Tom Friedman and Don Boudreaux: Arguments Against the Auto Bailout

Lynne Kiesling

Tom Friedman and Don Boudreaux are making different, but complementary, arguments against the auto bailout.

If you think that you recognize Tom Friedman’s argument in his most recent NYT column, you should: he is analyzing Better Place and its business model, which I did in this post from December 5. One important point from Friedman’s column:

What I find exciting about Better Place is that it is building a car company off the new industrial platform of the 21st century, not the one from the 20th — the exact same way that Steve Jobs did to overturn the music business. What did Apple understand first? One, that today’s technology platform would allow anyone with a computer to record music. Two, that the Internet and MP3 players would allow anyone to transfer music in digital form to anyone else. You wouldn’t need CDs or record companies anymore. Apple simply took all those innovations and integrated them into a single music-generating, purchasing and listening system that completely disrupted the music business.

What Agassi, the founder of Better Place, is saying is that there is a new way to generate mobility, not just music, using the same platform. It just takes the right kind of auto battery — the iPod in this story — and the right kind of national plug-in network — the iTunes store — to make the business model work for electric cars at six cents a mile. The average American is paying today around 12 cents a mile for gasoline transportation, which also adds to global warming and strengthens petro-dictators.

Do not expect this innovation to come out of Detroit. Remember, in 1908, the Ford Model-T got better mileage — 25 miles per gallon — than many Ford, G.M. and Chrysler models made in 2008. But don’t be surprised when it comes out of somewhere else. It can be done. It will be done. If we miss the chance to win the race for Car 2.0 because we keep mindlessly bailing out Car 1.0, there will be no one to blame more than Detroit’s new shareholders: we the taxpayers.

[I love being able to say this!] Advantage: Knowledge Problem!

Sure, Friedman says it better and to a larger audience, but hopefully if enough of us are piling on to the same message, the point will get across.

Similarly, Don Boudreaux has a commentary in today’s Wall Street Journal on why auto company bankruptcy is not the catastrophic idea that the “Big Three” and some members of Congress would have us believe:

Bankruptcy doesn’t make assets — such as factories, machines, contractual options to buy raw materials, workers’ skills — disappear. If markets still exist for products produced by these firms, Chapter 11 is the best way to discover this. Some workers might lose their jobs and some suppliers might lose their markets, but there would be no industry-wide collapse of the sort portrayed by the bailout’s cheerleaders. …

A government bailout of the Big Three keeps huge amounts of productive inputs in firms that can’t use them efficiently. Forcing taxpayers to subsidize the continued employment of gargantuan quantities of raw materials, labor and capital goods in unproductive pursuits is a recipe for economic stagnation. The popular and politically convenient myth has matters backwards: The bigger the unprofitable firm, the more vital it is that it be allowed to fail.

Note the similarity of conclusion in the Friedman and Boudreaux arguments: the artificial perpetuation of obsolete and unprofitable business models stifles the development of better, more innovative uses of those resources.

2 thoughts on “Tom Friedman and Don Boudreaux: Arguments Against the Auto Bailout

  1. Unfortunaley, Better Place is going to rely on massive government subsidies. That’s the most obsolete and unprofitable business model in existence.

  2. While they’re at it, they might as well at least throw something in the bill mandating that the showrooms serve decent coffee and have a limited number of mirrors.

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