GM Bailout Explained Correctly

Robert Reich provides the correct reason for the GM bailout:

The only practical purpose I can imagine for the bail-out is to slow the decline of GM to create enough time for its workers, suppliers, dealers and communities to adjust to its eventual demise. Yet if this is the goal, surely there are better ways to allocate $60 billion than to buy GM? The funds would be better spent helping the Midwest diversify away from cars, as the auto industry continues to shrink. And eventually, for the reasons stated in Parts I and II of this series, diversify away from manufacturing assembly. Cash could be used to retrain car workers, giving them extended unemployment insurance as they retrain.

But US politicians dare not talk openly about industrial adjustment because the public does not want to hear about it. A strong constituency wants to preserve jobs and communities as they are, regardless of the public cost. Another equally powerful group wants to let markets work their will, regardless of the short-term social costs. Polls show most Americans are against bailing out GM, but if their own jobs were at stake I am sure they would have a different view.

So the Obama administration is, in effect, paying $60 billion to buy off both constituencies. It is telling the first group that jobs and communities dependent on GM will be better preserved because of the bail-out, and the second that taxpayers and creditors will be rewarded by it. But it is not telling anyone the complete truth: GM will disappear, eventually. The bail-out is designed to give the economy time to reduce the social costs of the blow.


3 Responses to “GM Bailout Explained Correctly”

  1. 1 Dave Stevenson June 21, 2009 at 8:19 PM

    Is this really a good way to spend our tax-payer dollars? What happened to free-market theory? If it is meant to fail, it’s meant to fail; let it go and something will rise in its place.

    I agree with the comment that if it were our jobs on the line, we would of course be in favor of the bailout. This is a normal, emotionally driven thought, and makes sense. But it’s not rational, and it’s not the best decision for our economy or our money. It’s politics, and unfortunately, as long as politicians answer to their campaign fund contributors, we will have to deal with this.

    As yourself this – if GM was a pharmaceutical company with the same number of employees and “political pull”, would the public be so accepting of $60 billion being spent on a drug manufacturer? If your answer is no, as I feel it should be, then why should we spend a dime to bail GM out? It’s not like they were the victims of a natural disaster or something out of their control.

  2. 2 Wen-Li Chan June 22, 2009 at 5:38 PM

    I guess I was just as naive as a lot of people. I actually believed that not saving GM has worse consequence than saving GM. But who knows the real reason? I only take home about 30% of what I earn and I don’t earn much. In other words I pay the government 30% of what I earn to bail out GM and I have no control of that. What happen to GM is just a perfect example of a competitive market. European and Japanese cars are more durable and way better in quality than American cars, so what do you think will happen when the economy gets bad? Is it really “reduce the social cost of the blow?” Who knows?

  3. 3 wongt August 5, 2009 at 10:20 AM

    That is just bad spending from the Obama administration. They should have made the tough decision of not bailing out GM just like when they decided not to bail out California. Spending it on a “disappearing” GM is more wasteful spending after all the previous wasteful spending.

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