court reorganization plan that would fully repay all of Chrysler’s secured debt.

The Treasury rejected this proposal and instead insisted on a plan that would completely eradicate Chrysler’s secured debt, hinging billions of dollars in additional TARP funding on Chrysler’s acquiescence. When Chrysler’s first lien lenders refused to waive their secured rights without full payment, the Treasury devised a scheme by which Chrysler, instead of reorganizing under a chapter 11 plan, would sell its assets free of all secured interests to a shell company, the New Chrysler.

Chrysler was thus able to avoid the “absolute priority rule,” which provides that a court should not approve a bankruptcy plan unless it is “fair and equitable” to all classes of creditors. The forced reorganization amounted to the Treasury redistributing value from senior, secured creditors to debtors and junior, unsecured creditors. The government should not have been allowed, through its own self-dealing, to hand-pick certain creditors for favorable treatment at the expense of others who would otherwise enjoy first lien priority.

While the Court’s ruling prevents the creditors from collecting what would have otherwise been considered their rightful portion of the liquidation, it also erases a terrible precedent from the federal judiciary’s books and reaffirms years of settled bankruptcy law. A decision upholding the Second Circuit’s ruling would have undercut the established practices of bankruptcy and introduced even more uncertainty into a still-uneasy market.

To put it more broadly, the bankruptcy laws are in place to ensure that debts are paid in an established and fair manner and not at the whim of whatever political actors happen to be in power at the time. Taking away that assurance stifles investment and thereby hurts the economy.

Cato joined the Washington Legal Foundation, the Allied Educational Foundation, and George Mason law professor Todd Zywicki on a brief supporting the creditors’ petition that you can read here.  And you can watch Cato’s policy forum on the auto bailout here.

Supreme Court Erases Legal Precedent for Auto Bailout is a post from Cato @ Liberty - Cato Institute Blog

As described in the current Cato Policy Report, one of the “Hard Lessons from the Auto Bailout” is that management at GM is likely to be “highly erratic, as the president and Congress wrestle for decisionmaking primacy at this majority taxpayer-owned entity.”  The “dealerships” issue is Exhibit A.

One of GM’s first decisions upon emerging from bankruptcy was to announce closures of a number of dealerships to help reduce costs. Then-nominal-CEO Fritz Henderson explained that the planned closings would save GM about $100 in distribution costs per vehicle–a few hundred million dollars per year when factoring in the millions of units GM expects to produce.

But many of GM’s congressional CEOs cried foul, demanding reconsideration from a company that had taken public funds.  The House of Representatives even passed a bill requiring companies that received federal funds to reestablish terminated dealership agreements, though no action was taken in the Senate.

However, as reported in The Hill today, Congress is fast-tracking legislation to restrict GM’s (and Chrysler’s) closings, by subjecting each decision to an arbitrator, who will “balance the economic interests of the terminated dealership, the car companies and the general public.”  A Senate aide is cited as saying legislators intend to pass this measure before Christmas.

Well, look, EVERY decision GM makes will produce winners and losers in terms of real and opportunity costs.   Hence, EVERY decision is just as worthy of legislative or executive scrutiny, if the dealership issue is the litmus test. 

With 537 CEOs, all but one of whom have bigger priorities than GM’s bottom line, GM’s future will be dictated by splitting differences, political logrolling, and managing by consensus–tactics that will assure GM’s demise.

How to Kill a Company: A Beginner’s Guide (Chapter 1, P. 1.) is a post from Cato @ Liberty - Cato Institute Blog

I caught a lot of flack from my Republican friends for my post blaming the FY2009 deficit on Bush instead of Obama. Well, I must be a glutton for punishment because I can’t resist jumping (albeit reluctantly) to Obama’s defense again. I’m venting my spleen for two reason. First, FoxNews.com posted a story headlined “Obama Shatters Spending Record for First-Year Presidents” and noted that:

President Obama has shattered the budget record for first-year presidents — spending nearly double what his predecessor did when he came into office and far exceeding the first-year tabs for any other U.S. president in history. In fiscal 2009 the federal government spent $3.52 trillion …That fiscal year covered the last three-and-a-half months of George W. Bush’s term and the first eight-and-a-half months of Obama’s.

This story was featured on the Drudge Report, so it has received a lot of attention. Second, Bush’s former Senior Adviser wrote a column for the Wall Street Journal eviscerating Obama for big budget deficits. Given Bush’s track record, this took considerable chutzpah, but what really nauseated me was this passage:

When Mr. Obama was sworn into office the federal deficit for this year stood at $422 billion. At the end of October, it stood at $1.42 trillion.

