Posted by: Jeff | May 4, 2010

Making Peace With Creative Destruction

Andrew Sullivan and Megan McArdle had a quick but interesting exchange over the merits of the auto bailout a few days ago. The interesting part was when McArdle pointed out that it would’ve been cheaper to just give all the autoworkers who lost their jobs $100,000 to start over.

McArdle may have intended that flippantly, but I actually think it would’ve been a pretty good idea and a more effective long-term response to the problem. When you’re talking about giving someone and their family the resources they need to transfer out of one industry and into another – think time, moving expenses, training, eduction, etc. – a sum in the area of $100,000 is probably what you’re talking about.

Now, McArdle thinks the reason the Obama Administration went with the bailout was to pay off the unions, as they’re a favored interest group of the Democratic Party. That’s certainly plausible, and I’m a cynical guy so I think intellectual consistency demands I give credence to that theory.

But I think a deeper reason was a simple failure to think outside the box. The auto industry represents a particular model of economic life in America; workers with a lifetime commitment to one trade and one company, that company’s reciprocation through generous pensions and benefits, and larger communities who are more or less economically dependent on the ongoing health of that company. That model has become pretty deeply embedded in the American psyche at this point, with some pretty positive undertones. And certainly the stability and interdependence it represents deeply informs the economic liberalism of a lot of Democrats. So the desire to prevent a further shock to the economy of the northeast and the loyalty to the unions all dovetailed with the desire to preserve a particular way of life.

The problem, of course, is that this way of economic life is no longer viable, and hasn’t been outside of a longish period in the middle of the 20th century. Free market competition has now gone global, with all the continuous and widespread creative destruction that entails; America has been kicked off our invulnerable perch on top of the economic pedestal, and we aren’t getting back up there.

So yes, McArdle’s right that the auto bailout was “a gross allocation of economic resources.” That gets us back to the idea of giving all the autoworkers $100,000, which strikes me as a good starting point for figuring out how to empower Americans to ride out creative destruction rather than fight it. Obviously, a real-world policy would need to be more nuanced and complex; you’d need to do things like index the stipend to inflation, make some of it conditional on workers getting retraining or further education, and maybe means-test it according to economic and geographic circumstances. And there would be the deeper problem of figuring out who counts as a victim of creative destruction in the first place.

But if America is going to make its political peace, and more importantly its cultural peace, with a dynamic and competitive globalized world, then I think this is the sort of direction we need to be thinking in.

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