Thursday, January 15, 2009

A Lesson on Investment

The real question posed by the auto bailout is then clear. Will the benefits, in terms of higher current and future incomes in the auto industry, fully offset the incomes lost as a result of the lost consumption and investment that the bailouts displace?

We are all moved by the visible prospect of lost jobs in the auto industry. We tend to forget the unnamed people who lose jobs or don't get jobs, the businesses that close or the new businesses that don't start, because the bailout displaces productive activities elsewhere.

That's finance economist Eugene Fama at his relatively new blog. The post is insightful. I didn't mention the first part of Fama's post, but it has set off quite a storm (see this post by Felix Salmon for a roundup). So far Fama hasn't responded, but he will have to if he wants the blog to maintain any credibility. I have no doubt he had something like this in mind, but he never fully made his argument clear.

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