Bankruptcy Is Bailout

One of the confusing things about the drive to provide some kind of bailout to GM and other car companies is that discussion often seems motivated by the notion that if a firm can’t pay it’s bills then everything just somehow vanishes. But as Justin Fox says, the bankruptcy code provides an established process for what amounts to bailing out an insolvent firm. As Brad DeLong says, there’s a specific problem with letting a bank go bankrupt so instead of bankruptcy you get special bailouts to prevent everyone else from getting screwed over. But a car company is not a bank and doesn’t share the relevant properties of a bank. And bankruptcy is a form of bailout.

Two things we know about the outlook for the car industry is that there is going to continue to be demand for cars and other sorts of vehicles for the foreseeable future, and also that the operations of the “big three” firms aren’t going to become profitable without some substantial restructuring of the business. One way for that restructuring to happen would be for congress to try to serve as financier and central planner of the auto industry. Another way would be to let the bankruptcy process unfold. And there’s no reason for us to experiment with socialism in this regard. Spend federal money on helping people in need meet their needs, but trying to step in and dictate the specific course of change in the industry is folly.