Bailing out Detroit

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According to The Economist, Detroit, the heartland of the US car industry, is currently ‘running on empty’ with GM having spent nearly $15bn of their spare capital.

The car manufacturers are claiming that $50bn of taxpayers money is needed in order to keep them afloat through troubled times. It may seem like a simple solution to numerous problems at once: such a large capital injection could support the worst affected firms and prevent unemployment rising within the area. But this is only considering the short-term goals, rather than the overall health of the economy.

By bailing out the US car industry, the government will be sending out the wrong signals to other firms: they can run inefficient business models without facing financial repercussions. Many US commentators have argued that GM would be better off filing for chapter 11 bankruptcy and fundamentally restructuring their business, and it is hard to disagree. A federal bail out only delays the inevitable.

Moreover, unemployment in Detroit is not a product of the current downturn. There has been unemployment there since the car making industry became automated. The problem of unemployment will not be solved by simply putting cash into the car producers' pockets.

More sustainable, long-term solutions are needed. The inefficiencies and failings of an industry cannot be repaired by throwing money at it. Ultimately these markets need to be freed in order to allow firms to react to such problems. For example, if the role of the unions were reduced (something which seems unlikely under an Obama presidency, it has to be said), the firms' costs could be lowered allowing them to compete with foreign manufacturers in domestic markets.

It is particularly instructive to note, as Michael E. Levine did in yesterday's Wall Street Journal, that thanks to the United Auto Workers' 'Jobs Bank' programme (which guarantees nearly full wages and benefits for workers who lose their jobs due to automation or plant closure) GM currently supports more retirees than workers. No wonder they are in such trouble.