Brian Deese hails from the establishment elites: the son of an engineer specializing in “renewable energy” and a political science professor at Boston College, he majored in political science at Middlebury College, went on to Yale Law School, took leave to become deputy economic policy director for the Obama campaign, then moved on to the White House’s National Economic Council. The New York Times recently profiled  Mr. Deese, 31 years old, as the face behind the dismantling and restructuring of General Motors:

Mr. Deese’s role is unusual for someone who is neither a formally trained economist nor a business school graduate, and who never spent much time flipping through the endless studies about the future of the American and Japanese auto industries.

The profile quotes Lawrence Summers on Deese:

“And there he was in the Roosevelt Room, speaking up vigorously to make the point that the costs we were going to incur giving Fiat a chance were no greater than some of the hidden costs of liquidation.”

Yet Mr. Deese’s impressive legal and politically scientific education has apparently not instilled in him any basic understanding of opportunity cost. Presiding over General Motors’s operations should teach him a few lessons, which he is likely to ignore, as have scores of career bureaucrats preceding him. The argument Mr. Deese employed in favor of nationalizing General Motors — that costs to the government would be greater under dissolution due to associated unemployment and insurance expenses — betrays inability to see past the numbers in front of him.

Mr. Deese was not the only one favoring the Fiat deal, but his lengthy memorandum on how liquidation would increase Medicaid costs, unemployment insurance and municipal bankruptcies ended the debate.

This simplistic approach to the cost equation takes for granted the immediate negative consequences of liquidation but looks no further. It doesn’t factor in the future, possibly perpetual, operating losses of an inefficient company still burdened by unreasonable contractual obligations to the UAW. Also, it doesn’t take into consideration the high likelihood that the majority of workers terminated in the wake of liquidation would soon find employment elsewhere (restoring a significant fraction of the lost income) instead of eternally remaining on the dole.

Unprofitable ventures have been regularly going out of business since the dawn of the Industrial Revolution. According to Mr. Deese’s line of reasoning, every market-dictated liquidation yields permanent unemployment. If so, vibrant market economies with fewer barriers to exit (as well as to entry) would be plagued by the highest unemployment rates in the world — an obviously absurd conclusion. Contrary to Mr. Deese’s cost-benefit analysis, liquidation of an unprofitable venture does not mark a black hole of spiraling unemployment and welfare costs, but rather a reallocation of scarce resources (including capital and, most importantly for the administration, labor) toward productive ends. In fact, it makes more sense to speak of the hidden costs of nationalization rather than those of liquidation. The billions funneled to bailout General Motors and the workforce tied to it could be put to more profitable uses by the market. But D.C. bureaucrats cannot see the unrealized private alternatives to the taxpayer money they are spreading around; they only see the palpable, if temporary, salvaging of a constituency-group’s pet-cause. The abstract (but oh so real) opportunity costs are flushed down the political blind spot.

It does say something about the merits of General Motors’ nationalization that its biggest champion in the administration was a political science major law-school quasi-graduate with no business experience.

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This entry was posted on Tuesday, June 2nd, 2009 at 4:38 PM and is filed under Contentions. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.