What To Do About The Auto Industry

The automotive industry has been going before Congress with a mixture of groveling, implicit threats, and dooms-day scenarios, proclaiming the urgent need for a bailout of their industry. It is true that if the auto industry fails, there will be some heavy initial job losses for people who are currently employed by Ford, GM, and Chrysler. On the other hand, who is to say that a $25 billion low-interest loan to these companies will do anything to contribute to their long-term viability.

Congress has been responding to this by demanding that the Big 3 draw up plans for their viability and present them before Congress. This approach is ridiculous. Congress has no ability whatsoever to judge how likely the business plans are to succeed. Having Senator Dodd or Barney Frank put their stamp of approval on GM's business plan says absolutely nothing about how the market will value the companies' products and business strategies.

Another problem with the potential bail-out is the precedent it sets. What distinguishes the auto industry from any other major US industry (aside from its inability to be competitive)? What if the pharmaceutical industry knocks on Congress' door, or large energy companies, or agribusiness? Will Congress expect all of them to draw up business plans for Congress to evaluate? The whole notion is patently absurd.

My preferred approach is to let the marketplace decide the fate of the auto companies, just as it does all other companies. In the meantime, the government should focus on helping out the workers themselves who would be potentially affected by a bankruptcy. These workers should not get any more insurance or protection than workers at other US companies, nor should they receive less. I do not doubt that a bankruptcy would have some negative short-term consequences for the US macroeconomy, but that is no different than any other major loss of jobs. If we start meddling in the economy to prevent companies from failing, in the long-run all we will really end up doing is to ensure that fewer companies end up truly succeeding. That is a consequence we should all hope to avoid.