GMAC's Lifeline Is the Economy's Noose

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The 18th century French writer Voltaire once observed that the State is "a device for taking money out of one set of pockets and putting it into another." Voltaire elegantly distilled what we're witnessing right now as Washington seeks to prop up what private investors won't: the redistribution of limited capital from the productive to the unproductive. "Stimulus" this is not.

Though economic logic tells us that GMAC should never have received even one dollar of federal largesse, if the planned handout of an additional $5.6 billion is approved by Treasury, GMAC will be the unworthy recipient of $17 billion of taxpayer funds. The latest GMAC lifeline is being defended as a way to revive carmakers GM and Chrysler, which politicians see as important to the health of the U.S. economy.

The problems with this thinking are many, however. Put simply, everything Washington gives out must somehow be paid for, and in this case the political class will seek to stimulate two companies left for dead by private investors. But in order to do so it must by definition depress the commercial outlook for successful companies that don't require government funds to survive.

It is frequently said by Republicans and Democrats that the government served a necessary, economy-boosting role in "bailing out" dying businesses over the past 18 months, but nothing could be further from the truth. To "bail out" the politically connected, one must as a rule harm the economic chances of business entities not so lucky as to have Washington connections.

In this case, just as tariffs subsidize the growth of the inefficient in concert with the starving of the efficient, the funds earmarked for GMAC's continued existence mean that the firms in possession of business plans that might actually be profitable will necessarily go without. The economic impact of such charitably backward thinking promises to be profound.

Indeed, the notion of access to "capital" isn't so much about money per se as capital consists of labor and equipment. When the failures in our midst are given funds by a government lacking any of its own resources, what's really happening is that capital of the human and physical variety is placed into the hands of the talentless over the talented.

Thinking about the above in real terms, if politicians had bailed out failed Internet firms of the Webvan and Globe.com variety earlier in the decade, the losers would have been productive Internet concerns like Amazon and Google, not to mention other technology firms who've yet to improve our lives through innovation. Going back even further in time, had the horse and buggy industry been politically connected, the rise of the previously vibrant U.S. auto industry would have necessarily been slowed for it being less able to access what is always limited capital in order to grow.

In today's case, the "seen" will be the jobs and factories preserved thanks to the continued support lent to automakers headquartered in the U.S., but the "unseen" will be what our economy loses for the entrepreneurs in our midst not being allowed to redirect limited resources to productive concepts that private investors might support. Indeed, not asked enough is what major industrial advances will never see the light of day in order to save a couple of automakers that have so stupendously failed consumers.

Ultimately it all comes down to the basic economic concept that as workers, we can only do so much. And when governments such as ours seek to control the flow of capital from the Commanding Heights, they tragically support unprofitable economic effort at the expense of the profitable.

No doubt if we as individual Americans chose to, we could likely make the best t-shirts, televisions and paperclips in the world, but in order to do so, we would have to cease engaging in other kinds of labor at which we excel even more. The tradeoff would surely be negative, but presently this economy-retarding deal is what's being foisted on us by our allegedly benevolent handlers in Washington.

In short, the bailout of GMAC will do nothing to stimulate the U.S. economy, and a lot to depress it for ensuring the continued misuse of human and physical capital. This should be remembered the next time politicians express hurt over a downcast economic and jobs outlook. Their sadness is all too fake, because the downturn has nothing to do with the private sector, and everything to do with a public sector too self-important to simply get out of the way.

 

John Tamny is editor of RealClearMarkets, Political Economy editor at Forbes, a Senior Fellow in Economics at Reason Foundation, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). He's the author of Who Needs the Fed?: What Taylor Swift, Uber and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank (Encounter Books, 2016), along with Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You About Economics (Regnery, 2015). 

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