What’s the Point of Bailing Out the Auto Industry?

Governments intervene in markets all the time — and they should, in order to make markets more competitive; to solve problems of externalities (which are ubiquitous); to resolve difficulties caused by individuals’ shortsightedness, including the spurring of innovation; and to reduce transactions costs.

Where does the auto bailout fit in?

It certainly doesn’t make markets more competitive; instead it subsidizes American oligopolists. It certainly doesn’t spur innovation; while the provisions may talk about this, bailouts have proven to be a poor way of getting firms to innovate.

It doesn’t reduce transactions costs; Chapter 11 bankruptcy procedures exist for that purpose, and they do well at it. The only possible economic argument might be fear that a bankruptcy by G.M. might spook many other markets. What about a bankruptcy by Wal-Mart? It’s much bigger than G.M., so wouldn’t the spooking effect be bigger?

Let’s face it — the bailout is purely political, pushed by troglodyte companies and their unions of high-paid workers, and helped by their agents — elected representatives from the many states in which auto production occurs. Once again, as was true with the Chrysler bailout of the late 1970’s, the taxpayer will take a beating. To quote the old protest song, “When will they ever learn?”


pelayo@cms

Excellent point saving the auto industry will do nothing for the country just help those involve in it. The governments doesn't learn from the past. What about in 30 years time will the auto industry need another bail? The bailout will just extend the life of those companies. They are like a patient in a coma who is kept alive by tubes. They will eventually die, what is the point of extending its life?

Mike

Isn't the chilling effect of GM bankruptcy in other markets THE valid reason to bail out the big three domestic automakers? It seems that is the rationale that is most often cited in the media that I have seen at least.

Robert

I think we need some kind of legislation that comes up with a new type of corporation - the "too big too fail" type. If a corporation is of this type, various restrictions and oversight are put on it to prevent it from failing in the first place.

BTW - I thought Chrysler paid back the loan with interest so how the the taxpayer get hurt?

Jared

Amen. Although you left off one "benefit"--the bribes that Congressmen might be taking from the industry and/or unions.

Brian Befano

Mike, if that is the valid reason then really no other fortune 500 company can go bankrupt either. That is the point, if the bailout is to prevent other markets from spooking then how can you let any other large company fail. Are you willing to turn our economy into State controlled, or directed, business because you are afraid of spooking markets?

Mike B

The point of the bailout is that with every other country constantly bailing out their own industries and subsidizing them with health and retirement benefits domestic auto manufacturers are in a long term structural disadvantage no matter what products they produce. So unless you want this to be a country that buys everything from overseas we need to step up and get dirty just like every other nation has least we follow in the footsteps of the UK which no longer has a car industry.

BTW I thought that Chrysler repaid all its loans from the last bailout.

Witty Nickname

The nation's fourth largest city, Houston, got slammed by a major Hurricane in September, money from the federal Government has been slow in coming to the point where the state has had to fill the gap.

But Michigan, here is your money pail, keep being a swing state and the pigs in Washington will fawn for you.

Daniel Ivandjiiski

Totally agree with the author... enough cronyism and socialism

charles

I remembered when TV's died in the US. Boy, we are hurting in that department now.

Alfred C. Ingram

Nice display of intellectual laziness.

No antibiotics for people whose hygiene is poor? Even if it might keep the rest of us from their contagion? Statrs to seem absurd, doesn't it?

Scott Supak

So, then, you were against the much bigger Wall Street Bailouts?

Talk about high-paid workers!

But this myth of high paid union workers is getting old. Fact is, the people who are against the auto bailout are from right to work states with large foreign owned auto plants.

There are many reasons to be against the bailouts, mostly starting in the board room. To blame the union workers, who have made plenty of concessions is disingenuous at best. At the very least, though, we should be consistent. If Wall Street deserves to bailed out, at much higher cost, then why does Detroit not?

Alex B

I thought it was because now-a-days bancruptcy means certain liquification.

Mike

Brian, if I'm not mistaken, GM and Ford are both top 10 on the Fortune list, so I would say anything that large is a different case from, say, number 490 on the Fortune 500 list.

Similarly, I would say that ExxonMobil and Wal-Mart are also part of the category of companies that are 'too big to fail'.

