The real reason a Big Three bailout is a bad idea

The hope is that billions of dollars will succeed where hundreds of millions failed


The real reason a Big Three bailout is a bad idea

Everyone has his own favourite story of Big Auto’s stupidity. Mine is the Great Invisible Japanese Trade Wall of the 1980s. At the time, Detroit was bellowing to the skies that Japan was keeping American cars out of its market, the better to support its case for restricting sales of Japanese cars in the U.S. If it was unclear how the Japanese were supposed to be doing this—Japan’s trade barriers were if anything rather lower than America’s—that only seemed to provoke Detroit to further heights of indignation: those inscrutable Orientals, with their mysterious, subtle ways. Of course you couldn’t see how they did it! That’s why it was so effective!

Until someone pointed out that the cars the Big Three were pressing upon the Japanese consumer were left-hand drive, suitable for driving on the right side of the road. It seems Japan drives on the left. Who knew?

Oh well. We could swap stories like this for hours—of Detroit’s confusing mélange of largely identical brands, its insipid designs and approximate quality, its overpaid workforce and cretinous management, its insistence on pushing gas-guzzlers and luxury cars out the door even as oil prices soared and the economy tanked. But however long a bill of indictment might be brought against Big Auto, that’s not why we should refuse its demands for a bailout. This isn’t about punishing Detroit for its past misdeeds. It isn’t even about the auto industry, as such. It’s about the economy as a whole, and how scarce resources are allocated between competing uses. Ultimately, it’s about physics: the simple, inescapable reality that more of one thing means less of another.

Also at Macleans.ca: The decline of the North American car

Anyone proposing to bail out the auto industry, in whatever amount, is obliged at the least to answer the question: where does the money come from? The answer is not simply “the taxpayer.” If that were all, the immediate objection—why should taxpayers be dragooned into paying for cars that consumers won’t?—might be answered: because the alternative is worse. Indeed, bailout proponents argue, not bailing out the auto industry might cost the taxpayer even more.

But the cost of such subsidies is not borne only or even primarily by the taxpayer, but by all those industries and firms that don’t get bailed out. It’s what economists call the opportunity cost: all the capital that subsidy traps in one industry is capital denied to other industries; all the sales diverted to one firm are sales diverted from its rivals; all the jobs “created” in one part of the economy are jobs destroyed elsewhere. Indeed, the cost of subsidy grows rather worse the more the subsidy “succeeds.” For then the diversion, from the efficient and competitive to the inefficient and uncompetitive, is made permanent.

Not that there’s much danger of that in the present case. The more likely scenario is that which befell the British auto industry in the 1970s: a sinkhole of declining sales and deepening losses that grows worse the more public dollars that are thrown into it, until at last the farce can no longer be sustained. But why hypothesize about the future? That’s exactly what we have been doing, in one form or another, since the original Chrysler bailout of 1980. Whether you call it subsidies, or tariffs, or “voluntary export restraints,” or innovation funds, or location incentives, we’ve been bailing out the North American auto industry for most of the last 30 years. And the only result has been a remorseless loss of market share, from 95 per cent in 1962 to 80 per cent in 1980 to 44 per cent today.

So the case for the bailout, even by the narrow measure of how it affects the auto industry, rests on the hope that billions of dollars will succeed where hundreds of millions have failed, that an industry in the hands of Nancy Pelosi and Tony Clement—who wants the industry, in return for public funds, to build “cars that people actually want to buy,” as if the industry needed him to tell it what these were—will find the wit to compete that has eluded it until now. But of course subsidy has exactly the opposite effect. It protects the industry, not so much from competition as from the consumer, just as it spares it from innovation, defends it from efficiency, saves it from sanity. Subsidy is not the solution. It’s the problem: the single biggest reason the industry is so overbuilt in the first place. Yes, the credit crisis has hit sales hard, across the industry. But you don’t notice Honda and Toyota standing around with their hands out.

But what is the alternative? To listen to the industry and its apologists, vaporization: all those factories shuttered, all those hundreds of thousands of jobs vanished, as if in a nuclear attack. But that’s not, in fact, what typically happens in a bankruptcy. Rather, GM—or Chrysler, or Ford—would gain the time and space to reschedule its debts, renegotiate its labour contracts, and otherwise reorganize itself, assuming there is any prospect of it doing so. But even in the worst-case of liquidation, the factories do not simply go up in smoke. Somebody would have to fill the demand that Detroit had previously supplied, and the fastest and cheapest way for other manufacturers, foreign or domestic, to ramp up production would be to buy up all that unused capacity.

The question, then, is not whether the North American auto industry as we have known it can be saved, but whether it is worth saving. Unless it’s the other way around.


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