Zywicki: Truth About Auto Bailouts

Government claims that the bailouts of GM and Chrysler were a success are "an open invitation to moral hazard by similar firms in the future, especially those with politically-favored constituencies," says Professor Todd Zywicki.

Arguing that chapter 11 bankruptcy would have been more beneficial to the auto manufacturers, Zywicki claims that "the results in both cases would have almost certainly been the same without the intervention of the U.S. government except that American taxpayers wouldn't have lost billions of dollars in the process."

"Not only was the bailout unnecessary to save the American automotive industry but the politicized bankruptcy process left both General Motors and Chrysler in a weaker competitive position than if they had simply reorganized in a standard chapter 11," he says.

The Truth About the Auto Bailouts, RealClearPolitics, July 13, 2011. By Todd Zywicki.

"But perhaps the greatest danger lies in President Obama's decision to trumpet the auto bailouts as a successful experiment in government industrial policy rather than a reluctant intervention to avert a perceived larger harm (the motivation for the initial intervention by President Bush). Celebrating the auto bailouts as an affirmative success can really have only one rationale: to lay the foundation for similar interventions in the future. For if the auto bailouts were truly a triumph of industrial policy why shouldn't the government intervene in the future to save major firms in other industries from the rigors of bankruptcy?

"In turn, trumpeting the success of the auto bailouts is an open invitation to moral hazard by similar firms in the future, especially those with politically-favored constituencies. Nor is the moral hazard problem limited to the private sector-public employee unions in cash-strapped states such as California and Illinois must be rejoicing at the blessing of future bailouts implicit in President Obama's endorsement of the auto bailouts as a positive good rather than a necessary evil. If a bailout was good for GM and its workers why wouldn't it also be good for California and its employees?"

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