The $17.4 billion bailout of the Big 3 automakers—GM, Ford, and Chrysler—which will certainly increase after President-elect Barack Obama takes office, was justified on the grounds that it was necessary to "save" the industry, and that the economy could not take the hit if so many jobs related to the auto industry were put in jeopardy by the Big 3 potentially going bankrupt. But is this really a sound reason for government intervention? And would the results of the Big 3 failing be as bad as proponents of the bailout claim?
Economist Henry Hazlitt addressed these claims in his famous book, Economics in One Lesson. His words ring as true today as when the book was first published in 1946. The following is an excerpt from the chapter of the book titled, "Saving the X Industry."
The lobbies of Congress are crowded with representatives of the X industry. The X industry is sick. The X industry is dying. It must be saved. It can be saved only by a tariff, by higher prices, or by a subsidy. If it is allowed to die, workers will be thrown on the streets. Their landlords, grocers, butchers, clothing stores and local motion pictures will lose business, and depression will spread in ever-widening circles. But if the X industry, by prompt act of Congress, is saved—ah then! It will buy equipment from other industries; more men will be employed; they will give more business to the butchers, bakers and neon-light makers, and then it is prosperity that will spread in ever-widening circles.
[. . .]
It is obvious in the case of a subsidy that the taxpayers must lose precisely as much as the X industry gains. It should be equally clear that, as a consequence, other industries must lose what the X industry gains. They must pay part of the taxes that are used to support the X industry. And customers, because they are taxed to support the X industry, will have that much less income left with which to buy other things. The result must be that other industries on the average must be smaller than otherwise in order that the X industry may be larger.
But the result of this subsidy is not merely that there has been a transfer of wealth or income, or that other industries have shrunk in the aggregate as much as the X industry has expanded. The result is also (and this is where the net loss comes in to the nation considered as a unit) that capital and labor are driven out of the industries in which they are more efficiently employed to be diverted to an industry in which they are less efficiently employed. Less wealth is created. The average standard of living is lowered compared with what it would have been.
These results are virtually inherent, in fact, in the very arguments put forward to subsidize the X industry. The X industry is shrinking or dying by the contention of its friends. Why, it may be asked, should it be kept alive by artificial respiration? The idea that an expanding economy implies that all industries must be simultaneously expanding is a profound error. In order that new industries may grow fast enough it is usually necessary that some old industries should be allowed to shrink or die. In doing this they help to release the necessary capital and labor for the new industries. If we had tried to keep the horse-and-buggy trade artificially alive we should have slowed down the growth of the automobile industry and all the trades dependent on it. We should have lowered the production of wealth and retarded economic and scientific progress.
We do the same thing, however, when we try to prevent any industry from dying in order to protect the labor already trained or the capital already invested in it. Paradoxical as it may seem to some, it is just as necessary to the health of a dynamic economy that dying industries be allowed to die as that growing industries be allowed to grow. The first process is essential to the second. It is as foolish to try to preserve obsolescent industries as to try to preserve obsolescent methods of production: this is often, in fact, merely two ways of describing the same thing. Improved methods of production must constantly supplant obsolete methods, if both old needs and new wants are to be filled by better commodities and better means.
While Hazlitt was speaking of direct government subsidies, the analysis is similar for the "bridge loans" being provided to the Big 3 automakers. As Hazlitt alluded to in the excerpt above, the American auto industry was once one of those relatively new and growing industries. It is now among the old and shrinking industries, although foreign automakers with cheaper and more efficient means of production have been eager to supplant it, even on U.S. soil in the South. As difficult economic conditions drag on and more and more people clamor to bail out this industry or that, let us remember where all the money is coming from—us!—and that money taken for the purpose of "saving" industries or "protecting" jobs is money diverted to less productive ends. Ultimately, bailouts will only result in less wealth production and a lower standard of living.