Detroit: Bailout Necessary Due to Unlevel Playing Field

Austroglide posted on Sat, Dec 6 2008 3:00 PM

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It's the 1st time I've seen Peter Schiff dodge a point, and at the time I couldn't think of the correct economics either:

In this interview [ http://www.europac.net/Schiff-CNN-12-4-08_lg.asp ], the mayor of Detroit argues that the automakers need a government bailout because, among many other reasons, their foreign competitors are currently being subsidized by their home governments and, as a result, Detroit cannot compete with them.

Let's assume for the sake of argument that this is true.  Here's what Robert P. Murphy has to say:

"Fair Trade"

"Many people deride free trade and instead champion what they call "fair trade." To the extent that this is a voluntary plea for consumers to refrain from purchasing the products of slave labor, I have no problem with the movement. But often the proponents of "fair trade" want to use the US government to penalize imports made by foreigners earning low wages or by companies receiving subsidies from their governments. Both accusations have been leveled against Chinese imports that allegedly are "unfair" to their American counterparts.

It is true that the average Chinese worker earns a lower hourly wage than the average American worker. Our workers (in general) enjoy better training, as well as the use of more capital and superior legal institutions. American laborers are hence more productive, and that's why they get paid more. It is also true that in certain industries, American firms can't stay competitive with Chinese imports if they have to pay wages attractive to US workers. Yet that is exactly what should happen when two countries trade with each other; relative prices and wages channel the workers in each country into those industries in which they have a comparative advantage. If cheap Chinese imports didn't put some US manufacturers out of business, then what would be the point of trading with China in the first place? You trade with others so you don't have to make everything yourself.

Regarding foreign governments' subsidies to their manufacturers, we must never forget that receiving gifts doesn't make one poorer. Even in the "worst case" scenario, where the Chinese government (say) completely subsidizes its TV exporters in order to ship US consumers free plasma screens, this would be a boon to the American economy. Yes, it would put US television producers out of business, but it would allow US consumers to get TVs for free. After American workers had reshuffled in response to the free goods, per capita US income would be higher; instead of using scarce resources to produce television sets, we would now be showered with them for free and could use the freed up resources to produce additional goods and services. If, instead of free imports, American consumers receive merely cheap imports, the principle is the same: Foreign governments taking money from their own people and giving it to American consumers doesn't make us poorer."

link:  http://mises.org/story/1979

So, in the face of subsidies to foreign car manufacturers by foreign governments, the correct policy looks to be "Great, let's enjoy cheaper vehicles, courtesy of (whichever country). "  As for Detroit, again assuming for the sake of argument that foreign competitors are being subsidized, the workers and owners of capital must suffer the individual consequences for the sake of the greater good. 

In the short run this is some hard truth to face, to be sure.  But the general standard of living will thus be increased.