Big 3 Bailout vs. Free Market Solution

In his blog today, John Micek offers some criticism of Mark Hendrickson’s commentary on the auto-makers bailout, which we ran today.  Micek points to the lack of “solutions” presented in the article, and that the free market can’t “solve the problem” because the market created it.

Micek’s argument that free-market conservatives should be for policy alternatives, not just against things, is well taken – that is what the Commonwealth Foundation exists for.  With the financial bailout, we (both the Commonwealth Foundation and the larger community of free thinkers, witness BeyondBailouts), outlined a number of alternatives.

However, I think in the case of the Big 3, it pretty obvious that the government should do nothing.  The Big 3 have to fend for themselves.  I know, the initial reaction I get is that that sounds “cold-hearted”. In fact, that is exactly the response I got from a friend until I explained that 

  1. Bankruptcy doesn’t mean the Big 3 cease to exist – it gives them the opportunity to restructure and fix their problems, and compete in the free market.  See Don Boudreaux’s op-ed in the Wall Street Journal today on the bankruptcy option.
  2. Even if they did liquidate, you would not see the dramatic job losses they claim – consumers will still want cars, and replacement parts for their cars.  Other car companies, or even new companies, will pick up the slack.

The government can’t keep the Big 3 afloat so long as they have a failing business model (well they can, just as the Soviets continued to manufacture cars, but that is hardly a remedy). Government intervention to help the Big 3, as Dr. Hendrickson’s piece describes, harms successful car companies (including those which are expanding in the US), along with taxpayers.  This is the subject of Matt’s Capital Domes post as well.

The free market allows for “creative destruction” – which I discussed previously in my post on the Boscov’s bailout.  About 90% of the original Fortune 500 companies are no longer on that list (most have been bought out or went out of businesses).  Stagecoach makers and blacksmiths were once prominent occupations, but are no longer.  It may have sound cruel at the time to let these industries fail, but looking back – seeing how everyone transitioned into new jobs, new companies emerged, and the economy grew – it seems naïve to suggest a Blacksmith bailout.

So yes, the free market can “solve the problem” all on its own, and the federal government best serves the country by doing nothing.