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  • Auto Bailout: Stuck in Neutral

    Congress is facing a few road bumps during this lame duck session to pass any legislation. The Omnibus Lands Bill that restricts energy exploration has been put on the backburner, at least for now, to make room for a vote to bail out Detroit. The good news is Democrats and Republicans are at a stalemate when it comes to how to actually help General Motors, Ford and Chrysler.

    The auto bailout debate is heating up and although Republicans, Democrats, the Bush Administration and President-elect all agree that Detroit should not be handed a “blank check” is it really better for the government to take ownership in these companies or tell them how to operate? Last time I checked, that hasn’t worked out so well. In a choice between a bailout and a bailout with strict conditions, it’s best to check off “none of the above.”

    As Robert Crandall and Clifford Winston of Brookings assert, Detroit’s been receiving help for years but it’s done little good. In their 2005 op-ed they write,

    For decades, the U.S. manufacturers have been able to rely on government protection and robust economic growth to mask their fundamental problem: American consumers increasingly believe that other companies produce better vehicles — cars and light trucks — for the money. The federal government tried to help by subsidizing development of new fuel-savings technologies, but this project came up empty when the U.S. companies used the money on trying — thus far unsuccessfully — to develop electric cars and fuel cells while the unsubsidized Japanese companies developed hybrid vehicles.”

    The airline industry typically comes to mind when discussing major bankruptcies:

    Several major U.S. airlines have operated under Chapter 11 bankruptcy provisions. United Airlines has been through it. US Airways and Continental Airlines filed twice. Both Delta Air Lines and Northwest Airlines, which are in the process of combining operations, emerged from bankruptcy court protection last year. Labor contracts were renegotiated, and everyone, from pilots to baggage handlers, took pay cuts. Yet through it all, travelers continued to book tickets to fly.”

    And the Wall Street Journal’s Michael Levine affirms,

    While consumers buy tickets from bankrupt airlines, electronics from bankrupt retailers, and apartments from bankrupt builders, they say consumers won’t buy cars from a bankrupt auto maker. But bankruptcy no longer means “liquidation” or “out of business” to a generation of consumers used to buying from firms in reorganization.”

    And George Mason economist Don Boudreaux finally puts to rest the “Too Big To Fail” claim, arguing that it’s just the opposite:

    These firms certainly are big, meaning that they use unusually large amounts of productive resources. If they have reasonable potential to put these resources to good use in the future, Chapter 11 bankruptcy will likely uncover this fact and ensure that these firms are not disassembled. But if the only way to keep these firms operating is a government bailout, then taxpayers will be subsidizing the continue employment of gargantuan quantities of productive resources in unproductive pursuits. That’s a recipe for economic stagnation. Popular sentiment has it backward: the bigger the unproductive firm, the more vital it is to let it fail.”

    Posted in Economics [slideshow_deploy]

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