Disproportionately Large Bailout?
Last night, Andrew Coyne prematurely began celebrating the demise of the US auto bailout and proclaimed the death of “any last lingering justification for†a parallel bailout in Canada.
Now that American and Canadian governments have committed auto industry support, he pans Canada’s pledge as being “disproportionately large.†(Disproportionate to what, he does not specify.)
Coyne links to a CTV headline: “$3.5 billion auto aid packageâ€. CTV has since changed the figure on its website to $3.3 billion. The Globe and Mail reports “an estimated $3.4-billion†but also explains the numerical differences:
[Industry Minister Tony] Clement would not provide a specific figure, but he said the amount of money in the Canadian bailout represents this country’s one-fifth share of the Detroit Three’s North American vehicle production and on Canada maintaining that percentage.
In other words, the figure is imprecise because Ottawa and Queen’s Park have committed to strict proportionality. (The reported Canadian-dollar figures are indeed worth about one-fifth of the US$14 billion from Washington, as opposed to the old $25-billion figure cited by Coyne.)
UPDATE (Dec. 13): I also note that the CTV story explains, “the [Canadian] fund represents 20 per cent of the proposed US$14 billion dollar package in the U.S.”
Could you tell me what the difference is between the $3 + billion auto package & the $75 billion given to the banks? Both, to me are bailouts only in a different form.
The bank one makes the auto one look like peanuts.
I’m so sick of Coyne. He just seems to get worse & worse. He’s lost any sense of fair reporting in any shape or form. I’m hoping he’ll get a Senate seate then we won’t, hopefully, have to listen to anynore of his diatribes.
But then, we are talking about Andrew Coyne.
One of the great minds of the 18th century.
Disproportionate to the proposed U.S. response. On the theory that the U.S. is 10 times Canada, and they seem about ready to give $14 billion to the auto industry, a proportional response from Canada would be to give the auto industry $1.4 billion.
I think what Coyne is saying is that it appears that relative to our size, we’re about to give the auto industry more than twice as much as the Americans are.
Could you tell me what the difference is between the $3 + billion auto package & the $75 billion given to the banks? Both, to me are bailouts only in a different form.
At this point it has yet to be determined what form the auto bailout will take. The bank bailout though, was simply an asset swap. The government traded secure bonds and t-bills (most of which came from the ones that are used to underwrite our currency) to the bank for their riskier mortgages.
I think Kitchener is correct that Coyne is implicitly assuming that the bailouts should be proportional to population. But I cannot see any justification for this assumption.
Surely a joint bailout should be proportional to the industry’s size on each side of the border. Canada has about twice as much Detroit auto production per capita as the US, so it makes sense that our contribution to a rescue plan would be twice as much per capita.
Why at the very least are we not talking about taking an equity stake in the autos? Why loans?
At Friday’s close, GM and Ford had market capitalizations of $2.4 billion and $7.3 billion respectively. Chrysler is presumably worth less than GM. Therefore, governments could acquire all of the equity in all three companies for not much more than US$10 billion.
Nationalization would give the Big Three access to credit at the same (extremely low) interest rates as governments. This would reduce or eliminate the need for governments to make loans to these enterprises. Instead of getting loans paid back, taxpayers would collect all of the (potential) future Big Three profits.
A formidable obstacle to such a scheme would be formulating a Canada-US agreement for joint ownership of the enterprises. Although Canada could easily borrow the funds to buy them, there would be significant problems with the Canadian state unilaterally taking over enterprises mostly located in the US. If the American government owned these enterprises, it would have a strong incentive to close Canadian plants and invest only in US facilities.
Therefore, governments could acquire all of the equity in all three companies for not much more than US$10 billion.
So what. Just because you own all the shares of a company it doesn’t mean you own the company. At best this would only give the government control over who is chosen to sit on the board of directors.
And we’d also acquire their liabilities (GM says that it’s net worth as of September was $US -60b) and we’d be eating their losses until they become profitable. Whenever that would be.
So nationalize and wipe out the creditors. Or give the creditors what they would get in bankruptcy. Its an ideological / political problem.
Yes, Robert, but owning all of the equity would allow governments to nationalize the companies and exercise any degree of control over management.
Stephen has identified one of the strongest arguments against nationalization. But to the extent that governments are already taking on some of the downside risk by providing loans or loan guarantees, there is a case for also obtaining some claim on the upside potential of future profits.
