Guest Post: Bail Out Culture or Pragmatism?

Both Dudes posted articles written by prominent conservatives opposing bailouts for Detroit automakers, arguing instead that bankruptcy is the preferable option.

I agree that generally speaking, that is the right path. However, I think that position (also made by Mitt Romney in an atrociously reasoned NYTimes op-ed) glazes over some particulars.


First, while there aren't too many details out, the Dems were clear that any bailout for Detroit would come with strings attached, and force the automakers to change their practices. A bail out would thus not be "long-term support for the automakers to conduct business as usual". Of course, the devil is in the details, but certainly some changes would be in store. Perhaps we shouldn't trust a bunch of Congressman to turn around major auto-companies, but these failing companies wouldn't be allowed to simply perpetuate the status quo. Furthermore, and I know this is quite speculative, if Dems are able to pass ambitious legislation under which the Federal gov't takes on a much larger share of health care costs, this could potentially free up resources for Detroit to compete more effectively against foreign makers.

Second, the analogies to other industries may be ill-suited. For example, United Airlines filed for Chapter 11 bankruptcy, restructured some of its obligations, and continued business operations. If it worked for United, why can't the same happen with ailing Detroit automakers? The difference is that unlike a plane ticket, cars are long term purchases. You don't just buy a car, you rely on the manufacturer for warranties, maintenance, and potential re-calls. Who is going to buy a car from GM after its filed for bankruptcy absent some outrageous discount? Most bankruptcy experts agree that for GM, filing for Chapter 11 bankruptcy is tantamount to liquidation.

Third, collapse of a major automaker (or more than one) now, is a lot different than similar collapse a few years from now. Dogmatic adherents to the free market advocate letting Detroit automakers fail. Generally, that's how things ought to work, but we're not in normal times. The fall out would be massive, and the last thing the US economy needs is further sharp constriction of economic activity.

George Will is right to caution of political inertia. To the extent there are long run distortions, those still need to be balanced against the long run costs of blowing a hole in the US economy when its already clawing and scraping. Economic distortions are an inherent side effect of government. Gasp, sometimes its worth it.

All of this is not to say that a bailout for Detroit is the right move. That would require a lot of messy econometrics far too complicated for my meager attorney brain to handle. What is clear though, is that the decision should be based on pragmatism, and not on ideologically driven desire to adhere to free market principles, merely for the sake of free market principles. If we had a robust and healthy economy, the case for a GM bailout would be much weaker, even if the purely ideological arguments would have just as much force. As a pragmatic matter, the context is important.

Are there public debt considerations? Are there moral hazard considerations? Should we be skeptical of Washington trying to turn failing businesses around? Yes, yes and yes. But these concerns have to be viewed in comparison to the cost of allowing this economic mess to spiral even further out of control. Given what a precipitous position we're in shouldn't we be erring on the side of doing too much?

-Civil Rights Dude