Bailing out Detroit

Matthew Yglesias looks at the argument for a Big Three bailout and puts his finger on the problem.

Matthew Yglesias: Bailing Out in the Real World

I feel like some of the commentary on the prospect of an auto industry bailout is starting to remind me of some of the stuff I fell for before we invaded Iraq. The kind of thing where someone yes, “yes this sounds like a bad idea, but if we do it like this and like that and like this then it’ll all be okay, therefore we should do it.” Which is fine. But we also need to ask ourselves, if we accept the proposition of Detroit’s management, the UAW, and Michigan politicians that what’s good for General Motors is good for America, how likely is any of this stuff to happen.

TNR‘s Jonathan Cohn, for example, makes the most persuasive case for a Detroit bailout. Per Krugman’s summary:

If the economy as a whole were in reasonably good shape and the credit markets were functioning, Chapter 11 would be the way to go. Under current circumstances, however, a default by GM would probably mean loss of ability to pay suppliers, which would mean liquidation — and that, in turn, would mean wiping out probably well over a million jobs at the worst possible moment.

In essence, given the credit crunch Chapter 11 bankruptcy won’t work so the only alternative to bailout is liquidation, but liquidation is unacceptable given the macroeconomic situation, so we need to keep GM on life support as a jobs program.

But then read Jon’s colleague Clay Risen also in TNR:

There’s little I could say in addition to Jonathan’s wonderful article laying out the case for a brokered bailout for Detroit. […] But any bailout must be predicated on a planned shrinkage of the three companies. Suppliers need to be transitioned to other firms or industries, employment needs to be gradually reduced, and production facilities need to be shuttered. There should probably be a forced consolidation, too, with GM taking over Chrysler—a move that was already in the works before the credit crunch made it impossible to complete without government assistance.

Now there’s no metaphysical issue or law of nature preventing the government from first keeping these firms on life support as a jobs program, and then when the economy starts recovering beginning to shrink the workforce and drop suppliers. But in the real world, that’s very hard to imagine. If you think it’s politically difficult for politicians to stand aside and do nothing as a situation that threatens to cost a lot of people their jobs develops, just wait ’till you try to tell the White House political office that you want the president to order a round of massive layoffs in key midwestern swing states.

Similarly with all this environmental stuff. GM, Ford, and Chrysler may not be very good at turning a profit by selling cars and trucks but they’ve got a lot of political clout. Perhaps enough to get tens of billions of dollars of taxpayer money. Whatever conditions they agree to, they’ll probably be able to fight off.

I hope I’m wrong about this. But I’m pessimistic. The mere fact that it would be desirable to do something to keep everyone who depends on the car industry for a living that simultaneously restores the domestic car firms’ economic viability and serves environmental policy goals doesn’t make it possible. Generally the reason we try not to have the government running businesses is that promoting public goals and maximizing profits require you to do different things. We normally try to advance policy goals by establishing a framework of taxes and regulations so that firms pursuing their interests will be compatible with the public interest. But if GM is going to be a welfare agency, it’s hard to also expect it to be a viable company that will rapidly get off the federal teat.

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