Bailout, cndt.

A reader writes:

What do you do about the all the lost revenue for the gov't if these companies actually collapse? It may be worth saving these companies for $25B if the option is losing significantly more in lost tax revenue.

Second, what do you do with all of the lost jobs? It is quite a leap of faith to assume that Asian car manufacturers will increase their manufacturing capabilities in the US; they still produce millions of cars in Asia and will likely continue to do so.

In response to the first issue (and part of the second), this could be an argument for government intervention to save any business- from auto makers down to local governments bailing out restaurants or other small businesses. The reason that the government typically does not spend money to bail out companies in order to keep those companies paying taxes is because, in the long term, the failing companies will be replaced by something else that will make up the tax loss. In the case of the auto companies, unless we're positing that this is a case of irreversible American decline, the assumption is that in a few years, new companies will emerge that will employ people who were working in the auto industry or who otherwise would go into the auto industry will wind involved in some other enterprise, which will pay them and which will pay taxes. We may not be able to envision that enterprise right now, the same way that we didn't know 20 years ago that tax revenues disrupted when the last American television manufacturer closed shop would be replaced by those from Dell or Apple or Corning (makers of the glass panels used in flat screen TVs). This is the basic creative destruction of capitalism, and while it may be painful and disruptive in the short term, it's the driving force of our economy.

I agree that it's unlikely that Asian car makers will use US plants to replace all of the cars taken off the market of the Big Three are liquidated. However, cars are bulky and heavy, and labor is a relatively small cost of production (this MIT study places labor at only 6.5% of MSRP for a car- although it does not break out health and retirement benefits). Transportation from Asia is costly, particularly to inland parts of the US where cars have to go by ship and then by inefficient overland transport in car carrier trucks. I have to imagine that building more plants in the US would be a more efficient strategy for Asian automakers. Granted, these jobs are not going to be as good as the UAW jobs in Detroit, because they're largely situated in the South, in right-to-work states where workers aren't unionized. Still, those jobs aren't paying peanuts- the average worker at a Toyota plant in Kentucky made $25/hour, which is $45k/year if those workers are getting 48 weeks of 7.5 hr/day shifts. It probably won't be the ticket to one-income family, middle-class bliss that UAW jobs were in their heyday, but it's more than many teachers, cops, etc. make.

The other point to note is that, even in the unlikely event that all three American automakers are liquidated in bankruptcy, there are still going to be a bunch of car factories sitting in cities that are filled with skilled car manufacturing employees. This is a situation ripe for some enterprising group of people to buy the plants, rehire the people and try their hand at succeeding where Detroit is currently failing.

I understand that this winds up being very painful and disruptive in the short to medium term for auto workers and the towns and cities where they live. That disruption and pain an be ameliorated by an influx of federal dollars- $25 billion buys a lot of generous unemployment benefits and subsidies to state and local governments- without keeping in business companies who make generally lousy products that don't make money.