I originally sent this next bit to Cecil as a question, but one of his staff read it and suggested I post it here, so here goes:
Well? Have at it.
~SD
First, I don’t think anyone is completely ignoring the ramifications of a GM failure – did you write that before the bailout was announced?
You wrote yourself that folks are saying that the banks are a higher priority. So? That doesn’t make it the only priority.
Anyway, I think the concern is that if the banks fail, all the manufacturing companies will be hurt, since the economy doesn’t work well without liquidity. So, GM failing will hurt GM, suppliers, dealers, business that rely on those entities. A general bank failure will hurt GE, Boeing, IBM, plus GM, it’s suppliers, dealers, etc. So, the higher priority is to take care of the things threatening the whole economy, then the things that threaten parts of it.
To use a bad car analogy, the banks provide the lubrication (liquidity) that lets the motor (economy) keep running. GM provides, I don’t know, the exhaust pipe – without it, the car won’t run as well, but won’t die. Without the lube, the car dies.
Now, lube up and deal with it! (kidding of course)
I don’t know if the government is doing the right thing, but I don’t think you asked that. I think you asked why it was treating the banks with higher priority than the car companies.
What is the average salary of a factory worker? What is the average salary of a Wall Street Banker, including perks and bonuses? Answer those two questions and you’ll understand why economists want to bail out bankers but not factory workers.
For years the central economic dogma in the United States has been that the rich are rich because they work harder and do more valuable work. Hence, the theory goes, we need to keep making the rich richer, so that they’ll agree to continue working. Meanwhile, there’s no need to make the working class richer, because nothing they do is valuable anyway. That’s why we’re giving so much money to the financial sector and relatively little to others in need.
That’s also why the majority of America’s manufacturing has been sent overseas. Economic leaders don’t see any value in having a large middle class based on the manufacturing sector. It never occurs to them that building cars and other necessities is more valuable work than shuffling papers in a bank.
You know, I’ve heard this argument for years, and I just don’t see it. The American middle class HAS gotten richer. I was raised in a middle-class family, the son of a truck-driver, and I have seen the standard of living for the working class increase significantly in my last 40 years.
While I was in the military, I had the chance to live in Tokyo, Spain, Italy, Turkey…all sorts of places. Our middle-class has the highest standard of living I have seen. Even those living below the poverty level in the US live better than the middle class in many other nations.
(I know, this is a hijack, but I just don’t see the merits of this argument. Could someone please explain it to me?)
I think these things are usually done in comparison with people in the same country. Many lower income people in the US are fabulously wealthy when compared to upper income people from 200 years ago, when it comes to having stuff. So what?
I think it’s pretty unambiguous that the upper x% (you choose – 1%, 2%, 5%, 10%) have gotten wealthier relative to the middle 50% in this country, who are barely staying even. I don’t have the energy to look for a cite right now.
In the US in the past, or in many European countries (and Canada) right now, the disparity of wealth is much lower between richer and poorer or between richer and middling than it is in the US. I don’t think it’s a “good thing” to have a big difference between rich and poor. I think Denmark or Sweden is a more pleasant place to live than Niceragua or Columbia. Right now, we’re much more like Western Europe, but for the past 30 years, we’ve been slowly moving in the wrong direction (in my view).
This is really a hijack, so I won’t comment further on that topic.
IMHO - The comparison can be made that the financial industry provides money flow like a municipal utility provides water or electicity flowing. Much of the financial industry is “piped together” so keeping the major parts working keeps the money flowing. We need money flowing, just like we need water or electricity flowing. If enough pumping stations and pipes (financial industry players) break down then the whole system stops the the flow.
Now, the US auto industry builds a product. It’s an important product and it is used in the “flow” of transportation and moving other products. But it doesn’t have the same essential nature or interconnectedness of money flow. So, letting a manufacturer vanish just means that another manufacturer will step in to fill the void in the marketplace. Not quite the same problem.
[Moderator Hat ON]
Edited thread title for clarity.
[Moderator Hat OFF]
I think the major distinction is that the financial system was perceived to have hit a temporary glitch, due to the confluence of some specific recent events (convoluted investment vehicles) and a rare occurance (bubble bursting). The problems of the auto industry are perceived to be more chronic.
So the idea is that if we thrown money at the financial system it will get itself out of the hole and maybe even return money to the taxpayers in the end. Money thrown at the auto industry is good money after bad.
Not that I personally support bailouts of the financial industry either. But the distinction is there.
[It should also be noted, that it now appears that many of the financial firms that participated in the bailout were not in any (immediate) danger of collapse. Some participated by the request of the government, rather than out of their own needs. Essentially they were shoring up their balance sheets by cutting back on lending, and the government asked them to take TARP money instead. Many of these institutions are the ones now looking to return the money once the gov. started attaching strings.]
Irrespective of anything else in the thread… you know, I’ve never in my life heard anyone seriously advance this idea.
In the last forty years? Sure. In the last ten years? Not at all. This graph shows median income, adjusted for inflation. That was flat from 2000 to 2007, and needless to say the two years since 2007 have not been good ones.
Within roughly the last ten years we’ve seen an enormous change in the American economy, with money shifting away from salaried workers and towards corporations. As of 2007, “First, profits stand at 12% of gross domestic product, the highest level since the 1960s and 33% above the historical average of 9%”. (From here) So in short, corporations have been earning a bigger share of the pie. Someone else has to be earning a smaller share of the pie to make up for that. Guess who it is?
