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The Auto Bailout: So Wrong in So Many Ways

Posted By Nicolas Loris On December 10, 2008 @ 4:29 pm In Economics | Comments Disabled

There’s been a lot of good discussion on the auto bailout over the past day or so. And by good discussion, I mean pointing out how utterly ridiculous an auto bailout is. Our own James Gattuso lays out Congress’s plan [1]in his latest paper:

“Eligibility for the program is limited to firms that submitted restructuring plans to Congress on December 2–thus limiting participation to General Motors, Ford, and Chrysler, since they were the only firms asked to submit such plans.

Aid would be provided in two stages: an immediate bridge loan to forestall possible bankruptcies, and longer-term aid, with repayment over at least seven years. Nevertheless, at current loss rates, the $15 billion would not last long, keeping General Motors and Chrysler afloat only a few months, meaning further funding would likely soon be needed to continue the program.

The program would be overseen by an individual to be designated by the President. This so-called “car czar” would authorize disbursement of money, determine how much goes to each firm, and establish measures for assessing automakers’ progress toward restructuring. This czar would also have extraordinary powers over participating firms, with approval authority over all corporate expenditures over $25 million.”

David Harsanyi makes the public choice, rent seeking argument [2]as to why bankruptcy isn’t an option:

“Many people are asking: Why can’t these companies go bankrupt and reorganize like everyone else? In bankruptcy court, the process allows the auto industry to negotiate with creditors, stakeholders and unions. Well, the auto industry spent nearly $50 million lobbying Congress in the first nine months of this year while unions spent hundreds of millions to put Democrats in Washington. Those are two reasons.”

Here’s Portfolio’s Felix Salmon take [3]on nationalization leading to even more money for Detroit:

“On the other hand it’s bad news for taxpayers, who will pony up billions of dollars now, just to get the Big Three into the new year, and then billions more in January, as part of the restructuring plan, and then untold billions on top of that in the years to come, as no one in Washington wants to take any responsibility for pulling the plug.

And of course it doesn’t stop there. Just for starters, think for a minute about the car czar’s responsibility for Opel, and the negotiations which are going to start up between the US and German governments over the European marque’s fate. On the one hand, Opels are clearly the kind of thing which Congress wants GM to make more of. But they want GM to make those cars in America, not in Europe. And GM has already asked the German government for money to keep Opel going.”

The Baltimore Sun’s Dan Neil thinks nationalizing GM is a good idea because [4]“without big subsidies, there is no way in the near term to build these [electric] vehicles and make a reasonable profit, because of the stubbornly high cost of advanced batteries” GMU economist Don Boudreaux discusses the seen and the unseen of this idea [5]:

“Neil makes several wrongheaded assumptions. For example, he assumes that the future benefits of such a battery would outweigh the current costs of using them. But there’s no way he can know this to be true. These batteries cost a lot today because their production requires an extraordinary amount of resources today.

Using these resources to produce an unprofitable battery means that we sacrifice, TODAY, a great deal of profitable outputs and investments in other industries. Perhaps resources artificially forced into advanced-battery development would otherwise have helped cure cancer, or encouraged development of more fuel-efficient jet engines, or deployed to keep millions of retired Americans more financially secure. Neither Neil nor Uncle Sam can know the value of what would never be created as a result of subsidizing unprofitable production in Detroit.”

I don’t know about you, but I don’t trust Members of Congress or a car czar to make business decisions. Last time I checked we have managers and business leaders who have a comparative advantage in that sort of thing. Good business decisions are rewarded with profits and bad business decisions are punished with losses. Good business decisions create jobs while bad business decisions lose them. And now the government wants to provide taxpayer money to reward the bad business decisions made by Detroit. That being said, bankruptcy is a much better option, as explained by another GMU economist, Walter Williams [6]:

“What happens when a company goes bankrupt? One thing that does not happen is their productive assets go poof and disappear into thin air. In other words, if GM goes bankrupt, the assembly lines, robots, buildings and other tools don’t evaporate. What bankruptcy means is the title to those assets change. People who think they can manage those assets better purchase them. How much congressional involvement do we want with the Big Three auto companies? I’d say none.”

I’d second that.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2008/12/10/the-auto-bailout-so-wrong-in-so-many-ways/

URLs in this post:

[1] James Gattuso lays out Congress’s plan : http://www.heritage.org/Research/Economy/wm2164.cfm

[2] David Harsanyi makes the public choice, rent seeking argument : http://www.denverpost.com/harsanyi/ci_11179143

[3] Here’s Portfolio’s Felix Salmon take : http://www.portfolio.com/views/blogs/market-movers/2008/12/09/nationalizing-detroit

[4] because : http://www.baltimoresun.com/news/opinion/oped/bal-op.gm08dec08,0,5134903.story

[5] GMU economist Don Boudreaux discusses the seen and the unseen of this idea: http://www.businessandmedia.org/articles/2008/20081209130403.aspx

[6] as explained by another GMU economist, Walter Williams: http://www.gmu.edu/departments/economics/wew/articles/08/BailoutsAndBankruptcy.htm

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