"You don't need banks and bondholders to make cars"

So says an unnamed official of the Obama administration in connection with the administration's attempts to privilege the junior claims of the UAW over the senior claims of Chrysler and GM bondholders. The statement has been criticized as stunningly ignorant and so it is.

Of course, cars - and lots of other things - have been made without banks and bondholders. Government can appropriate and allocate capital and make things like the East German Trabant. But without profits, capital tends to shrink and, without price signals, it tends to be misallocated. Trabis continued to be built because nothing else was.

We might dismiss this as an ill considered remark by a single official of unknown importance, but we can see its influence on administration policies. The deals proposed by the administration are an attempt to use the power of the state to scare creditors away from exercising their legal rights. Given the administration's demonstrated penchant to use money it does not have (as it borrows at staggering rates) to influence decisions that it knows nothing about (like restructuring auto companies), the scope of the political world seems to be expanding exponentially.

It is not surprising that a group of Wisconsin legislators would protest Chrysler's plan to close its Kenosha plant. They are politicians and their constituents are here. But when capital is allocated by command, they direct their protests to other politicians who will respond to them as politicians. If our guys have more pull, then cars are built in Kenosha. If Michigan's pols have more weight, they'll be built there. Or they will be built in both places. If this turns out to be a good business decision, it will be so by coincidence and not because the choice was made for the right reasons.

It would be going too far to say that the Obama administration has undercut the rule of law, displaced the role of profits and confounded the importance of price in allocating resources. But it has moved more quickly and gone further in that direction than I would have thought it would.