Bail out Detroit

My thinking on why Congress should bail out Detroit's big 3 auto makers:

1. The consequences of not bailing them out would be disastrous and probably more expensive than a bailout.  Normally this would be a disaster that could be managed with unemployment insurance, with new companies expanding to fill the gap and hiring workers, etc.  But this isn't a normal time.

2. It will function as a stimulus. Beyond the non-failure of 3 giant companies along with not losing millions of jobs obviously be a good thing, but maybe even the increase in economic security after a bailout would spur consumer spending. People delaying purchases right now because they don't know whether they'll be fired because of an industry collapse might have enough trust to spend money if a bailout comes through.  If 10% of US jobs really depend on the auto industry like Michigan Governor Granholm says, then this could actually be a big impact.

3. Chapter 11 bankruptcy doesn't really seem to be an option right now. Reorganization of giant companies require giant amounts of credit. That credit is currently unavailable.  So if you let GM and the rest go bankrupt, it looks like they'd just shut down and nothing would replace them.

4. I don't see any reason why American auto makers can't be profitable again if you take away the legacy health care costs (via universal health care) and replace management (untrained monkeys with dart boards would be an increase in decision quality over the current idiots).  It's obvious that labor costs themselves aren't the problem - unions are much stronger in Germany than in the US, and VW, BMW and Mercedes are doing fine.

5. There isn't much of a moral hazard problem, especially with CEOs having their pay cut to $1 a year.

6. They deserve it more than Wall St.  They make stuff, which is important.  Wall Street doesn't make stuff and they are thus less important.  This will obviously require some explaning:

Wall Street created imaginary wealth with financial instruments too complicated for anyone to understand (that was the whole point), and when the whole thing blew up they got $700 billion to try to rebuild a fantasy land.  The way I understand it, we need financial institutions for two things: lending and speculation.  Lending to provide capital to businesses, and speculation to even out prices.  But creating financial instruments so complicated that nobody understands what they are based on isn't speculation, because nobody knows what they are betting on.  Information, key in any transaction, isn't there.  Then you just get a situation where people buy these things because they think other people will buy them in the future, which creates a bubble underlied by something that nobody knows what it is.

This is the reasoning that tells me that most of what got Wall Street into trouble was useless activity in the first place.  Creating super-complicated financial instruments seems like a good way to take money from silly rich people and give it to smart rich people, but it doesn't do anything to grow the economy (via lending to businesses that actually produce things) or stabilize the economy (via speculation).

On top of this, Wall Street steals all the smart people that were urgently needed in Detroit board rooms.

So if Wall Street was judged important enough for a $700 billion bailout for basically adding nothing of value to the economy, shouldn't Detroit autmakers get $701 billion for adding something to the economy (even if that something is mediocre cars)?

Ultimately I think Detroit will get a bailout, but not for any of these reasons.  They'll get a bailout because the Democrats control Congress and there would be hell to pay if they didn't back up the Midwest unions.  Hopefully all the necessary provisions will be attached - firing management and putting some monkeys with dart boards and typewriters in charge instead, and pushing them towards a 'green' economy.

Everyone wants a larger State Dept

My thoughts on Obama's national security team:

Assuming things work out between Obama and Clinton at State and Bill Clinton wherever he is, then this looks to be a very good cabinet. And I think things will work out.

But what is even better news is that Clinton, Gen. Jones (the national security adviser), and Gates at the Pentagon all signed on to Obama's core idea of shifting resources away from the Pentagon and towards the State Dept. This is a great idea and people have been screaming about it for years. In one of the first workshops I did in grad school, the professor pointed at someone and said "imagine you are the State Dept. rep and you have to argue against all of the rest of us from DoD. OK, now in real life it'd be you against the rest of the entire graduate program." While the Pentagon's budget is over $500 billion and including the wars and future medical costs may rise over $1 trillion (and some idiots want to pin it to 4% of GDP), the State Dept had a measly $10 billion for FY 2008.

Despite almost universal agreement that the State Department is under-resourced, Pentagon budgets have continued to outpace State budgets in growth because of lots of Congressional pork.  Probably the largest pork item is the United States Air Force.  OK, that was an exaggeration, but stuff like the F-22 which is projected to cost at least $62 billion is equal to the State Dept budget for six years, and this is for an aircraft with no actual mission other than to defeat imaginary Chinese planes.  Unfortunately for the State Department, it's budget doesn't create jobs in Congressional districts because they invest in people rather than buying stuff, so Congress doesn't throw $5 billion (half the State Dept's budget) at the State Dept in unwanted pork projects like they do the Pentagon.

Because Obama hasn't appointed any intelligence people yet, the intelligence community hasn't really been a part of this "national security team" rollout.  However the CIA and the rest of the intelligence community will be the happiest of all due to the proposed enlarging of the State Deptartment.  When the State Department shrinks, CIA officers overseas have to pick up the slack from there being fewer Foreign Service Officers.  FSOs usually report back to Washington intelligence that is easier to collect (intelligence collecting isn't their main function), and that allows CIA officers to concentrate on targeting their collection on harder targets.  But that basic embassy/elite chatter that FSOs report on is still important, and when FSO positions are cut because the State Dept budget is cut, that means CIA officers have less time to spend on harder (and more interesting) targets and have to report gossip instead.

Bottom line: Obama's national security team looks good, and the intelligence community should be very happy.