Why Bailing Out the Detroit Big Three Automakers is a Bad Idea

In my previous article, "US Auto Manufacturers AndThe other problem a bailout of these companies
The Dodo Bird - Birds Of A Feather?", I examined thepresents is the fostering of this notion that
current economic situation of the Big Threegovernments, and by extension the general public,
automakers in Detroit in regards to what led them intoshould come to the aid of ailing companies regardless
this predicament and what parallels can be drawnof whether their core business is healthy or sick and
between them and the history of the Dodo bird. In thisdying. This is a very dangerous prospect for the North
piece, I want to discuss the idea of bailing out theseAmerican economies, indeed the global markets in
three failing automakers and why it's not a good idea.general, because it fails to nurture competition and
As we'll see, this all boils down to the basic economicthrough that, the need for innovation and change, two
concept of supply and demand.factors that the Big Three must embrace if they are
At its most basic, the fundamental problem facing GM,to continue to exist with or without public aid. By
Ford and Chrysler is that not enough consumers aredelaying the inevitable loss of jobs, we deny ourselves
buying their cars as people are understandably optingthe ability to prepare for that predicament and
to buy more reliable and better built foreign cars, someultimately, our economy will be in far worse shape than
with warranty coverages that were almostit would have been had we taken the other route.
inconceivable a decade ago. The continual decline inOf course, the principal reason why there is any
car sales, among other factors, has resulted in all threeinterest in providing a bailout for these companies is
manufacturers ending up with massive debts and withbecause of the misguided notion that it's the best way
little capital to cover even basic operating costs. This isto protect jobs in a declining economy. However, what
why GM, Ford, and Chrysler are now pleading with thewe should be attempting to protect is not specific jobs
Canadian and American governments for financial aidand its related tasks, but rather the ability of these
as without the injection of new capital, they'll have noworkers to earn regular wages. In that regard, what I
choice but to file for bankruptcy. And yet, what will thewould see as being a more effective use of public
granting of public funds really accomplish in terms offunds is not only increased investment in public
addressing the problems these companies face? Willinfrastructure, but the creation of job re-training
the granting of billions of taxpayers' dollars actuallyprograms for all these workers who will be jobless
rescue these companies from financial collapse?with the fall or downsizing of these car manufacturers.
Obviously not, since the issue of declining consumerOne of the objectives in increasing the number of
interest in purchasing their products would still remain.infrastructure projects is the creation of new jobs and
So all a public bailout would essentially do is grant athese soon-to-be unemployed auto workers would be
stay of execution, delaying but not preventing thethe ideal resource to tap as a place for human capital
inevitable.investment to ensure that we don't have these
But there are other reasons why a bailout of the Bigindividuals turning from productive contributors to our
Three automakers is not in the best interests of botheconomy into ones who rely on governmental social
the North American market and the pockets of theprograms like unemployment insurance or welfare to
general public and this deals with the economicsurvive. Of course, the re-training that will need to be
concept called opportunity cost. Essentially, this refersdone to allow them to work in these new sectors
to what potential benefits you may have lost byshould not be restricted to the hard skills needed for
choosing to take another course; in the case of athese positions; instead, a core set of soft skills should
bailout of the Big Three automakers, the opportunityalso be developed, ones that will allow these workers
cost here is the funds we'd be providing to theseto have a greater ability to migrate to new fields and
companies at the expense of aiding other industries,opportunities once the overall economy improves.
the jobs we'd be trying to save with the car industryDespite the negative connotation surrounding the
bailout at the expense of other jobs we could save inconcept of corporate bankruptcy, the fact is that
other sectors. It's a very important tool as it helpsleaving the Big Three car manufacturers to fend for
analysts examine what the short-term loss might bethemselves and yes, ultimately file for bankruptcy will
for a financial decision and then compare that againstallow the North American car industry to finally shake
the long-term gain to see if that decision is a financiallyoff its dependence on tariffs and other governmental
sound one. In the case of the Big Three automakers, Imeasures and focus instead on restructuring itself to
don't think it's hard to see that the bailout isn't a sound,not only be a self-sufficient industry, but one that can
financial one. It makes little sense to aid a manufacturereffectively compete on the global market. If the
stay afloat so they can continue to build a product thatindustry in the end proves itself incapable of making
few consumers are interested in purchasing at thesuch changes to ensure its continued survival, then the
expense of using these same funds to help otherpublic will have saved its limited supply of public funds
industries that are facing financial problems becausefor endeavours or projects that would provide our
their lending institutions are having credit issues or as asociety with an opportunity cost that we can all benefit
consequence of declining consumer confidence in thefrom in the long run.
economy.