In this Age of Rapid Communication we all seem to be turning into lemmings. Powerful governments and great minds develop momentary bouts of "conventional wisdom" that blank out context and rationality. We all feel that one direction is the only direction - for a while.
I'm not against bailouts, but are bailouts the only way to go?
I know I'm slipping into dangerous groupthink when my reaction to a $15B auto sector bailout is "small potatoes". But after all, AIG has received ten times that amount this year, and hasn't even managed to clear up $10B in bad trades.
Now we hear that the Italian government is buying up 7.7M pounds of Parmigiano Reggiano and donating it to charity in an effort to save the great cheese from extinction. (Makers of buffalo mozzarella, who are also facing economic difficulties, are crying foul.)
There was a time when direct bailouts would not be considered. We started accepting them earlier this year because there were businesses so large and integrated that their failure would bring down everyone else, and then the trend spread because temporary economic conditions (like the credit crunch) were making it temporarily impossible for some businesses to survive. But when there are structural problems that need to be addressed to provide long-term solutions, bailouts could be the wrong approach.
For the sake of argument, let's agree that this great cheese is worth saving. (I think this is true, but there is some argument that cheaper Italian competitors are just as good and I don't want to get into that.)
Real Italian parmesan costs US$4.73/pound to produce but is wholesaled for US$4.38/pound. Zingermans in Ann Arbor sells it over mail order for US$26/pound (plus shipping), and that's not a bad price relative to other cheese shops. Parmesan is a hard cheese produced in 77-pound rounds that are not especially expensive to ship. You'd think that the Italian government could help parmesan producers lessen the markup (perhaps with a marketing board). In the winter months I can buy fresh South American cherries for $3.99/pound. They cost more to ship, suffer more from spoilage and obviously have a much smaller markup.
I'm not sure where the WTO stands on this, but perhaps bailouts are being used to circumvent trade agreements that prohibit subsidies to exported goods. Perhaps governments are just finding it difficult to shut their purse after opening it so wide for banks.
2 comments:
I am really worried about the bailout. That is an awful lot of money for the auto industry, and no way of knowing if this time next year they will go belly up anyway, and we taxpayers will be left with the enormous debt. I feel disloyal saying that, as I have family whose livlihood depends on this industry, but the bigger picture could still mean that they will have to find other work anyway, in the long run. Any other people wondering about this?
One interesting suggestion I read is that they should have given the $15B to Ford - the only US auto maker that doesn't need a bailout - and let Ford use it to buy up what they want of the rest. The rationale is that Ford's success shows that it's the only one with decent management.
It's also interesting that one of the best bailouts ever was Jimmy Carter's to Chrysler in 1979. He saved the company and the government turned a profit. Not being in the pocket of big business is probably an important reason for his success - and something we're lacking with the current US administration.
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