I’m a big fan of criticizing Obama’s profligacy, but it is inaccurate and/or dishonest to blame him for Bush’s mistakes. At the risk of repeating my earlier post, the 2009 fiscal year began on October 1, 2008, and the vast majority of the spending for that year was the result of Bush Administration policies. Yes, Obama did add to the waste with the so-called stimulus, the omnibus appropriation, the CHIP bill, and the cash-for-clunkers nonsense, but as the chart illustrates, these boondoggles only amounted to just a tiny percentage of the FY2009 total — about $140 billion out of a $3.5 trillion budget.

There are some subjective aspects to this estimate, to be sure. Supplemental defense spending could boost Obama’s share by another $25 billion, but Bush surely would have asked for at least that much extra spending, so I didn’t count that money but individual readers can adjust the number if they wish. Also, Obama used some bailout money for the car companies, but I did not count that as a net increase in spending since the bailout funds were approved under Bush and I strongly suspect the previous Administration also would have funneled money to GM and Chrysler. In any event, I did not give Obama credit for the substantial amount of TARP funds that were repaid after January 20, so the net effect of all the judgment calls certainly is not to Bush’s disadvantage.

Let’s use an analogy. Obama’s FY2009 performance is like a relief pitcher who enters a game in the fourth inning trailing 19-0 and allows another run to score. The extra run is nothing to cheer about, of course, but fans should be far more angry with the starting pitcher. That having been said, Obama since that point has been serving up meatballs to the special interests in Washington, so his earned run average may actually wind up being worse than his predecessor’s. He promised change, but it appears that Obama wants to be Bush on steroids.

Defending Obama…Again is a post from Cato @ Liberty - Cato Institute Blog

• Just in time for Thanksgiving, the turkey has arrived: How Harry Reid’s health care “reform” bill is stuffed with extra costs.

• A few things you might not know about the Chrysler bankruptcy.

• Why you should not blame Obama for Bush’s 2009 deficit.

• Standing against the storm: Nien Chang, 1915-2009.

• Podcast: Think the Federal Reserve is independent? Think again.

Weekend Links 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

According to reports, executives from bailed out companies Citigroup, Bank of America, GM, Chrysler, GMAC, Chrysler Financial and AIG are going to see major pay cuts this year, which will be enforced by the president’s “pay czar,” Kenneth R. Feinberg. WaPo:

NEW YORK — The Obama administration plans to order companies that have received exceptionally large amounts of bailout money from the government to slash compensation for their highest-paid executives by about half on average, according to people familiar with the long-awaited decision.

The administration will also curtail many corporate perks, including the use of corporate jets for personal travel, chauffeured drivers and country club fee reimbursement, people familiar with the matter have said. Individual perks worth more than $25,000 have received particular scrutiny.

The American people have every right to be upset about generous compensation packages for executives at financial firms that are being kept alive by subsidies and bailouts.

But their ire should be directed at the bailouts, because that is the policy that redistributes money from the average taxpayer and puts it in the pockets of incompetent executives. Unfortunately, rather than deal with the underlying problems of bailouts and intervention, some politicians want to impose controls on salaries. This might be a tolerable second-best (or probably fifth-best) outcome if the compensation limits only applied to companies mooching off the taxpayers, but some politicians want to use the financial crisis as an excuse to regulate compensation at firms that do not have their snouts in the public trough.

This would be a big mistake. So long as rich people make money using non-coercive means, politicians should butt out. It should not matter whether we are talking about Tiger Woods, Brad Pitt, or a corporate CEO. The market should determine compensation, not political deal making. Markets don’t produce perfect outcomes, to be sure, but political intervention invariably produces terrible outcomes.

I debate this further on CNBC:

C/P The Hill

U.S. Cutting Pay for Bailed Out Company Executives is a post from Cato @ Liberty - Cato Institute Blog

Further to Ilya Shapiro’s post this morning, let me also point you to a concise chronology of events culminating in the government’s robbery of Chrysler creditors.

The story is that of Richard Mourdock, Treasurer of the State of Indiana and the man responsible for stewardship of the state’s pension funds, some of which were victimized by the Obama administration’s pre-packaged and then forced-fed bankruptcy deal for Chrysler. I strongly urge you to read Mr. Mourdock’s testimony, which is at once revealing, sobering, compelling and, regrettably, a frightening sign of the times.

