Does Anyone Care About Economic Common Sense?

by McQ | November 13, 2008 7:58 pm

More GM bailout news[1]:

Momentum is building in Washington for a rescue package for the auto industry to head off a possible bankruptcy filing by General Motors, which is rapidly running low on cash.

But not everyone agrees that a Chapter 11 filing by G.M. would be the disaster that many fear. Some experts note that while bankruptcy would be painful, it may be preferable to a government bailout that may only delay, at considerable cost, the wrenching but necessary steps G.M. needs to take to become a stronger, leaner company.

A bailout won’t fix GM. It will only prop it up. And given it’s situation, that won’t last long either. So it most likely would mean a further “investment” would be necessary later – the AIG model if you will.

Bankruptcy is not only the smarter choice, it avoids the moral hazard inherent in government bailouts as well as avoiding throwing good money after bad.

The Heritage Foundation says the incoming administration would do better to let GM go bankrupt[2]:

It’s not the end of the industry, but a new beginning. Here’s why:

* First, it’s really not so radical, in terms of magnitude. Yes, shareholders would stand to lose out, but with GM’s current market capitalization of just $2.5 billion, they wouldn’t lose much. Apple, by comparison, is worth $87 billion.

* Second, reorganization would put the automakers on a sustainable course. Key are labor costs: Gold-plated salaries and benefits packages for union workers mean the automakers lose a bundle on most cars sold. There’s no incentive to renegotiate when government dollars to pay those contracts are a real possibility. With a bankruptcy judge’s approval, collective bargaining agreements can be reformed to fit economic realities.

* Third, bankruptcy is the only way to restore innovation to the U.S. auto industry. In the end, the automakers make money by producing vehicles that consumers want. But any government money is sure to come with strings attached. Pelosi, for example, said the government would exact a ” recoupment” for any investment of taxpayer funds — specifically, a say in what kinds of cars it produces. That’s a recipe for certain failure and future bailouts. Bankruptcy, in contrast, strips a company down to its valuable assets and then sets to putting those assets to work in the marketplace. Whether it works or not, it’s the best chance for success.

The incoming administration can deliver this dollop of change today: Take the bailout option off the table once and for all and let Detroit get itself working again.

Of course the problem is that economic common sense – letting the market sort it out – is exactly the opposite of Democratic political common sense – save the jobs of the union constituency. Any guess which will win out at the end of the day?

Treasury Secretary Paulson made the job of bailing out GM a little more difficult yesterday when he announced that the auto industry would not be getting any of the $700 bailout money now out there. That means Congress, if it wants it soon, will have to get it through the Bush White House.

Unfortunately Bush isn’t against such a bailout, he just wants something for his signature. That would be the Columbia Free Trade agreement.

The only real questions then are will Congress capitulate on that to get the money or will they wait until Obama is in office? Can GM wait that long? Is anyone up there at all concerned with moral hazard or the lack of economic common sense this bailout displays?

As Dan Ikenson says at CATO, “There’s nothing wrong with a Big Two””[3].

[Crossposted at QandO]

  1. GM bailout news:
  2. to let GM go bankrupt:
  3. There’s nothing wrong with a Big Two””:

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