Did the Gummint Make Money on the AIG Bailout?

This has been the subject of some debate over the last day or so. The Treasury announced it had made an $18b profit. Watchdog Neil Barofsky and blogger Henry Blodget got into a little Twitter spat over it, leaving completely unsatisfied. Dreading the task of attempting to look into it more deeply, I instead partook of various diversions such as a the Yankees-Red Sox game and red wine.

I'm happy to report though that physicist Steve Hsu has accepted the premise (that the AIG bailout was profitable) and that's good enough for me. But that then conjures up a disturbing paradox.

Intuitively, one feels that bailing out blood-sucking financial institutions (like AIG and the banksters) is a bad thing, while bailing out actual goods-producing firms (like GM) seems rather virtuous. But it looks like bailing out the vampire squids is actually profitable - or at worse break-even - while rescuing the manufacturers has led to losses.

Hsu expected the AIG bailout to be profitable because the tendency of markets is to both overshoot - and undershoot - value. So at the depths of the depression, when the bailouts were instigated, financial assets were generally undervalued, thus providing a good buying opportunity for the Treasury. And especially in the meltdown, financial assets were in a state of complete chaos valuation-wise - no one really had a clue about their intrinsic value, as no one had a clue about what could be paid off and what couldn't. But with financial assets, liquidity in and of itself can stabilize financial assets and thus raise their value (assuming the reduced value is due to lack of liquidity).

But with manufactured goods, far more of their value is built into the goods themselves (at a minimum, scrap value). Sure, the value of any good will be depressed during a recession due to the demand curve, but the value of a car is not dependent on who has possession of it at a given time. A mortgage, on the other hand - or a CDS - is indeed entirely dependent on the specific counterparty. Thus, bailing out GM does not ipso facto increase the value of their manufacturing plant nor of their cars. By the same token,neither did the poor fiscal shape of GM affect its intrinsic value.

In a pure bankruptcy, GM's liabilities would have been abrogated and it's assets sold at auction. Assuming GM cars would have any marketability, it's inconceivable that it would not have survived as an auto-manufacturing concern. What could not have survived is the U.A.W.'s role in the new G.M. That is what Obama bailed out - not GM, but the UAW, which is why there will be no GM-bailout profit.

Stuctural or Cyclical?

There's a little skirmish going on between the Keynesians and the more conservative economists over the underlying source of our current travails. Team K (Keynesians), most prominently represented by Krugman, insist the problem is lack of aggregate demand which can be solved by government the handing out jobs. Team S (Structuralists), insist unemployment is structural, meaning the unemployed lack the proper skills to be productive in today's economy, and so such government intervention would be useless. Here's the K-Man:

What does it mean to say that we have a structural unemployment problem? The usual version involves the claim that American workers are stuck in the wrong industries or with the wrong skills...but...contrary to what such stories suggest, job losses since the crisis began haven’t mainly been in industries that arguably got too big in the bubble years. Instead, the economy has bled jobs across the board, in just about every sector and every occupation...So all this talk about structural unemployment isn’t about facing up to our real problems; it’s about avoiding them, and taking the easy, useless way out. And it’s time for it to stop.

It sounds to me though that it's the Keynesian-approach that is the easy way out. Who wouldn't want increasing wealth to be as easy as spending a whole bunch of government-created money? No one who believed that such policies could work would object to doing it. Tyler Cowen, from Team S, responds here. While characteristically opaque, I think what Tyler is saying is that "structural" unemployment need not be concentrated in specific industries, but can be manifested in widespread chronic unemployment. Let's remember that this Great Recession wasn't a shot out of the blue - we had the Internet Bubble bursting in 2000, followed by 6 years of very anemic growth accompanied by a massive housing bubble. This has been going on for quite awhile.

One thing I don't hear too many people discussing these days is the apparent unwillingness of Corporate America to train their own workers. There is much gnashing of teeth over the dearth of STEM graduates and it is indeed distressing seeing so many young people graduating college with useless majors like journalism and communications. But in past decades people with non-technical degrees - or quite often just high-school graduates - could get hired by a large corporation and learn COBOL or accounting basics or whatever. A few months ago I heard the chairman of Caterpillar complain on SquawkBox about the lack of trained mechanics to service their high-tech equipment. No one on the panel asked him why Caterpillar doesn't train them.

One obvious disincentive is poaching - companies get real sore about investing in employee training only to have newly-trained workers leave for a higher salary. In the old days, presumably, a mutual sense of loyalty limited this problem. But such ideas are now quite passe. Corporate America's view of colleges is now much like the NFL's - a recruiting ground for fully-trained star players who only need some additional coaching on some organizational specifics. It's probably a no-brainer for any young person that if you're smart enough to do well in engineering or computer science or quantitative analysis that's how you ought to proceed. But if you're not - and the vast majority are not - it's pretty tough to figure out which field is going to get you somewhere. When companies did their own training, that kind of took the guess work out of the equation.

My feeling is that Krugman is wrong and we cannot cure our ills by artificially boosting aggregate demand - and that the problems run deep as the Structuralists contend. But this structural problem is much deeper, and no one is really thinking very deeply about what to do about it.