Yah not to mention the downside risks being taken all over the advanced capitalist zone by nationalizing banks. I do not get the logic here. Banks are worthy because they are a service on real activity but real activity is not worthy of taking-on downside risks? Like what universe is this anyway?
Given the political space, I think the ground is too rigid to plant nationalizing the industry seeds, maybe in Canada but it would never get far in the US. However a private-public model is undoubtedly where Obama is heading. Given the potential size of the financial aid package, what else can tax payer dollars hold out for given the extremely large outlay.
1) Jobs, high quality jobs that is, will be the cornerstone of any agreement. That is we need to have a public guarantee of high quality jobs as a response. However given the capacity issues, I am not sure how that could work, unless the big three help out communities by entering into other business interests that require business like services as, tool and die shops, assembly, metal fabricating etc. Potentially some potential of the big three entering into the alternative energy, outside of auto.
We need to address the jobs issue with a public private response. Similar to the CAW’s announcement this morning, we need to have an agreement that jobs have got to be guaranteed and any adjustments have got to be outside of wage and benefits concessions as only promotes deflationary pressures.
2) As Adam Smith once let us all know, in many cases private investment will in many case of a public good never be made due to the lack of profits. So for example when Henry Ford out out his first auto’s he would not have done so if he also had to pay for roads and bridges construction and maintenance, as the price of an automobile would have been too high. So I see this crisis as w really large opportunity for the environment. One of the many reasons that potentially we have not seen real progress with alternative fuels for auto in a pass production sense, is the lack of profit potential and lack of vision. There are some fundamentally large R&D, infrastructure, and standards development that no one private company could afford and still be viable, given the internatioanl competitive structure to the world auto sector.
Too many free riders and not enough coordination on these activities. I am sure one could model this out fairly easily.
I have a few others but time and space here are not in good supply at the moment.
Automobiles are not a public good; they are rival and excludable.
Stephen you don’t seem to get anything I write on this blog, what is your problem?
Transportation is a public good, and I hate to break it to you, and a good majority of the people in our society rely upon it for transportation, so you can talk about rival and exclusion but your kidding yourself if you view this problem as not a public good.. Built into the core of western society is individualized transportation, and hence public. Yes we have subways and bus systems and the like but, the majority of workers drive a car and that to me transposes an individualized mode into a public good and a public problem. Need I say more. The tech to make this public good a lot more green is also within the realm of a public space, from outlays for infrastructure improvement to service these tech to the tech development themselves are some huge public investment prerequisites.
I think we should be keeping the platforms public but the individual agents on that platform should be private. Hence public roads, private cars. Should have public rail right-of-ways, private rail cars. Should have public fibre-optic platforms, private ISPs. Should have public wireless towers, private cell phone providers. Then the public can control the system of organizing so that it’s in the public interest, while also supporting the largest number of competing agents, who can be charged prices which are either profitable or subsidized based on the public’s need. At some point subsidizing the infrastructure becomes a cheaper way of reducing inflation than the monetary-policy equivalent.
I oppose the bailout, but if we’re going to do it, it should be strict proportionality. I don’t want to send canadian money into a US black hole, but if the US bailout works, we would be freeloading, which is also unfair (which I now care about since Obama won).
I would rather we spend that much money on perfecting the batteries for electric cars. Maybe open source the technology. Then any local plants owned by non-big-3 automakers still get the benefit, so there’s no big hazard about national preference. The problem with hybrid batteries is that the components practically go around the world before they end up in your driveway. So the footprint is bigger than owning a subcompact. If you could get them all made using North American parts, we could eventually end up with an electric vehicle which truly has a lower footprint.
“Then the public can control the system of organizing so that it’s in the public interest, while also supporting the largest number of competing agents, who can be charged prices which are either profitable or subsidized based on the public’s (sic) need.”
Did we not already try this in Canada? At the very least we would need to develop very different institutions to democratically manage the publics’ infrastructure in the publics’ interest.
It appears that governments have obtained claims on some of the future upside potential.
Wow they sure drove a hard bargain with the publics money. 20% of loans can be swapped for equity. When I am so financially distressed that no one will loan me a dime and I go to my version of the state for a bailout Vinny gets substantially better terms. But then again he is only responsible for the good of his family.