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Bankrupt Bankruptcy

| Glenn MacDonald |

The US bankruptcy process is designed to be an orderly way to preserve any value that is left in the bankrupt business, and treat the creditors fairly and consistent with their contractual rights. This process has been honed through use and generally functions highly effectively. The point of preserving value is obvious enough. Fair treatment of creditors is not about fairness per se, but rather about investor investor protection generally, i.e., in the US, to promote efficient credit markets, investors are generally well protected, including in bankruptcies. The recent GM bankruptcy is an interesting case of how this process can be made to fail, mainly through rushing the process and dictating its outcome rather than by letting the process do what it was designed to do.

Specifically, much value was wasted. For example, among car aficionados, there are few brands more revered than the Pontiac GTO; this persists despite the weak offering brought out in 2004. Where is the GTO? On the scrap heap with the rest of Pontiac. A more deliberate bankruptcy would have preserved this value, e.g., by folding parts of Pontiac into Chevrolet. Second, GM’s creditors rightly claimed they were wronged by allowing the sale of all good GM assets to the new GM, owned mostly by the government and the UAW, and denying them the rights to argue their case to the bankrupcy court. They correctly argue they were robbed.

Who are the main beneficiaries of this mess? To the extent that despite the poor reorganization, GM is actually worth something, obviously the Federal government and the UAW benefit from the treatment of creditors. But more importantly, this is terrific for GM’s competitors, who have much to gain from GM’s remaining value being wasted through a weak product line, politically driven lack of cost reduction as inefficient facilities are retained, etc.

18 September 2009 at 7:45 am 3 comments

Climate Change Economics

| Glenn MacDonald |

Some thoughts about how carbon emissions will evolve. Assume carbon emissions cause climate change. (Obviously this is controversial. But I have nothing new to add to this and so am willing to grant this assumption.) There are two fundamental economic forces at work. One is that emissions are a classical prisoners’ dilemma. That is, reducing emissions is costly, and the benefits to any one country are mainly enjoyed by others. Thus, in equilibrium, there will not be a lot of effort devoted to reducing emissions. Getting around this would require either some sort of external enforcement, e.g., the United Nations (pause for laughter!), or some approach based on repeated interaction; unfortunately the latter requires more patience and information than is realistic in this situation. Thus, consistent with the data, emissions will grow, and, per my assumption, climate change will ensue. Second, tastes for amenities such as clean air appear to be normal goods, maybe even luxuries. Individuals in China, eastern Europe, . . . appear to have little interest in these amenities, given what they might have to forego to have them, whereas many in the US, Canada, western Europe, . . . seem more inclined to pay a little more for green goods and services. Thus, efforts to reduce emissions will grow as more and more countries prosper sufficiently that their inhabitants are willing to forgo consumption for cleaner air, etc. So, from an economic perspective, the most realistic way to fewer carbon emissions and (per my assumption) less climate effects is through the aggressive promotion of activities that promote growth: free trade, democracy, economic freedom, reduced taxes, regulations and tariffs, protection of property rights. . . . Interestingly, freeing individuals to pursue their interests is likely the best practical/realitic approach to what, at first blush, seems like a classical case for collective action.