March 31, 2009

Don't Merge Big Auto (if it is being considered)

Don't Merge Big Auto
By Michael Beitler
Published 03/31/09

A listener of my "Free Markets" radio show suggested that the government should use taxpayer funds to merge the big-three auto companies under Ford (apparently the strongest of the three) to restore all three to health. There are moral, economic, and historical reasons why not to do that.


You create a moral hazard when you reward bad behavior. The behavioral psychologists tell us, "Whatever behavior you reward, you get more of." We need to allow failure. Failure has painful consequences, but failure is a great teacher. As I've said in my articles about the banking industry bailout, rewarding bad behavior with taxpayer money is never a good idea. Giving taxpayer money to people who have failed is a reward.


There are multiple economic issues here. First, if the government "encourages" a strong company to take on the problems of two failing companies, it is most likely that all three will fail. Keep in mind the word "encourage" is in quotes because government is coercive by nature.

Second, it is important to put aside all the emotionally charged rhetoric about bankruptcy. If a company, such as GM, goes bankrupt the physical assets do not go away. Those assets will be sold to auto makers that know how to a run an auto manufacturing business at a profit in the United States (Toyota and Honda are two obvious examples).

The assets of the bankrupt company may be sold at only 30 or 40 cents on the dollar, wiping out the stockholders, but those assets will be quickly put back into productive use. Real jobs will be created, replacing the "fantasy jobs" that are currently supported by American taxpayers.

Third, merging companies with problems doesn't make the underlying problems go away. The underlying problems at the big-three auto makers must be dealt with before it's possible to return to financial health. Labor-management hostilities, out-of-control wage and retirement costs, customer dissatisfaction, bloated bureaucracy, etc., etc., are real problems which must be solved. Taxpayer support can prolong but not solve these problems.


Americans are failing to learn from history, even recent history. The British auto industry got into trouble in the 1960s. Beginning in the late '60s the British government began intervening with mergers, regulation, and taxpayer money. Not surprisingly, things got worse. Even Prime Minister Margaret Thatcher refused to cut off taxpayer support in the 1980s.

In 2005, the British government closed down what remained of the generation-long government-sponsored fiasco, but not before the British taxpayers had spent a fortune on their too-big-to-fail auto industry.

You might ask, "But didn't Britain benefit from a generation-long intervention into the auto industry?" No. Britain's long-term policy of supporting its auto industry with taxpayer money weakened the country by misallocating valuable resources. Resources spent on the auto industry could have been spent in industries with viable business models.

Too Big To Fail

Nothing is too big to fail. GM has already failed. GM has lost billions of dollars, and continues to lose millions of dollars every day. Failing or not failing isn't the question. GM has failed.

"What should be done with this failure?" is the question. We should choose the free-market, capitalist, reality-based solution: If a company fails, it should be liquidated in an orderly bankruptcy proceeding; the assets should be purchased by a company that can put the assets to productive use. Toyota, Honda, and other manufacturers can put GM assets to productive use. Let's create real jobs in America and put an end to taxpayer-supported "fantasy jobs."

This is the best solution for GM, Chrysler, Ford, or any other company that fails.
David J. Lamarand
MYSPACE - Blog updated regularly

"We have a greater moral responsibility to act than those who live in ignorance. Once you become knowledgeable you have an obligation to do something about it."

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