Townhall.com | Thomas Sowell | Dec. 17, 2008
The current bailout extravaganza is applying the postponement of reality democratically– to the rich as well as the poor, to the irresponsible as well as to the responsible, to the inefficient as well as to the efficient. It is a triumph of the non-judgmental philosophy that we have heard so much about in high-toned circles. […]
Some of us were raised to believe that reality is inescapable. But that just shows how far behind the times we are. Today, reality is optional. At the very least, it can be postponed.
Kids in school are not learning? Not a problem. Just promote them on to the next grade anyway. Call it “compassion,” so as not to hurt their “self-esteem.”
Can’t meet college admissions standards after they graduate from high school? Denounce those standards as just arbitrary barriers to favor the privileged, and demand that exceptions be made.
Can’t do math or science after they are in college? Denounce those courses for their rigidity and insensitivity, and create softer courses that the students can pass to get their degrees.
Once they are out in the real world, people with diplomas and degrees– but with no real education– can hit a wall. But by then the day of reckoning has been postponed for 15 or more years. Of course, the reckoning itself can last the rest of their lives.
[…]
We are told that the collapse of the Big Three automakers in Detroit would have repercussions across the country, causing mass layoffs among firms that supply the automobile makers with parts, and shutting down automobile dealerships from coast to coast.
A renowned economist of the past, J.A. Schumpeter, used to refer to progress under capitalism as “creative destruction”– the replacement of businesses that have outlived their usefulness with businesses that carry technological and organizational creativity forward, raising standards of living in the process. Indeed, this is very much like what happened a hundred years ago, when that new technological wonder, the automobile, wreaked havoc on all the forms of transportation built up around horses.
For thousands of years, horses had been the way to go, whether in buggies or royal coaches, whether pulling trolleys in the cities or plows on the farms. People had bet their futures on something with a track record of reliable success going back many centuries.
Were all these people to be left high and dry? What about all the other people who supplied the things used with horses– oats, saddles, horse shoes and buggies? Wouldn’t they all go falling like dominoes when horses were replaced by cars?
Unfortunately for all the good people who had in good faith gone into all the various lines of work revolving around horses, there was no compassionate government to step in with a bailout or a stimulus package. They had to face reality, right then and right there, without even a postponement.
Who would have thought that those who displaced them would find themselves in a similar situation a hundred years later?
[…]
Detroit and Michigan have followed classic liberal policies of treating businesses as prey, rather than as assets. They have helped kill the goose that lays the golden eggs. So have the unions. So have managements that have gone along to get along.
Toyota, Honda and other foreign automakers are not heading for Detroit, even though there are lots of experienced automobile workers there. They are avoiding the rust belts and the policies that have made those places rust belts.
A bailout of Detroit’s Big Three would be only the latest in the postponements of reality. As for automobile dealers, they can probably sell Toyotas just as easily as they sold Chevvies. And Toyotas will require just as many tires per car, as well as other parts from automobile parts suppliers.
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“Were all these people to be left high and dry? What about all the other people who supplied the things used with horses– oats, saddles, horse shoes and buggies? Wouldn’t they all go falling like dominoes when horses were replaced by cars? ”
The replacement of horse-based with engine-based transportation took place over several decades, easing the transition. In addition, the emerging auto industry created new jobs — even new kinds of industries — that added to the economy.
What we’re talking about now is quite different — the loss of much of domestic auto manufacturing in a very short period of time, without being replaced by any new industry or technology. And this would come on top of the current loss of much of the American manufacturing base, and in conjunction with what may be the worst economic period since the great depression.
“While Detroit’s Big Three are laying off thousands of workers, Toyota is hiring thousands of workers right here in America, where a substantial share of all our Toyotas are manufactured.”
One reason why foreign manufacturers located plants here was to avoid import quotas and tariffs. With no domestic auto industry foreign manufacturers may decide to relocate production back to the home countries or to Mexico. Thus we could end up in a situation in which no cars of any kind are manufactured here. We wouldn’t have anyone working on fuel efficient or solar cars because there would be no domestic production. Without domestic production there would be no reason for domestic graduate auto engineering programs, and the entire knowledge base related to auto manufacturing could disappear.
“Toyota, Honda and other foreign automakers are not heading for Detroit, even though there are lots of experienced automobile workers there. They are avoiding the rust belts and the policies that have made those places rust belts.”
Yes, they headed for low-wage southern states that also offered huge tax subsidies and incentives to the foreign car makers to induce them to locate there in the first place.
If this is what conservatism offers working people, don’t expect to start winning a lot of elections any time soon.
Mr. Holman, you make some good points. The article is a bit too simplistic. I thought import quotas and tariffs, however, are no longer a significant factor, especially when speaking about Mexico which is within NAFTA, but perhaps I’m wrong.
Either way, there is a fundamental problem. Neither party will address it because mentioning it does not, as you put it, win a lot of elections. First, in a globalized economy, the UAW laborers are simply overcompensated. Not only that, they are inflexible concerning things like job descriptions. The brillance behind Toyota is that each laborer can perform various duties and can move about the shop floor to wherever there is demand. Second, in a globalized economy, our corporate tax rates (the highest in the world in some states) are way too high to be competitive.
Unless American laborers have something more substantial to offer than their foreign competitors, they will eventually see reduced wages in the current system of global trade. Cultural lack of seriousness regarding education and discipline will increasingly work against America in this regard. Don’t get me wrong – globalization has certainly added to economic growth. However, while benefitting from various cheap goods, the lower and middle classes have not benefited in terms of increased wealth.
Tariffs are the traditional way to protect domestic labor and industry, but raising big tariffs would most certainly throw the world economy into depression. Tariffs would have no support from either party, as both parties are run by folks who profit from global trade.
We could prop up unprofitable businesses by subsidizing the excess cost of domestic labor and inefficient processes. While this would appear compassionate and would give the appearance of doing something, like almost all government interference it would tie up capital that could be used for more profitable purposes, slowing economic growth. It also leaves us in deeper indebtedness and/or will degrade the value of the dollar.
I expect we’ll muddle along via government subsidies, and pay for it with eventual degradation of the dollar. One way or another most of us will end up worse off than we are today. We are indeed postponing reality.
Jim Holman
Sowell is using simple examples here in order to explain economic concepts to the layman. The situation is no doubt more complex, but the same principles apply.
I did a lot of work with the auto industry in a previous job. Most people have no idea how lucrative the union contracts are for non-skilled workers. It was common for me to work with operators on the assembly line who, with maybe a high school education, were making more than me – with an MS in chemical engineering and 10 years experience. Great for the “working people” you mention, but ultimately unsustainable.
The southern states that welcome the foreign manufacturers and offer them incentives obviously know what is in the best interst of their citizenry in the long run.
D. George’s summary is on point: