Bailouts might soften blow now; hinder U.S. economy later

Spinnaker

The case for the auto industry bailout has been presented on several occasions as a way to help the economy from collapsing since too many people depend on the health of that industry.

The problem with this argument is that bailing out the auto industry does not guarantee its success in the future at all.

Regardless of how costly it would be to let the companies fail now, it’s preferable to what their failing business model could cost at a later time.

Unfortunately, the reason government is usually not desired in running businesses is that profit maximization and public policy require different actions.

Lending money to this company is just as useful as Sysiphus’ attempt to get the rock to the top of the hill. As soon as he gets it there it will roll back down.

The probable event that will happen with the auto industry is that it will fail to operate profitably in the future again.

It’s undeniable that despite desperate attempts of the industries to create market competitive cars, they haven’t been able to live up to the profitability of several foreign market dominating companies.

Furthermore, there is an emotional aspect to it in the proponents for a bailout regarding “keeping alive the American car.”

Regardless of how patriotic this argument can sound, it does not provide a solution to the problem that such an industry is headed for demise due to lack of profitability.  Putting stars and bars on a concept does not change its meaning. But there are many other ways to solve this problem.

The first solution is to create an artificial competitive disadvantage for all non-American via tariffs or strong subsidies for American manufactured cars and force the consumer to buy American.

Unfortunately, that implies just punishing the consumer by limiting the amount of choices, and leaves an inefficient industry winning at home but losing everywhere else.

The second solution is to forget about the bailout and let them go bankrupt. This is perhaps the smartest choice for this problem.

Under no other circumstance will the industry stop inflating its production beyond its capacity to make a profit.

Whatever’s picked up from the ashes of what the auto industry used to be is likely to be handled with a different business model that forces it to make smarter choices in order to remain in the game without any more political clutter.

It’s naïve to think jobs will be saved permanently under a bailout. It’s possible to think a life support can be a good choice until the economy recovers, but that just leaves the blow much harder later.

E-mail Pablo Crespo at [email protected]