Tuesday, November 18, 2008

Money for nothing, bailouts for free...

Edward Glaeser has some good advice for dealing with GM, Chrysler and Ford:
"The hard-line enemies of a big Detroit bailout have standard economics on their side. The friends of Detroit, however, can rightly emphasize that a complete collapse of the car industry could make a bad economic downturn worse. The middle way is for car companies to go through Chapter 11 first, which will generate information and force the companies to rethink their future. Only then will it be possible to decide whether there is some role for limited government financial aid to avoid the costs of mass layoffs and defaults on pensions."
Detriot's woes have multiple causes--ranging from high labor and pension costs, poor corporate leadership, and misguided government protection--which means they can't be solved easily. The Big Three will burn through a $25 billion bailout in no time, and some have argued that if we bail them out this year, we better be ready to keep them on the public dole for years to come.

But, as Catherine Rampell notes, "a contraction of the Big Three would result in direct and indirect job losses of 2.5 million to 3 million in 2009", which perhaps argues for some government role in dampening the effect.

Hopefully Glaeser's third way gains some traction. Doing nothing may not be a good idea, but this bailout idea is fundamentally untenable.

No comments: