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InsiderOnline Blog: November 2008

Automaker Bailout: Bad for Trade, Bad for the Economy

An important point to keep in mind about any and all bailouts: While corporate welfare is always a bad idea, the costs of such policies consist not in the transfer of wealth from taxpayers but in the less-productive allocation of resources that arises from the distortion of incentives that bailouts create. Sometimes these distortions are not entirely obvious. For instance, Matthew Slaughter, writing in today’s Wall Street Journal, points out that bailing out automakers would have deleterious consequences for the movement of goods and capital across borders. How so?

In the first place, foreign companies would be discouraged from bringing their operations to a country with a habit of protecting its domestic nameplates from competition—even though that competition provides good jobs for Americans, too:

In 2006 these foreign auto makers (multinational auto or auto-parts companies that are headquartered outside of the U.S.) employed 402,800 Americans. The average annual compensation for these employees was $63,538.

At the head of the line of sustainable auto companies stands Toyota. In its 2008 fiscal year, it earned a remarkable $17.1 billion world-wide and assembled 1.66 million motor vehicles in North America. Toyota has production facilities in seven states and R&D facilities in three others. Honda, another sustainable auto company, operates in five states and earned $6 billion in net income in 2008. In contrast, General Motors lost $38.7 billion last year.

Across all industries in 2006, insourcing companies registered $2.8 trillion in U.S. sales while employing 5.3 million Americans and paying them $364 billion in compensation.

Secondly, says Slaughter, bailing out the Detroit Three would “entrench and expand protectionist practices across the globe, and thus erode the foreign sales and competitiveness of U.S. multinationals.” Again, Americans would lose jobs:

… these companies employ more than 22 million Americans and account for a remarkable 75.8% of all private-sector R&D in the U.S. Their success depends on their ability to access foreign customers. They do this two ways. They export goods from their U.S. parent companies. And they sell goods locally through foreign affiliates. These foreign affiliates are built by direct investment of American companies in other countries. In 2006, U.S. parent companies exported $495.1 billion to foreign markets. That same year their majority-owned affiliates earned over $4.1 trillion in sales – $8.33 for every $1 in exports.

The Detroit automakers, of course, are among the U.S. multinationals that benefit greatly from selling in foreign markets—markets they might find closing up if U.S. policies embolden protectionist sympathies.

Posted on 11/20/08 05:32 PM by Alex Adrianson

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