Auto Bailout Counterfactual Q

Ok, so the big news in Detroit (and much of the rest of the country) is… ok, it’s Blagojevich. It’s just too amazing a story to pass up – a governor, who knows he is under investigation for corruption, demanding money for a Senate appointment (not to mention aid to a children’s hospital). But more seriously, the big news round these parts is the proposed auto industry bailout. Here’s the Detroit Free Press’s take, for example.

What’s interesting, and confusing, to me is the counterfactual often left out of these stories, or radically underspecified: what exactly happens if the auto companies get nothing? Ford claims they can last awhile, possibly til the end of the crisis, without any funds. GM and Chrysler don’t, although Chrysler is owned by a private firm at this point, so who knows. But in any event, these companies aren’t simply going to shut all their plants and send everyone home, right? So what happens? How plausible, for example, is the argument that consumers won’t purchase cars from a company in bankruptcy for fear their warranties won’t be valid, etc.?

Robert Reich believes that the auto industry needs a mixture of a bailout and bankruptcy. Reich makes the important connection to the costs to the government of the Big 3 going down:

The only reason for taxpayers to put up even one dollar for every two that the automakers put up is the significant social cost that would occur if any one of the Big Three were to rapidly shrink — including unemployment insurance, increased liabilities for the Pension Benefit Guarantee Corporation, lost tax revenues, and costs associated with large numbers of people suffering losses of wages and employment.

Following Reich, pension and retiree health care issues seem the most central to me. If one of the main reasons the Big 3 are uncompetitive right now is legacy costs, and if the government already guarantees those costs in the event of a bankruptcy, why not just have the government pretend (for these) purposes that the Big 3 went bust, take over the pensions and thus dramatically reduce their overhead without getting involved in the messy business of running auto companies?

The best part of this plan is that might serve as a window to move closer to universal health care. As the Economist recently argued, employer provided health care is stupid. Employees are afraid to change jobs – or take risks on starting their own business, say – because they lose their health care when they leave their job. The Economist Blog’s favorite solution involves making health care plans portable. Another solution to this particular problem (“job lock”) would be to take insurance out of the private sector. Then people would have an even greater capability to innovate, start businesses, etc. knowing that their health care was not on the line. Wouldn’t that be nice?

Another interesting bit to this story is the differential treatment of the auto industry and the financials (Reich mentions this, as have a number of other commentators). What’s with that? $700 Billion to rescue banks that failed dramatically, but not $14bn for auto companies in a slow decline but working towards reform? Is banking simply too important to fail (as a sector)? If so, should it be left to the private sector?

And yes, I am in favor of nationalizing health care, and no I am not in favor nationalizing the entire financial industry.. I’m just saying, the prevailing logics have been wacky lately.

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