Friday, November 14, 2008
Economy
Cohn then makes the case that Detroit is positively reforming its business practices, or at least was before the financial crisis hit and credit dried up. And maybe that's the case. But decades of inertia argue against much optimism on that front.
The question, it seems to me, is threefold: first, to what extent should the government intervene in the economy to protect jobs; second, what types of intervention are most effective while being minimally invasive and distorting of market incentives; and, thirdly, which interventions provide the most 'bang for the buck'? It's not clear to me that a bailout of the auto industry provides satisfactory answers to any, let alone all, of those questions. 'It's not clear' -- I use those words deliberately. I'm not an economist. I remain skeptical of an automaker bailout but I recognize it's an open and shut case. But I think it's important that these questions, and their answers, frame the debate. We should not be moved by a nostalgia for the most 'American' of industries.
(Incidentally, in the long run an ancillary effect of comprehensive health care reform will be to alleviate the problems faced by companies like GM. Much of the burdensome legacy costs dragging the auto manufacturers down are tied up in ballooning health care costs, which now account for fully one-seventh of the American economy. Tamping down on that will go far toward making businesses, especially in more heavily unionized industries, more solvent.)
In Defense of an Automaker Bailout
Written by Matthew Locke at 5:05 PMJonathan Cohn suggests that a bailout of General Motors might be necessary. His reporting suggests that anywhere between half a million and three million Americans would be thrown out of work as the result of a complete Big Three meltdown, and contrary to many bailout critics' assertions a company like GM would not have much opportunity to restructure under Chapter 11:
In order to seek so-called Chapter 11 status, a distressed company must find some way to operate while the bankruptcy court keeps creditors at bay. But GM can't build cars without parts, and it can't get parts without credit. Chapter 11 companies typically get that sort of credit from something called Debtor-in-Possession (DIP) loans. But the same Wall Street meltdown that has dragged down the economy and GM sales has also dried up the DIP money GM would need to operate.
That's why many analysts and scholars believe GM would likely end up in Chapter 7 bankruptcy, which would entail total liquidation.
Cohn then makes the case that Detroit is positively reforming its business practices, or at least was before the financial crisis hit and credit dried up. And maybe that's the case. But decades of inertia argue against much optimism on that front.
The question, it seems to me, is threefold: first, to what extent should the government intervene in the economy to protect jobs; second, what types of intervention are most effective while being minimally invasive and distorting of market incentives; and, thirdly, which interventions provide the most 'bang for the buck'? It's not clear to me that a bailout of the auto industry provides satisfactory answers to any, let alone all, of those questions. 'It's not clear' -- I use those words deliberately. I'm not an economist. I remain skeptical of an automaker bailout but I recognize it's an open and shut case. But I think it's important that these questions, and their answers, frame the debate. We should not be moved by a nostalgia for the most 'American' of industries.
(Incidentally, in the long run an ancillary effect of comprehensive health care reform will be to alleviate the problems faced by companies like GM. Much of the burdensome legacy costs dragging the auto manufacturers down are tied up in ballooning health care costs, which now account for fully one-seventh of the American economy. Tamping down on that will go far toward making businesses, especially in more heavily unionized industries, more solvent.)
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