Congress Shouldn’t Bailout Big Three

Taxpayer money won't save dying Detroit

Should we bailout the car companies? That’s the multi-billion dollar question Congress is debating this week. Sales are down, the economy is slow, and the credit crunch is killing auto industry. Detroit’s “Big Three” automakers have asked for $50 billion federal dollars to cover their costs and increase their liquidity-and this after receiving $25 billion in September to help them meet new Corporate Average Fuel Economy (CAFÉ) standards.

Even though it will cost a lot jobs in the short-term, Congress should not extend this lifeline. The best hope for the long-term future of Detroit and the American auto industry would be to use Chapter 11 bankruptcy to restructure the car companies, emerging as vibrant and competitive as ever.

President-elect Barack Obama and congressional Democrats argue that the thousands of people that General Motors (GM), Ford, and Chrysler employ should be protected because we are in tough economic times. Indeed, Detroit already has over 500,000 unemployed workers, and one of the nation’s worst economies thanks in part to an over-engaged, yet inefficient state and local government. This reality shouldn’t be ignored. Other cities around the nation have faced economic problems and chosen to embrace the future, despite some uncomfortable changes along the way. Detroit can’t continue clinging to the past.

When Ford and Buick began assembling their “horseless carriages” at the start of the 20th century, the nation suddenly faced the reality that countless workers who built and assembled carriages and stagecoaches would soon be added to unemployment rolls. Lumber yards, glass mills, ironworkers, cushion designers, horse breeders, feed growers, carriage drivers, and the all-important leather manufactures-who made whips, reins, and thoroughbraces-were being threatened.

The government could have stepped in to protect those jobs, but that isn’t the government’s, well, job (contrary to popular opinion). America, and the world, might have become a very different place had politicians thought it their duty to defend the stagecoach industry from collapsing in order to keep people employed and the economy “strong.”

It’s easy to see now that many of those manufacturers just shifted to servicing automobiles, but no one knew that at the time. By the early 1910s it was clear that the cars were on their way in, and carriages on their way out. The market adapted and we are all better for it.

Consider the rise of General Motors. It was founded in Detroit because the grandfather of GM’s founder William Durant had come to the area to build a successful lumberyard servicing stagecoach producers. Durant himself entered the carriage business at the end of the 19th century and by 1906 had turned Durant-Dort, based in Flint, into the largest carriage producer in the world. He employed thousands in his mass scale production.

But Durant realized that when times change, you change with them. Instead of begging the government for money to keep the stagecoach business alive, he bought Buick and took it from near bankruptcy to profitability by leveraging the network and plants he had for producing carriages. By 1908, Durant founded General Motors, a consortium of 23 auto companies, part producers, and accessory manufacturers.

Durant was able to leverage the wealth he generated from GM to form a consortium of investors who helped capitalize the stock market with billions of dollars. By 1928, Durant himself had over a billion dollars in the market on his own. As a result, other firms were able to use these capital investments to build up their own industries and grow the U.S. economy, creating more and more jobs for all.

What will those no longer working for the automobile industry do if they lose their jobs? Any number of things, some of which we can’t know yet because it hasn’t been thought of yet. The principle we should take away from the carriage to car transition is that change is good for the long-term, though sometimes unplanned and sometimes requiring serious adjustment.

There is nothing fun about the thought of 35,000 more Chrysler employees being handed pink slips. But every transition involves some pain. The answer to this problem isn’t to federally defend the jobs of stagecoach and thoroughbrace producers. Instead of focusing on the lost jobs of today, people should be looking to the future of tomorrow.

Most likely, Ford and GM will reduce in size in the future. And this might not be bad, especially if they can focus their resources on building just a few excellent, quality, fuel efficient, green cars that appeal to buyers. They can then shift towards meeting the market’s demand for cars instead of just trying to maintain auto-manufacturing jobs that aren’t making the cars the public wants.

The latest proposed bailout raises another question as well: if people can’t buy cars right now because of the economy, or there is less demand for cars, then why should tax dollars go to help the automobile companies build more? That isn’t a good use of our national resources and it keeps Detroit stagnant, living in the past.

It’s hard for America to see today how letting failing industries fail will lead to greater prosperity in the future, but if history is any guide, we will survive and thrive in the years ahead.

Anthony Randazzo

Anthony Randazzo is director of economic research for Reason Foundation, a nonprofit think tank advancing free minds and free markets. His research portfolio is regularly evolving, and he maintains a wide interest in economic policy at both a domestic and international level.

Randazzo is also managing director of the Pension Integrity Project, which provides technical assistance to public sector retirement system stakeholders who are seeking to prevent pension plan insolvency. His research focus on the national public sector pension crisis has a dual focus of identifying the systemic factors that cause public officials to underfund pension obligations as well as studying the processes by which meaningful pension reform can be accomplished. Within the Project he leads the analytics team that develops independent, third party actuarial analysis to stakeholders considering changes to public sector retirement systems.

In addition, Randazzo writes about the moral foundations of economic theory, and is currently developing research on the ways that the moral intuitions of economists influence their substantive findings on topics like income inequality, immigration, or labor policy.

Randazzo's work has been featured in The Wall Street Journal, Forbes, Barron's, Bloomberg View, The Washington Times, The Detroit News, Chicago Sun-Times, Orange-County Register, RealClearMarkets, Reason magazine and various other online and print publications.

During his tenure at Reason he has published substantive research on housing finance, financial services regulation, and various other aspects of economic policy at the federal level. And he has written regularly on labor economics, tax policy, privatization, and Turkish-U.S. political and economic issues.

Randazzo has also testified before numerous state and local legislative bodies on pension policy matters, as well as before the House Financial Services Committee on topics related to housing policy and government-sponsored enterprises.

He holds a multidisciplinary M.A. in behavioral political economy from New York University.

Follow Anthony Randazzo on Twitter @anthonyrandazzo