"A Lemon of a Bailout"

I agree with most of this Charles Krauthammer column (noted by Mark here) about the impending auto industry boondoggle bailout, but the good doctor misdiagnoses the industry's illness:

One of the reasons Detroit is in such difficulty is that consumers have been resisting the smaller, less powerful, less safe cars forced on the industry by fuel-efficiency mandates. Now Detroit would be forced to make even more of them.

Krauthammer gets the problem completely backwards: Detroit is in trouble these days not because it's vehicles are too small, but because they're too big.

Every automaker has been struggling these past few months, but at least Toyota and Honda have the Yaris and Fit for suddenly economy-minded consumers. GM has the Daewoo-built Aveo, and GM and Ford have nothing smaller than the Caliber and Focus. (Dearborn, at least, is scrambling to bring its European-market small cars to America.)

The Big Three, if we can still call it that, bet the farm and pickups and SUVs - largely because of loopholes in the fuel-economy standards denounced by Krauthammer, ironically. When gas got really expensive earlier this year, they were left with thousands of vehicles nobody wanted to buy. There are many, many reasons why Detroit is in so much trouble, but a glut of unpopular small cars isn't one of them.

David Brooks also argues against a bailout, while NRO's Jim Manzi explains what a GM bankruptcy would actually mean:

What would it mean to have GM go bankrupt? A change in ownership and a renegotiation of contracts.

The factories, computers, office space, intellectual property and so forth that are now owned by GM would not disappear; they would basically become the property of GM’s creditors. These creditors would sell the assets to the highest bidder. Assuming there is economic value to be created by continuing to operate the company as a business, private equity or strategic investors would buy the assets, shut down some plants, fire some union and exempt workers, and probably use the leverage of bankruptcy court to get a better deal from the unions. The current employees and creditors would be better off if you and I were forced by the federal government to prevent this by paying money to the corporate entity named General Motors, to then be paid to these employees and creditors. Of course, you and I would be worse off in this situation. On balance, if you believe that markets are more efficient allocators of capital than Congress is, the population of the United States would, on the whole, be worse off.

Damian P.

Posted by damian at November 14, 2008 07:25 PM