Why We Shouldn't Bail Out Detroit

As a fervent supporter of the bank bailout in September and supporter of government intervention in economics a fair share of the time, I initially supported a bailout for the troubled American automakers. I also based this support on concerns of what bankruptcy would do to auto workers, suppliers, dealers, the Michigan economy, and the American car. Finally, I based this support on the opportunity it could potentially provide environmentally. I thought this could be an opportunity to force automakers who accepted government money to develop electric and hydro-powered cars and decrease fuel emissions.

A discussion with a co-worker today made me reconsider my position in bailing out Detroit. My co-workers and I typically solve the world's problems, so tackling the fledging auto industry was no surprise. Also, we combined his late night viewing of Charlie Rose and my readership of The Economist to develop our sweet plan. We in no way are economists or have any sort of expertise in this field. We're just a couple of people trying to solve the world's problems.

Anyway, we decided as follows:

The companies should be allowed to fail. The auto industry is not like the banking industry; it's failure will not effect every aspect of the economy. The banks needed saved because banks lend each other, and us, money, and it is that money that keeps our payroll checks coming in, our grocery store shelves stocked, and our daily lives humming along. GM going under will have a ripple effect on dealers, suppliers, and towns beholden to the auto industry. This is where I still want a bailout, but instead of bailing out the companies themselves perhaps the federal government can use that money to bailout these effected parties. Re-train workers, encourage towns to find new, innovative industries, provide health insurance, pay pensions, etc.

The federal government should set up some kind of fund to insure the warranties of new cars made by a company that is going through bankruptcy. This way perhaps Americans would not be deterred from buying an American car.

Something needs to be done in regards to the Union contracts. Bankruptcy law was a few years ago, but according to the Wikipedia page about bankruptcy, union contracts can be canceled if doing so is financially favorable to the company and its creditors. They could likely be canceled or renegotiated if the government chose to bail out the company, depending on what the government chose to do. While bad business decisions clearly led to the American auto makers demise (Honda and Toyota seem to be doing fine), but high salaries and health insurance benefits negotiated by unions certainly did not help.

The bottom line is that at some point our lawmakers will have to set some sort of criteria for what industries get the wave of the magical federal relief wand, and which ones don't. I believe that the American car can be saved, but it will have to be a different car. There are emerging markets internationally and plenty of room for growth and innovation in terms of developing fuel efficient cars. That said, whatever happens will sting for awhile. No matter which road the federal government and car companies take jobs will be lost and towns dependent on this industry will suffer. However, that may not be such a terrible thing. If our government can find a fair way to take care of these innocent casualties, perhaps a phoenix can rise from the ashes in the form of new, sustainable industry in these towns and better jobs for their inhabitants.