DJH

The proposed bailout is even worse than you characterized it, Dr Hamermesh. It's not mere politics at work. It is, rather, bona fide, out-and-out, plain-to-see blackmail.

Why do I say that? Look at how it's being presented by its own advocates: "Bail out the Big Three, or a million people will be out of work!" To me, that constitutes a threat, and cannot be called anything else. They've dismissed the option of bankruptcy out-of-hand, even though this sort of thing is EXACTLY what bankruptcy is designed to take care of. Rather than do that, they're opting for extortion.

Having said that, this matter isn't all that simple ... other countries have already bolstered their own car companies. This means there is no worldwide level playing field on which the Big Three can operate; some of their competitors have gotten help.

So am I saying we should bail out the Big Three, in spite of their extortion attempt? I honestly don't know. As you point out, the Big Three's own practices, as well as the unions, have contributed to the problem. Just throwing money at them because other countries have thrown money at their own auto makers, will not help substantially. The business will have to change. But I'm not foolish enough to think that it's government (aka "the Car Czar," a catchy phrase but a silly notion!) which should do that.

That other countries' governments have involved themselves means that ours most likely will have to play at least some role here ... but just paying off the Big Three is not the best option. Rather, what's required will be a subtle combination of less-drastic actions on the part of everyone concerned. I am not confident, though, that anyone involved ... government, the companies, the unions, or even consumers ... understand the problems enough to solve them, using such an approach.

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Patrick

GM is the 11th largest company in the world by revenue. Depending on how you look at it, you could argue that means it is the 11th most "economically impactful" company in the world. The ripple effect from the company going bankrupt would be enormous - an elimination of $300 billion worth of spending from the world (but primarily US) economy. Even if a cash infusion just delays the inevitable by another 5 years I say it's worth it. We don't need an "anti-stimulus" of that size at this point in time...

Imad Qureshi

Daniel I think you are just thinking using classic Economic principles and since you are a micro economist i think you are ignoring a lot of other things. If times were normal I would have agreed that let these automakers fail. They should file chapter 11 and restructure. But this is just not the right time. Did you see latest unemployment report? Ford said it could survive without help but did you ever wonder why Ford would ask government to help one of its major competitors? Clusters !!. If GM goes down so would many of its suppliers. Bailout will not be the best use of money in normal times but these are not normal times. One thing that is not being considered with bailout which I think should seriously be considered is scrapping of UAW. There should be no UAW. But this probably wont happen for political reasons. There are too many stake holders. I just hope sanity prevails (that doesn't happen very often in Washington though).

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Ezzie

Governments intervene in markets all the time — and they should, in order to make markets more competitive; to solve problems of externalities (which are ubiquitous); to resolve difficulties caused by individuals' shortsightedness, including the spurring of innovation; and to reduce transactions costs.

What?

1) In what situation does the author mean to imply that government intervention makes the markets more competitive where the markets would not have done so themselves?

2) Which problems of externalities?

3) to resolve difficulties caused by individuals' shortsightedness While spurring innovation is a good thing, doesn't resolving difficulties caused by shortsightedness just promote more of it? Wouldn't failure due to short-sightedness - particularly by a large company - cause more people to be a little more far-sighted?

Nuclear Mom

Agree w/Charles, #9's presumed sarcasm. It's one thing to try to fix a frozen credit market where no one can get credit under any circumstances. It's entirely another to prop up (dying) companies in a vibrant market. Does anyone really think they won't be able to buy a car -- a decent car at a decent price -- if GM and Chrysler go under?

And, um, we ARE making other cars in the US profitably. Better the badly run (whether it's mismanagement, union greed or whatever) companies fail and make room for companies who can succeed. That's been the much-praised reason for America's ability to turn on a dime, as opposed to propped-up state industries in France & Germany.

The money should go to assist workers in downsizing industries to be reemployed elsewhere. That's what economics tells us.

R. Davis

Economists frequently underestimate the utility derived from having stability in one's employment. The free market can swiftly and ruthlessly uproot many, many lives. Perhaps permitting a bankruptcy here would lead to a more efficient allocation of Michigan's resources (away from car manufacturing), but we should not ignore the effects on morale, confidence, pride, and dignity that come with the loss of one's job.

Economist

It's about market failure in the credit market.