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Perspective: Was it just a Big3 Bailout?

Posted by: pjeanty

Tagged in: Untagged 


At the Washington DC Auto show this year, President Obama had his victory lap - photo opp from feeling vindicated after a tough decision politically and financially.

The Auto Industry Bailout has given Obama lot of strength and hope and was stressed in his State of the Union Address on his decision for the Auto Industry Bailout.  Obama is using it as a strong campaign tool because the GOP had opposed it then.   

Paul Krugman writing for the New York Times reviewed both Obama and his state of the Union Address and clearly pointed out the Bailout was actually not targeted at the Big3 but the whole Auto Industry ecosystem.  The Auto Industry could have taken down lots of dependent companies down under if the industry had been allowed to collapse.  So the key takeaway from Paul’s analysis for us here is that the entire Auto Cluster was saved because of the Bailout.

It can be taken similarly that allowing the Big Investment Banks to be taken over or merged helped prevent further collapse.  By keeping interest rates close to Zero till 2014, the government is offering sufficient time for the market and economy to recover slowly.   The government understands that the markets cannot recover overnight and hence is betting on a slower recovery and deploying the financial tools at its disposal.

So, saving the cluster in any sector remains paramount to any stimulus decisions, not the individual companies.  Krugman rightfully points out when companies get their work done in other countries, it is not because that country has cheaper wages, and it is because it has a better eco system. 

Pondering over that statement and looking at India and China, India had a huge English Speaking Educated Graduate population which was just ripe for the outsourcing idea to fructify while China had well organized Industry clusters which allowed companies to reduce costs by getting products manufactured there with high quality at lower price. 

The price parity is largely again because of currency difference and not because of a difference in standard of living when compared ratio wise of costs, savings and expenditures.  These same industry clusters were once in the USA and no longer are there now.  Hence if the same jobs have to be created, it is paramount to create the Ecosystem which is no longer possible.

Despite the high cost of living, Silicon Valley wasn’t impacted as much by recession as were other areas.  People still flock to the Bay Area seeking jobs.  Despite a weak economy and the century’s worst recession, areas which contain clusters for say industries like pharma were not impacted as much as other areas.  

America should focus on creating these clusters again.