Mourdock will be speaking on this very topic at Cato, along with bankruptcy law expert David Skeel, on Thursday, October 15 at noon. Reserve your seat now.

Eyewitness to Government’s Robbery of Chrysler Creditors is a post from Cato @ Liberty - Cato Institute Blog

In January 2009, Chrysler stood on the brink of insolvency.  Purporting to act under the Emergency Economic Stabilization Act, the Treasury extended Chrysler a $4 billion loan using funds from the Troubled Asset Relief Program (TARP).  Still in a bad financial situation, Chrysler initially proposed an out-of-court reorganization plan that would fully repay all of Chrysler’s secured debt.  The Treasury rejected this proposal and instead insisted on a plan that would completely eradicate Chrysler’s secured debt, hinging billions of dollars in additional TARP funding on Chrysler’s acquiescence. 

When Chrysler’s first lien lenders refused to waive their secured rights without full payment, the Treasury devised a scheme by which Chrysler, instead of reorganizing under a chapter 11 plan, would sell its assets free of all secured interests to a shell company, the New Chrysler.  Chrysler was thus able to avoid the “absolute priority rule,” which provides that a court should not approve a bankruptcy plan unless it is “fair and equitable” to all classes of creditors. 

Cato joined the Washington Legal Foundation, Allied Educational Foundation, and George Mason law professor Todd Zywicki on a brief supporting the creditors’ petition asking the Supreme Court to review the transaction’s validity.  We argue that the forced reorganization amounted to the Treasury redistributing value from senior, secured creditors to debtors and junior, unsecured creditors. 

The government should not be allowed, through its own self-dealing, to hand-pick certain creditors for favorable treatment at the expense of others who would otherwise enjoy first lien priority.  Further, a lack of predictability and consistency with regard to creditors’ expectations in bankruptcy will result in a destabilization of existing and future credit markets. 

The Court will be deciding whether to hear the case later this fall.  Thanks very much to Cato legal associate Travis Cushman for his help with the brief.

The Government Robbed Chrysler Creditors 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

The First Amendment guarantees our freedom to petition the government, which is one of the reasons why the statists who wants to restrict or even ban lobbying hopefully will not succeed. But that does not mean all lobbying is created equal. If a bunch of small business owners get together to lobby against higher taxes, that is a noble endeavor. If the same group of people get together and lobby for special handouts, by contrast, they are being despicable. And if they get a bailout from the government and use that money to mooch for more handouts, they deserve a reserved seat in a very hot place.

This is not just a hypothetical exercise. The Hill reports on the combined $20 million lobbying budget of some of the companies that stuck their snouts in the public trough:

Auto companies and eight of the country’s biggest banks that received tens of billions of dollars in federal bailout money spent more than $20 million on lobbying Washington lawmakers in the first half of this year. General Motors, Chrysler and GMAC, the finance arm of GM, cut back significantly on lobbying expenses in the period, spending about one-third less in total than they had in the first half of 2008. But the eight banks, the earliest recipients of billions of dollars from the federal government, continued to rely heavily on their Washington lobbying arms, spending more than $12.4 million in the first half of 2009. That is slightly more than they spent during the same period a year ago, according to a review of congressional records.

…big banks traditionally are among the most active Washington lobbying interests in the financial industry, and the recession has done little to dent their spending. …Since last fall, companies receiving government funds have argued that none of the taxpayer money they were receiving was being spent on lobbying.

…American International Group, the insurance firm crippled by trades in financial derivatives that received roughly $180 billion in bailout commitments, closed its Washington lobbying shop earlier this year. AIG continues to spend money on counsel to answer requests for information from the federal government, but the firm said it does not lobby on federal legislation.

The most absurd part of the story was the companies claiming that they did not use tax dollar for lobbying. I guess the corporate bureaucrats skipped the classes where their teachers explained that money is fungible.

The best part of the story was learning that AIG closed its lobbying operation, though that does not mean much since AIG basically now exists as a subsidiary of the federal government. The most important message (which is absent from the story, of course) is that the real problem is that government is too big and that it intervenes in private markets. Companies would not need to lobby if government left them alone and/or did not offer them special favors. Indeed, that was the key point of my video entitled, “Want Less Corruption: Shrink the Size of Government.”

Our Tax Dollars Are Being Used to Lobby for More Government Handouts is a post from Cato @ Liberty - Cato Institute Blog

The logic in Washington is ineluctable.  If government provides money, then it needs to impose regulations.  If the government takes ownership, then it must provide management.

