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Sunday, November 23, 2008

Auto-Destruct


The Big Three automakers got a cold reception in Congress this week when they asked for a bailout loan of $25 billion. But I wouldn’t count them out just yet. After appropriating over $700 billion to bail out the financial industry — with nothing to show for it but an ominous precedent and a scary accretion of power in the U.S. Treasury — members of Congress may be a little reluctant to hand out more money to demonstrably failing — even de facto bankrupt — companies.

Yet I have a hunch Congress will get over its reluctance, maybe as early as next month. Things just seem to work that way in Washington. Remember the first bailout bill?

Instead of getting a new $25 billion “bridge loan” as requested, the companies will probably have to be content with just a quicker dispersal of a $25 billion loan already approved or a smaller short-term handout — if they can come up with an acceptable plan showing the way to “viability,” an attribute that is very much in the eye of beholder. That $25 billion already approved was supposed to be used to develop high-tech fuel-efficient vehicles. But General Motors, Ford, and Chrysler have a higher priority than new products: immediate cash simply to keep operating. GM and Ford say they could run out of money by year’s end.

Even if Congress passes a compromise bill in December and President Bush signs it, that won’t be the last of the matter. The companies will need more help next year, and President-elect Obama will have a sympathetic ear.

None of this should be happening, of course. There should have been no initial $25 billion in loans for new products. If the products Detroit wants to build show that much promise, let the companies find private investors to throw in with them. ? Do the computer or mobile-phone industries need taxpayer help in rolling out new products? Why must the taxpayers be compelled to kick in money for new cars?

And what about money to keep the companies from going under? Same answer. The taxpayers should not be forced to become investors in companies that have been behind the curve in satisfying consumers for a very long time. What is so irritating about this story is how old it seems. The Japanese car makers have been accurately anticipating the preferences of American car buyers for quite a while. In the 1980s, after Chrysler won loan guarantees from Congress, the Japanese were so good at serving this market that the Detroit firms implored President Reagan to grant them “breathing space” against the foreign competition so they could catch up. In one of his most egregious betrayals of his stated free-market principles (more here), Reagan demanded that the Japanese “voluntarily” restrain their exports to the United States . . . or else. They did so.

This puts the current appeal for rescue into perspective. Yes, the government is partly at fault for the companies’ woes, and the general economy is flagging. But the company mangers and union leaders are hardly blameless. In any event, it shouldn’t be made the taxpayers problem.

America Without Automakers

But even if there were no American factories sporting foreign nameplates, no catastrophe would befall American civilization. David Friedman pointed out long ago that there are many ways to make a car. One way is to build it on an assembly line. Another way is to grow wheat, ship it to Japan, and get a car in return. Both methods of production are perfectly respectable and economically sound. There is no shame in turning wheat or anything else into automobiles. In fact, you might say it’s something of a miracle. (See “The Iowa Car Crop.”)

The point is, “we” don’t have to make everything we use. I really don’t care if an American, a Japanese, or a Korean, or a German makes the car I drive, as long as it does what I want at a price I like. To get the cars, of course, we’ll have to make something else that can be traded. That’s how the division of labor works. If the Big Three are bailed out, we’ll never know what the workers and resources would have been making instead. Whatever it is, I might want it more than a new car.

True, the economy is going into, or is in, a recession and unemployment is rising — the result of years of government intervention. But the way out of a recession is not to prevent the necessary reshuffling of labor and resources. Rather, it is to let the market correct for the mistakes of the past so we can move on to new economic growth and prosperity. Government intervention only delays the process.

No matter how you look at it, saving the Big Three is a rotten idea.

Scarce Resources

What gets lost in the debate is the fact that either the government or the market is going to determine who gets access to scarce resources. Capital devoted to making cars can’t be used to in make anything else. So whether Congress gives or lends the money to the Detroit firms or simply guarantees repayment of private loans, it deprives other entrepreneurs of capital needed for their projects. That means consumers won’t get to enjoy the fruits of those still-born ventures that die for lack of resources. That’s a real cost of government intervention, but since it is unseen, it isn’t counted in most discussions of the proposed bailout. How many congressmen have read Bastiat?

Of course, the heads of the companies predict the direst consequences if we don’t surrender the loot, including mass unemployment and the destruction of American manufacturing. It is encouraging to see these claims met with a healthy skepticism. Detroit may not have noticed that foreign-brand cars built in the United States — Honda, Toyota, Hyundai, Nissan, BMW, and more — make up about half the U.S. market, and their factories will continue humming along even if the Big Three disappear. As long as there are car buyers there will be car makers. Detroit need not be the center of the automotive universe. The sun will rise, and life will go on.

America Without Automakers

But even if there were no American factories sporting foreign nameplates, no catastrophe would befall American civilization. David Friedman pointed out long ago that there are many ways to make a car. One way is to build it on an assembly line. Another way is to grow wheat, ship it to Japan, and get a car in return. Both methods of production are perfectly respectable and economically sound. There is no shame in turning wheat or anything else into automobiles. In fact, you might say it’s something of a miracle. (See “The Iowa Car Crop.”)

The point is, “we” don’t have to make everything we use. I really don’t care if an American, a Japanese, or a Korean, or a German makes the car I drive, as long as it does what I want at a price I like. To get the cars, of course, we’ll have to make something else that can be traded. That’s how the division of labor works. If the Big Three are bailed out, we’ll never know what the workers and resources would have been making instead. Whatever it is, I might want it more than a new car.

True, the economy is going into, or is in, a recession and unemployment is rising — the result of years of government intervention. But the way out of a recession is not to prevent the necessary reshuffling of labor and resources. Rather, it is to let the market correct for the mistakes of the past so we can move on to new economic growth and prosperity. Government intervention only delays the process.

No matter how you look at it, saving the Big Three is a rotten idea.


  • Sheldon Richman is the former editor of The Freeman and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America's Families and thousands of articles.