Paul Krugman Gives Two Reason He Supports Bailout of Auto Companies

It was interesting this morning to see George Will confidently put forth an economic theory — only to have his theory be immediately contradicted by a Nobel winning economist. Ouch.  Will probably still thinks he is right.

The discussion happened on the George Stephanoupolis program on ABC between Stephanoupolis and Cokie Roberts, Sam Donaldson, George Will, and Paul Krugman.

George Will’s theory of why the depression became the great depression is that government intervention prevented the markets from working. Krugman disagreed and said it was the collapse of the financial system that was at fault, and it was an increase in taxes, along with a policy of balancing the budget that Roosevelt imposed in 1937. Wow. I need to go back and study my history.

Krugman said that only an enormous government public project — World War 2 — eventually turned the economy around.

About the question of bailing out the auto companies, Krugman said that if the question had been asked in 1999, when the economy was strong, his advice would have been to allow the auto companies to go bankrupt — chapter 11. The companies would have continued to operate on borrowed capital and under the bankruptcy rules, they would be required to undergo major restructuring.

Krugman says that because of the bad state of the overall economy he reluctantly favors a government bailout of the auto industry. He gives two reasons:

  1. The credit lines normally available to the auto companies are now frozen, so a Chapter 11, bankruptcy, would quickly turn into a chapter 7, liquidation. Such a liquidation would mean that over one million jobs would evaporate.
  2. And so, the net result to the economy would be a negative stimulus, and in the terrible slump we are in, a negative stimulus is the last thing we should be engineering.
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11 Responses to Paul Krugman Gives Two Reason He Supports Bailout of Auto Companies

  1. Patrick says:

    In the case of the auto-makers’ bailout, it’s a relief to have a national issue that is so straightforward: American cars tend to break down and fall apart therefore people have stopped buying them. If GM and Ford don’t want to go out of business, they should start making decent cars. To bail them out would be to reward their terrible manufacturing standards.

  2. Joe says:

    I hope Krugman will be so gracious with the taxpayers dollars when I need a bailout.

  3. JT says:

    Patrick need to check his facts in Consumer Reports auto repair history and COMPARE the repair records for a Ford Escape, Mercury Marquis or Buick -WITH- the Kia Sedona, Nissan Armada, Volkswagon Beetle, Mercedes, or Audi. These foreign cars are j-u-n-k. My friends insurance company wouldn’t even fix his Kia when he was in a minor accident because it had no value. They stripped it and gave him cash and he bought a Mercury. GM and Ford HAVE been making “decent cars”. When GM’s 10-yr warranty arrived last year, I got a Buick. I love it and was surprised when everyone who owns my model says it’s the best car they have ever owned. I was glad to end 15 years of tin-can Hondas. It all happened when I drove a GM rental car in Florida. Try an American car Patrick – it’s not grandpa’s Detroit-made junker anymore.
    – And Joe – this is not a “bailout”, it’s a loan with oversight.

  4. Joe says:

    JT, sorry if I am skeptical, I guess this is the same oversight that allows AIG fatcats time at the “spa” and other expensive amenities on my dime.

  5. Stan Hirtle says:

    From Consumer Reports annual auto issue (April 2008)
    Sedans under $20,000 – 6 cars recommended, no US
    Sedans $20,000 – $25,000 – 15 cars recommended, 2 Fords and a Saturn
    Sedans $25,000 – $30,000 – 13 cars recommended, 4 Fords, a Dodge, a Chevrolet and a Buick
    Sedans $30,000- $45,000 – 20 cars recommended, 2 Lincolns, a Buick, a Chrysler, a Dodge
    Sedans over $45,000, 8 recommended, 2 Cadillacs
    Minivans – 3 recommended, no US
    Wagons and Hatchbacks under $25,000, 8 cars recommended, 1 Chevrolet, 1 Chrysler
    Wagons and Hatchbacks over $25,000, 4 recommended, no US
    SUVs under $30,000, 8 recommended, no US
    SUVs $30,000 – $40,000, 14 recommended, 2 Fords, one Saturn, one GMC
    SUVs over $40,000 – 9 recommended, one Ford, 2 Lincolns
    They don’t recommended redesigned cars until they get a record and test them. That cost Ford the Focus, which has done well in the past. Also the Pontiac Vibe which is the same as a Toyota Matrix.
    On the used cars, there are some US cars on the good list. But the majority of the used cars to avoid are from GM.
    JT may have gotten one of the good Buicks. But still, that’s not great for GM.