Bail out the banks.  Set bankers’ salaries.  Bail out the insurers.  Decide on corporate bonuses.

And if the government takes over the automakers, then it should run the automakers.  That, of course, means deciding who can be dealers. 

Reports the Washington Post:

Now that the Obama administration has spent billions of dollars on the bailouts of General Motors and Chrysler, Congress is considering making its first major management decision at the automakers.

Under legislation that has rapidly gained support, GM and Chrysler would have to reinstate more than 2,000 dealerships that the companies had slated for closure.

The automakers say the ranks of their dealers must be thinned in order to match the fallen demand for cars. But some of the rejected dealers and their Capitol Hill supporters argue that the process of selecting dealerships for closure was arbitrary and went too far.

Since federal money has been used to sustain the automakers, they say Congress has an obligation to intervene.

At a gathering of dozens of dealers who came to Capitol Hill yesterday to lobby their representatives, House Majority Leader Steny H. Hoyer (D-Md.) and several other congressmen spoke in support of the dealers. More than 240 House members have signed onto the bill, supporters said.

“We are going to stand with them for as long as it takes,” Hoyer told an approving crowd.

What is next?  Congress deciding the prices that should be charged for autos?  The accessories to be offered?  The colors cars should be painted?

I have no idea who should or should not be an auto dealer.  But I do know that it is a decision which should not be made in Washington, D.C.

Intervention Begets Intervention, Which Begets… 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

Thursday, the House Committee on Oversight and Government Reform questioned Ken Lewis about Bank of America’s purchase of Merrill Lynch and the subsequent injection of tens of billions of taxpayer funds into Bank of America.

While much of the hearing focused on Lewis’ leadership of Bank of America, the hearing also touched upon the more important questions of government regulators pressuring BoA to purchase Merrill even after BoA realized that Merrill’s losses were greater than expected.

One of the basic tenets of sound regulation, exercised in the public interest, is that regulators remain at “arm’s length” from the entities they regulate. As defined by Black’s Law Dictionary, “arm’s length” relates to “dealings between two parties who are not related or not on close terms and who are presumed to have roughly equal bargaining power; not involving a confidential relationship.”

If anything, it appears that BoA and the federal government were in a bear hug, rather than at arm’s length. As described in Lewis’ notes on one of his many conversations about the Merrill deal with Fed Chairman Ben Bernanke, Bernanke told Lewis, “We will not leave you in the lurch.” Given the funds subsequently injected into BoA, one can say that Chairman Bernanke is at least a man of his word.

One of the significant problems arising from extensive government ownership of private entities is that in regulating those entities, the government no longer has the ability to be a neutral, objective arbitrator. Whether it is BoA or GM, government officials will come under increasing pressure to see a positive return on the taxpayer’s investment. One should not be surprised if that pressure manifests itself by government officials favoring the very companies they have invested in.

While BoA has been saved, it appears that the rule of law has been “left in the lurch.”

Fed to BoA: ‘We Will Not Leave You in the Lurch’ is a post from Cato @ Liberty - Cato Institute Blog

My son’s station car is an old Ford Explorer AWD which, despite being a V-6, was rated at about 15 mpg.  Approaching 100,000 miles, the SUV’ s resale value is very low.

The House approved a bill to give him a $3,500 voucher to buy a car that is supposed to get only 18 mpg, or $4,500 if it gets 20 mpg.  Only 18-20 mpg?  That’s not moving us much closer to President Obama’s pie-in-the-sky 35.5 mpg goalpost is it?

Consider how easy it would be to game this giveaway program by using that $4,500 voucher to buy a big SUV or V-8 muscle car.

First of  all, with Chrysler and GM dealerships folding, it should be easy to buy a mediocre Chevy Cobalt or Dodge Caliber for about $10,000 more than the voucher.

What you do next is sell that boring econobox, even if you end up with $1,000 less than you paid — that still leaves you with $3,500 of free money, courtesy of taxpayers.

As this  process unfolds, the flood of resold small cars will make it even  harder for GM, Chrysler and Ford dealers to get a decent price for small cars, because of added competition from new cars being resold as used.

That’s their problem, not yours.

So, take the $9,000 net from reselling the crummy little car plus the $4,500 from Uncle Sam.  Then use that $13,500 to make a big down payment on a used Cadillac Escalade,  Toyota Tundra pickup or Corvette.

File this under “unintended consequences” (my own file is running out of space).

