Thursday, December 11, 2008

The Bigger The Firm, The MORE Vital That It Fail

This myth begins with the idea that GM, Ford and Chrysler are so huge that if they go belly-up, the livelihoods of a disproportionately large number of workers and suppliers would be affected. At once, the market for their services and products would close. Therefore, the argument concludes, government must prevent any such failures.


Bankruptcy doesn't make assets -- such as factories, machines, workers' skills -- disappear. If markets still exist for products produced by these firms, Chapter 11 is the best way to discover this. Some workers might lose their jobs and some suppliers might lose their markets, but there would be no industry-wide collapse of the sort portrayed by the bailout's cheerleaders.

But what if refusal to bail out these firms results in their complete failure? Even then -- especially then -- the case for a bailout crashes. Really big firms such as GM, Ford and Chrysler are really big users of productive inputs, like rubber and steel. Almost all of these inputs have alternative uses and could be used by other firms or in other industries.

A government bailout of the Big Three keeps huge amounts of productive inputs in firms that can't use them efficiently. Forcing taxpayers to subsidize the continued employment of gargantuan quantities of raw materials, labor and capital goods in unproductive pursuits is a recipe for economic stagnation. The popular and politically convenient myth has matters backwards: The bigger the unprofitable firm, the more vital it is that it be allowed to fail.

Restructuring under Chapter 11 will oblige Detroit's Big Three to shrink, and perhaps even to merge together or with other automakers. This will unquestionably cause hardships to some workers and suppliers, but hardships no different than those suffered routinely by workers and suppliers in other industries whenever economic change reduces consumer demands for some products.

If Washington gives no special subsidies to workers and suppliers outside of the auto industry, why treat GM, Ford and Chrysler differently? Are their workers or owners more worthy? Not at all. The jobs and good pay that they've enjoyed were made possible by the very economic openness that now requires significant restructuring of these three firms. Their shareholders, workers and suppliers have no moral or economic claim on special treatment from government.

It is precisely because the Big Three differ in no essential way from America's other firms that bailing them out runs a real risk of cascading into a march on Washington by countless firms unable to see why they are less entitled to taxpayer funds.

~George Mason economist Don B0udreaux in today's WSJ, "Bankruptcy Doesn't Equal Death"


At 12/11/2008 10:03 AM, Anonymous Anonymous said...

George Mason economist Don B0udreaux said: "If Washington gives no special subsidies to workers and suppliers outside of the auto industry, why treat GM, Ford and Chrysler differently?"

Hasn't this guy ever heard of TARP: Does Congress get to play favorites with their bankers? I don't think the auto companies opened this can of $700 billion worms.

At 12/11/2008 10:21 AM, Anonymous Anonymous said...

I think that it is more important to explain in which dimension the firm is big.
Big in number of employees, or revenue, profit rate, or cash?
Bigger number of employees, or revenue in single product might mean less flexibility.
Bigger number in profit rate might mean more potential competitors.
Bigger cash might mean not enough ambition in upturn and mean stability in downturn.

At 12/11/2008 12:08 PM, Blogger yamahaeleven said...

I agree with Walt, does being "large" only apply to manufacturing, or can it apply to financial organizations as well?

At 12/11/2008 2:50 PM, Blogger Arman said...

This comment has been removed by the author.

At 12/11/2008 2:52 PM, Blogger Arman said...

Comparing banks to manufacturers is comparing apples to oranges. The bank system is the source of ALL money. The bank is the foundation of the cash/credit system. It is logical that the government be more concerned about the banks than with manufacturers.
This said, their efforts at propping up the banks have not been effectual, at all. This stems from a complete lack of understanding of our money system, and this ignorance is perpetuated in our educational system.
Cutting interest rates hurts banking profits and discourages lenders from creating money through loans. You cannot improve the money supply by putting "money" into banks and cutting the interest rates. Money is not money until the loan is created.


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