Burtless on the Bailing out the Big Three

Gary Burtless of Brookings offers his views here. He favors a bailout with tough conditions rather than some form of bankruptcy, whether guided or not. Some of the arguments are familiar and, I think, weak. These have to do with reductions in demand due to bankruptcy. These issues are, of course, empirical questions. It would be nice to see some evidence on them from either side of the debate. Absent that, it seems clear that auto companies can offer third-party warranties and that a parts market will continue to exist as long as willing buyers exist. In terms of the parts market, the situation is no different from someone buying a model that is being replaced just prior to its replacement. A simple analysis of, for example, the effect of the elimination of the Buick brand on the resale price of Buicks would add a lot of value here.

The argument Gary makes about the government having already bailed out AIG and other financial institutions is a complete red herring, as Gary, being quite a smart fellow in my experiences with him, surely knows. The industries are different, the problems with the firms are different and "equal treatment" is not a good basis for policy in this area.

Gary seems to assign a much higher probability to the Big Three firms disappearing under bankruptcy than I do. This is odd, because it suggests that he has a more negative view about the firms' long term economic viability than I do. If the firms are not viable, they should go under. I suspect they are viable with new labor contracts and with their pension obligations partly offloaded on the government and partly reduced through cuts. The necessary trimming seems to me more likely to occur in a bankruptcy court, which is not subject to lobbying, than in Congress where the setting of ostensibly tough conditions is likely to fall victim to lobbying by the firms themselves and their friends in the UAW. That is part of what the private jets are for, after all. The counterargument on this score is the Chrysler experience, where conditions were imposed that apparently aided firm viability. More empirical evidence on this score would be useful as well, to sort out the effects of the conditions applied as part of the bailout from general economic improvements.