Cash for Clunkers Lesson: How to Use the $$ to Buy a Gas Guzzler is a post from Cato @ Liberty - Cato Institute Blog

While the majority of Chrysler’s senior creditors sacrificed their fiduciary duties and caved into political pressure in accepting the Obama Administration’s pre-packaged bankruptcy of Chrysler, a small group of state pension funds in Indiana has challenged the Obama plan and is asking the Supreme Court to review said plan. As in the 1930s, the protection of contractual rights, one of the most basic pillars of a free society, along with the rule of law, is now in the hands of the Supreme Court.

As discussed in today’s Washington Post, these pension funds believe their rights were infringed by the Administration’s placing of junior creditors in a preferred situation to senior creditors. It doesn’t take Ms. Manners to remind us that cutting in line, whether in traffic, at the grocery store, or in a bankruptcy, is plain rude. To have the government re-order the line for you is even worse.

To re-build confidence in our markets, trust in our institutions must be re-stored. Not simply in our private institutions, but also in our government. If players believe the game is going to be rigged, fewer will be willing to play. And while the Administration has portrayed Chrysler’s senior creditors as nothing more than greedy speculators, the Indiana request exposes that myth. President Obama should clearly articulate why retired state employees, such as teachers and firefighters, should have their pension funds raided solely for the benefit of the auto unions. Here’s to hoping Indiana goes all the way in this Court.

Indiana: Defender of “the Rule of Law” 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

It has long been recognized that many capitalists are the greatest enemies of capitalism.  They want free enterprise for others, not themselves.

Unfortunately, organized labor tends to be even more statist in orientation.  Unions now routinely lobby for government to give them what they cannot get in the marketplace.

Labor influence is greatest in the public sector.  And as government’s power has expanded during the current economic crisis, so has the influence of unions.  Observes Steve Malanga in the Wall Street Journal:

Across the private sector, workers are swallowing hard as their employers freeze salaries, cancel bonuses, and institute longer work days. America’s employees can see for themselves how steeply business has fallen off, which is why many are accepting cost-saving measures with equanimity — especially compared to workers in France, where riots and plant takeovers have become regular news.

But then there is the U.S. public sector, where the mood seems very European these days. In New Jersey, which faces a $3.3 billion budget deficit, angry state workers have demonstrated in Trenton and taken Gov. Jon Corzine to court over his plan to require unpaid furloughs for public employees. In New York, public-sector unions have hit the airwaves with caustic ads denouncing Gov. David Paterson’s promise to lay off state workers if they continue refusing to forgo wage hikes as part of an effort to close a $17.7 billion deficit. In Los Angeles County, where the schools face a budget deficit of nearly $600 million, school employees have balked at a salary freeze and vowed to oppose any layoffs that the board of education says it will have to pursue if workers don’t agree to concessions.

Call it a tale of two economies. Private-sector workers — unionized and nonunion alike — can largely see that without compromises they may be forced to join unemployment lines. Not so in the public sector.

Government unions used their influence this winter in Washington to ensure that a healthy chunk of the federal stimulus package was sent to states and cities to preserve public jobs. Now they are fighting tenacious and largely successful local battles to safeguard salaries and benefits. Their gains, of course, can only come at the expense of taxpayers, which is one reason why states and cities are approving tens of billions of dollars in tax increases.

The government’s increased power over the economy also gives organized labor a new hook to lobby for more special interest privileges.  For instance, the AFL-CIO is arguing that the federal bailout of the auto industry should bar the companies from moving factories overseas.

Explains the union federation:

The pundits and politicians inside the Washington Beltway don’t get: If the United States continues to send its manufacturing jobs [1] overseas—as [2] General Motors and Chrysler are now proposing—the result will be more low-income U.S. families.

So today, workers, economists, academics and business and union leaders, fresh from the “[3] Keep It Made in America” bus tour through the nation’s heartland, brought that message to the policymakers’ doorstep as part of a teach-in on Capitol Hill.

The 11-day, 34-city bus tour showcased the ripple effect on communities of the lost jobs in manufacturing. ([4] See video.) Today, during the teach-in, those who took part brought the stories they heard along the tour and presented principles for revitalizing the auto industry to members of Congress and the press. 

Labor officials have been making similar arguments about bank lending.  If you got bailed out by Washington, then you have an obligation to keep funding bankrupt concerns.  Never mind getting paid back, and paying back the taxpayers.

Markets are resilient, but can survive only so much political interference.  If the American people aren’t careful, they might eventually find themselves living in an economy more appropriate for Latin America than North America.

Labor’s Waxing Political Influence 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