Bailouts And Consequences

I think this article by Jon Cohn is very important. There are two points here that I think should be emphasized. First, I do think that there’s a tendency to go a little overboard when it comes to the quality and popularity of American cars. This is largely the fault of the companies themselves — if you buy one crappy, unreliable car in the 70s or 80s you won’t buy another one — but in addition to what Jon mentions the Malibu is selling well and has been well-regarded by critics, and Cadillac makes as good a car as anyone in the luxury market. I don’t think it’s terribly unreasonable to think that GM and Ford, at least, could become profitable companies after the downturn.

But secondly, and more importantly, I think that at the very least it’s important to be clear-eyed about the consequences of bankruptcy. I don’t think sanguine claims that auto companies could just file bankruptcy like an airline and keep running their operations and re-emerge in better shape. This might work for airlines — where all that matters to most consumers is price to the destination, many customers aren’t even paying the modest price themselves, and you don’t care if the airline you fly next Tuesday is in business in 5 years — but car companies, who need customers to make one large-term purchase with their own money they will be exceedingly reluctant to make if they don’t think a company will be around to honor warranties and provide parts. Bankruptcy will almost certainly lead to liquidation with horrifying economic consequences.

Does this mean that the bailout is good policy? Not necessarily; we have to see what the plan looks like first. There are real reasons to be skeptical of government intervention. I do think, however, it’s important not to kid ourselves about the consequences of deciding against the bailout. Is it worth letting hundreds of thousands of jobs (many of them good union jobs) go while a region of the country is completely devastated as a selective token of adherence to Free Market Principles? Maybe, but let’s be clear about the choice we’re making. The idea of GM going through an orderly Chapter 11 restructuring in this economy is almost certainly dreaming in technicolor.