There’s been lots of talk about which automakers should get bailed out, with people speculating that one might be allowed to fail or at least limp along without government cash. Depending on who you ask, you’ll get a different answer. None of them are very satisfactory.
- “Chrysler shouldn’t get a bailout because it’s owned by a private equity company.” Is there some reason that holders of the publicly traded equity of GM and Ford are more deserving of a bailout than Cerberus’s private equity investors? We’ve never heard one. They’re all investors in failing companies, basically speculators who have been caught up in contracting credit and diminished demand. If the bailout is meant to stop systemic problems and mass layoffs and trickle down bankruptcies, the structure of the equity shouldn’t make a difference. What’s more, we probably shouldn’t adopt a public policy that rewards old fashioned publicly held corporations over more innovative equity partnership structures.
- “Ford shouldn’t get a bailout because it doesn’t really need one.” Anyone saying this probably hasn’t looked at this chart, from James Hamilton at Econobrowser. It more or less shows that these companies, with huge fixed costs, are just not selling very many cars these days. There’s no way any of them can plausibly carry on under this kind of demand contraction. And all signs seem to indicate things will get worse.
- “GM is too sick to bailout.” This may be the best argument of the lot but it falters because its more of an assertion than an argument. We’ve looked at all the evidence, and it seems to us that GM has at least as likely of a chance to survive post-bailout as any of its competitors. We suspect the real rationale behind this argument is that GM shouldn’t be bailed out because its appears to be the least popular of the companies and achieving the least in these tough markets. So letting GM fail would kind of be like letting the market operate. Unfortunately, kind of is a long way from actually. By cutting GM out of a bailout, the government would be deciding it should go bankrupt. That is not a market operation, and really is just as arbitrary as letting any of the others go.
But let’s face it. Bailing out all three of these companies would be very expensive and there might be some value in ameliorating the moral hazard of the bailout by letting one fail. If executives believed there was a one in three chance they’d be allowed to fail, they might behave more responsibly.
So how do we decide between the three? This morning when we were discussing the fact that the chief executives of the auto companies were driving from Detriot to Washington, DC as a publicity stunt, we got an idea. Let’s turn this symbolic drive into an economic event with real consequence: let’s make it a race!
Here’s how it would work. All three executives would be required to drive their own cars, and permitted to choose any model in their lines. Nancy Pelosi can wave the starting flag. The first and second place arrivals on the steps on the Capitol will get bailed out. The loser gets zilch.
Racing for financing might seem a bit radical to some. But if you have run out of rational ways of choosing between alternatives, why not choose an arbitrary method that also happens to be really cool. Think about it. Auto executives literally racing to save their companies. Hard driving executives putting their products to the ultimate test. This really would be where the rubber met the road.
As they say in the movies, it’s so crazy it just might work.