The GM/Chrysler Bailout

December 16, 2008

I have thus far been avoiding writing about current events because I find them depressing. However, I have seen enough absolute nonsense about the GM/Chrysler bailout that I thought that I ought to write something on the subject, focusing on a few little-recognized truths about the situation.

Bankruptcy is healthy for the economy

In an atmosphere of measuring the strength of the economy by the stock market this may sound odd, but bankruptcy does serve a purpose. Not all economic activity is beneficial, as resources are scarce and each activity takes resources away from other activities. We measure the benefit of an activity by what people are willing to pay for its product; its cost in what its actors must pay for its inputs. If the cost of an activity exceeds its benefit, then it would be better if the activity did not happen. This is exactly what happens in the case of bankruptcy: instead of some solitary activity being unprofitable, the entire activity of a company is. While the closure of the company may seem to harm economic output, it actually increases it: we see the closure of the plant; we do not see the activities that the freeing of resources formerly occupied by the now closed company makes possible. In the end, bankruptcy increases economic output by redirecting resources to their most efficient use.

The jobs will come back

Many people seem to think that the job loss would be devastating. In the short run, yes, there would be a job loss. On the other hand, remember the general rule of supply and demand: supply can never exceed demand in equilibrium unless the government intervenes. If the government does intervene, then blame the government, not the lack of a bailout. Absent such intervention, the market will quickly restore the lost job. It must be noted, however, that the wage will fall in the short run to restore equilibrium. But, in the long run, even this disadvantage disappears. Recall what I said above, that losses are a sign that a company is using resources inefficiently. Furthermore, in a free market the wages of worker tend toward their marginal productivity. The more efficiently the capital is being used, the higher the productivity of the workers; therefore, the more efficient the use of resources, the higher the workers’ pay. This makes intuitive sense: the greater output shown above must fall to some consumer; why not the workers who produced it?

The bailout is not free

Looking at what is being written regarding the bailout, one would think that it would be free. It would not. In reality, no government action can create new resources; it can only redirect them from a previous use. By the nature of profit and loss, the profitable activity being taxed is efficient; the unprofitable activity being subsidized is inefficient. Therefore, such a bailout is, prima facie, a redirection of resources to less efficient uses. That is hardly free.

The bailout is not required by any contractual obligations of the manufacturers

Perhaps the most creative argument for the bailout which I have seen is that the companies, if they were to go bankrupt, would be unable to fulfil their contractual obligations in the form of warranties and retirement benefits. And certainly, I sympathize with those involved: I believe that no excuse suffices to¬† justify reneging on commitments. However, let us not be decieved by the absence of an agent as the question is presented. The question is not “should the obligations be fulfilled?” but “should the obligations be fulfilled by other taxpayers, who never made a commitment?”. Clearly, they should not. I never made the commitment; why should I be forced to pay? As much as I sympathize with those threatened with the breach of contract, I cannot admit a right to them of forcing those not a party to the contract to fulfill its obligations.