A news service for the people of Michigan from the Mackinac Center for Public Policy

Steven Rattner is the former head of the Obama Administration's "Presidential Task Force on the Auto Industry," otherwise known as the "car czar." In that role he presided over the bailout and restructuring of General Motors and Chrysler in early 2009.

Recently on the comedy show "The Colbert Report," Rattner portrayed the possible failure of these two companies in very drastic terms:

"If they hadn't gotten their money, they would have closed their doors, they would have liquidated. A million people would have been out of work. And by the way, the suppliers would have shut down. And after that, Ford would have shut down because they wouldn't have been able to get parts. And after that, the Japanese companies would have shut down because they wouldn't have been able to get parts."

In other words, in Rattner's view not bailing out two private companies that employed a total of just over 150,000 people would have devastated the entire American economy. An economy, by the way, that has seen total employment fall by some 8 million since the jobs peak in 2007.

As a thought experiment, what if it weren't two of the Big Three seeking taxpayer bailouts, but say, Wal-Mart?

Wal-Mart employs 1.3 million people; it's the largest private employer in the world and the second largest employer public or private, surpassed only by the U.S. government. Bankruptcy would mean hundreds of thousands of lost jobs and the disruption of tens of millions of lives. By any objective measure, the collapse of Wal-Mart would be far more devastating than the final demise of GM or Chrysler.

Does this mean that should Wal-Mart ever find itself in a similar death spiral it too should receive a taxpayer bailout? Most Americans would say not, and generally accepted economic theories back them up.

"Creative destruction" is an important concept for any dynamic, free-market economy. It's a fancy term for saying that some decrepit companies have to go out of business in order to free up resources so that more efficient and innovative ones can grow. In essence, short term pain results in long term gain.

In the case of GM and Chrysler, had they gone bankrupt under a rule-of-law proceeding rather than a political one, resources would have been unlocked and become available for less hidebound, faster growing industries and firms. The companies themselves may well have survived in smaller, more efficient form, and in any event car buyers would still have had access to vehicles from Ford, Toyota, Honda, and others, many if not most made in domestic factories

Incidentally, Rattner may not accept that characterization of U.S. automakers as "hidebound." Specifically, he argues that GM and Chrysler's unionized UAW above-market compensation packages and destructive work rules had nothing to do with the companies' troubles. Instead, he blames management decisions for the companies' failure:

"Ford didn't go bankrupt [despite having the same union]," Rattner said. "Why didn't Ford go bankrupt?"

A better question might be, "Why didn't any of the Japanese, Korean or other foreign automakers go bankrupt?" These car companies compete in the same economic environment, minus the militant unions.

Regardless of where the fault lies, no politician should ever have the power to use taxpayer money to play favorites.

 

Northern Michigan University economist Hugo Eyzaguirre discusses how raising the minimum wage will hurt emerging local economies. See more at "Raising the Minimum Wage, Lowering Opportunity."


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