This shift has been missed by many people because it’s not the result of an one, big, defining moment. Rather, it results from a lot of little things: tens of thousands of government handouts to big companies, deregulation that allowed the financial industry to rack up profits by unscrupulous means, and decrease in benefits for ordinary workers. But most of all, it’s happened because manufacturing jobs have been exported, and the news jobs that replace them are mainly at Walmart, Starbucks, and the like.
Other than the last one, I don’t see how the factors you list would have the effect you claim. What changed about the laws of supply and demand as a result of these factors?
If big companies became more profitable, than all else being equal they should have been willing to pay more in order to attract the employees they needed to remain big companies (and thus qualify for the handouts, deregulation etc.)
I myself am not sure what changed, but I incline to think it’s all in the last item. And not just manufacturing jobs, but also hi-tech stuff being outsourced to India and elsewhere. And not just jobs being shipped overseas but immigrants coming here and bidding down the price locally as well.
If I had a nickel for every time I heard that, I could bail out GM by myself.
The sectors of the economy that *create *wealth, typically listed as manufacturing, construction, agriculture, and mining, should perhaps be treated more supportively and leniently than those that merely shuffle wealth around, keep a big chunk for themselves, and dissipate it, shouldn’t they? :dubious:
I think this is a big part of it. The financial system has a working model for success. They made some big guffaws, got greedy, were stupid, etc. but the theory is if they get back to doing business they can again be profitable.
The auto industry has no working model and hasn’t for years. Obama and Congress have asked for a plan from them and they can’t seem to come up with anything. They’ve basically thrown up their hands and given up. Yes the US auto industry is huge and effects a lot of people. But if it can’t be self sustaining it just become a charity case. A ginormous charity case.
“Wealth” is not made exclusively through exerting muscles and excreting sweat.
What school or modern book teaches this nonsense?
Concrete tangible products are “wealth” ← this seems obvious
Ideas are also “wealth” ← this is not as obvious, but it is also wealth!
The brick layer does not “deserve” any more respect, money, love, leniency, support than Albert Einstein. The brick layer is not more “noble” because he works with his hands while Einstein works with his brain and just creates intangible math equations.
People make their way in this world based on the exchange value of their contributions regardless of whether that contribution is laying bricks or publishing ideas.
Society has found that ideas such as insurance (risk management), capital pooling, compound interest, etc, etc are valuable. Society (without coercion) has evolved to place more value on people that have mastered financial concepts vs the people that mastered the art of laying bricks.
Those are all some interesting replies.
Now, can I get anyone to think past the next 2 minutes and really examine what the ramifications would be? Fotheringay-Phipps came close with this:
The point is that when a large manufacturer fails, its suppliers fail as well. What do those out of work, blue-collar workers do? What do those skilled trades men and women do? Right now there is a decided lack of need for the particular talents they offer. To use Ruminator’s metaphor, we aren’t building houses, so the brick layer has to do something else right now. He still has to eat, feed his family, etc. So what do they do? They get trained to do other work. Right now in Detroit, local colleges and universities are working to iron out the plans to retrain them into the medical field. Slowly but surely the manufacturing sector fails while the economy slowly “lubes” itself into feeling better. Once things get back to the point that the larger manufacturing facilities are ready to ramp back up, where are they going to find their workers? Sitting around waiting for their jobs back? That could be years. The man who waits for the fish to jump in his lap usually starves.
What happens, is that all the smaller facilities that support the larger manufacturers fail. Their workers go to other trades, industries, etc. And when the time is come, the large manufacturers have to have their suppliers and they need their supplies now. They will turn, as Fotheringay-Phipps intimated to the 3rd world countries where their supplies can be purchased at a much lower price than here in the USA. What is this going to do to all that “lubed” wealth? Where are all those ideas, and back-breaking labor going to be? Not in this country, but sent over seas. All that wealth going out of country cannot be good for the country, now can it?
Are we to become a non-manufacturing country because the ways to shuffle money around are more important than the ability to build the house that shelters you? Hmmm. Interesting. Sounds almost like people want us to become a nation of phone sterilizers.
True, but intellectual property is very hard to maintain possession of.
The point was to differentiate the wealth-creating and merely wealth-redistributing sectors of the economy, and to suggest that the government (under both the previous and current administrations) has had its bailout priorities and attitudes reversed.
I’m really disappointed. I had hoped that there would be just a touch more in the way of responses. I was led to believe that the members of this forum enjoyed a good debate.
The manufacturing businesses were the basis for innovation . There was a continuing improvement in manufacturing processes and and materials. These changes filter out into other businesses. That is gone. All the innovations will be in China and India. There is no way the products of the future will be invented here. Material science will be elsewhere. Cutting age manufacturing will be the property of someone else. We give away a lot when we outsource our jobs and manufacturing . It has profoundly hurt the future of America. But some people made an absolute fortune the last few years .
I think the problem with the financial system is massive, and there is a fear that a collapse of the large banks will bring down the entire economy. I also suspect a concerted effort to conceal systemic fraud that goes beyond Wall Street and would severely damage the reputation of U.S. industry and the government.
The cost to fix the financial system keeps growing. The real cost is probably so high, the administration and large banks can’t fathom explaining it to the public. The auto industry starts to look expendable when it comes down to a necessary choice between saving one over the other.
I do agree with your point about manufacturing. When high tech industry is outsourced, the brain power follows. Engineers and scientists follow the industry. The U.S. is undermining its own ability to compete. There is also a point when outsourcing undermines self defense. The auto industry invests in R&D that leads to new technology, the type of investment necessary to remain globally competitive. I hope U.S. auto in some form is saved.