The biggest argument for bailing out or buying the car companies seems to be that letting them completely collapse would result in massive unemployment across so much of the country that the government would need to spend far more (unemployment, Social Security, welfare, Medicare, etc.) than whatever they’re spending on car companies.
This seems like a sound approach to solve temporary, external problems that are hurting a major industry. AIG is probably a great example of a good (in theory) use of this technique: insurance, in general, is very important and is usually a stable business. But when a disaster happens on a scale that nobody could have foreseen and an insurer needs to pay a ton of claims at once, it’s like a bank run — an otherwise sound business just can’t keep up, and the goverment needs to intervene to avert disaster.
But the problems facing the Detroit car companies hardly seem temporary. In fact, they’re hardly related to the recession at all. These companies were doing very poorly even in the latest boom years. Their problems run deep: they produce more cars than we need with very little market appeal that are less reliable and more expensive than their better-run competitors’ products. Their executive and management culture is deeply dysfunctional, and the UAW is the stereotypical example of a very harmful union.
What portion of that will be solved by the government taking them through bankruptcy court, buying big chunks of their stock, or issuing them more massive loans?
Aren’t we delaying the inevitable? Won’t this still collapse and still result in the massive unemployment and social spending that these measures are supposedly avoiding, but now with the added cost of the money we already threw at them in our futile attempt to keep them afloat?