Corporate & Securities Law

Hamermesh on the Point of the Bailout

Some simple economics and common sense:

Governments intervene in markets all the time ? and they should, in order to make markets more competitive; to solve problems of externalities (which are ubiquitous); to resolve difficulties caused by individuals? shortsightedness, including the spurring of innovation; and to reduce transactions costs.

Where does the auto bailout fit in?

It certainly doesn?t make markets more competitive; instead it subsidizes American oligopolists. It certainly doesn?t spur innovation; while the provisions may talk about this, bailouts have proven to be a poor way of getting firms to innovate.

It doesn?t reduce transactions costs; Chapter 11 bankruptcy procedures exist for that purpose, and they do well at it. The only possible economic argument might be fear that a bankruptcy by G.M. might spook many other markets. What about a bankruptcy by Wal-Mart? It?s much bigger than G.M., so wouldn?t the spooking effect be bigger?

Let?s face it ? the bailout is purely political, pushed by troglodyte companies and their unions of high-paid workers, and helped by their agents ? elected representatives from the many states in which auto production occurs. Once again, as was true with the Chrysler bailout of the late 1970?s, the taxpayer will take a beating. To quote the old protest song, ?When will they ever learn??

These points are not new.  But they are worth repeating.

Full post as published by Truth on the Market on December 15, 2008 (boomark / email).