  6. Mac says:

    I love the punitive, angry nature of citizens who are against the bailout. The thrust of their argument seems to be that A) the UAW workers “make too much money”, and B) the American car companies “make rotten products”. Both of these assertions are ludicrous. American cars are no worse than foreign products, it’s simply that they are perceived as being less reliable. A few years ago, everyone was buying Chevy Tahoes, and GMC Yukons, and Cadillac Escalades. Our nation is basically overweight, spoiled, and out of shape, and people want big, macho trucks rather than small, ful-efficient cars. Plus, the faux affluence of the last decade has caused people to want “large” in everything. It is not the fault of the Amrican automakers for giving the people what they want. Nissan makes an SUV that’s almost as large as a Hummer. This is not just an American auto company trend.

    My feeling is that the Republican reluctance to provide a loan — it is not a “bailout” — of a measly $25 billion to three American auto companies is nothing more than another right-wing attempt to bust another labor union. The common thread running through the Republicans’ questions during the House and Senate committee hearings almost invariably come back to “those union workers make too much money”. Additionally, these overpaid politicians con tinually cite the fact that the workers in japanese auto plants in thias country make much less per hour. They fail to mention that Japam provides housing and health coverage for its citizens, thereby removing a lot of the labor costs from the company itself.

    If GM, Ford, and Chrysler go under, this country is literally over. We will become a third world peonage.

  7. J.D. says:

    “If GM and Ford don’t want to go out of business, they should start making decent cars. To bail them out would be to reward their terrible manufacturing standards.”

    It isn’t about rewarding certain standards. It isn’t about American pride. It is about saving jobs. It’s about trying to avoid a deeper recession by putting thousands of people out of work.

  8. Jeff says:

    “I love the punitive, angry nature of citizens who are against the bailout. ”

    Very noticeable on the DDN op-ed page.

    Just like the schadenfreude when the Moraine Assembly closure shut down.

    One can argue the situation either way, but for Daytonians, all I have to say there are some loudmouth sick f_cks in this town.

  9. Joe says:

    There has been long-standing gm envy from the non-gm employees in the Dayton area. Unfortunately, many of the gm workers sealed the fate of their fellow employees by abusing the sick leave policy and work rules. This resulted in less than adequate workers keeping their jobs because of union intervention. By fighting for and making the auto industry keep these sub standard employees the unions set a course, which resulted in sub-standard auto parts and cars. Sadly, for the hard working employees in the auto and production industry it may be too late. If the plants totally fold, the hard working employees do not have any further to look than their own backyard.

  10. Stan Hirtle says:

    There is an idea that union workers and retired workers shouldn’t have it too good, like having decent pay and health care to get to the middle class. Having it too good is limited to CEOs, hedge fund managers, lobbyists and mortgage industry insiders who got away with billions of peoples home equity, and a handful of entertainment stars.
    The main reason that unions existed to get those jobs in the first place was that workers had solidarity with each other. Now they are mostly envious, and they are no match for the companies.
    GM has a lengendary dysfunctional bureaucracy and corporate culture, and managers who certainly havn’t been able to catch up with foreign automakers with decades of opportunities. People like to blame lazy union workers, but in the big picture that is hard to do. Plus they can just abandon the communities they are in, without having to moderninze their plants. Why couldn’t they make hybrids in Moraine? Now many want GM to do a bankruptcy and unload their union contracts and obligations to retirees. There is no such thing as bankruptcy abuse when corporations do it. If you hand them a bailout without asking anything in return, won’t they be like the banks and do what they want with the money, rather than things that serve the taxpayers.

  11. Mark says:

    It seems that the majority of folks here who favor the bailout do so for many different reasons, most of which are true but irrelevant.


    (1) “Opposition to the bailout is mean-spirited, etc”. This is an attack on the MOTIVE of the opposition, when what people should be worried about is the CONSEQUENCES of the bailout, regardless of the motive. More on that later.
    (2) They want to beleive that the auto workers are entitled to the same protections that the auto CEO’s or the banks have. I agree – but the CEOs and banks should be every bit as vulnerable as the auto workers currently are, not the other way around. Nobody has a right to a protected job, least of all at taxpayer expense.
    (3) They think that the U.S. cars do in fact deliver the same value as Toyota, etc. I have no idea if this is true, but all the studies and facts cited in the world are not smarter than the collective purchasing decisions of average Americans who are choosing the foreign cars over the American ones. Are y’all saying Americans are too dumb to pick their own cars?
    (4) “We have to protect the jobs or the economy will tank.” No, we don’t – and no, it won’t. When a company is losing money hand over fist, how vital can it possibly BE? Doesn’t its loss HELP the economy, by freeing up people and resources to be used in more profitable endeavors? Most of those folks who do lose their jobs WILL find other work – at lower pay, to be sure, but that’s the breaks. Welcome to America.

    If I sound unsympathetic, it’s because I am. But my sympathy, or lack thereof, has no bearing on what is good economic policy. If the free market will no longer support the car companies, then by definition they are not needed and America wil NOT crumble when they go under. No company or companies, no matter how big, are vital. The principle of allowing failure IS vital.

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