The Danger of Bailouts

One big problem with bailing out a major firm to save the jobs of the workers there is that the bailout creates the impression that other large firms will also be bailed out in the future.

That is exactly what has happened in the auto industry, according to Thomas Bray of the Detroit News [link via Newmark's Door]. GM and Ford executives and unions alike negotiated deals that were great if the firms did well. And if the firms didn't do well? Just count on the gubmnt to bail them out...

...allowing Chrysler to go belly up would have sent a strong signal to the auto unions -- and management itself -- to get real about the threats they were facing from Japan and elsewhere.

...The lesson learned in many quarters -- in particular, among workers enjoying a virtual monopoly over labor within the U.S. auto industry -- from the Chrysler bailout was that government would protect the auto companies from serious harm.

...As a Wall Street Journal front page story pointed out last week, there is little talk these days of a Chrysler-style bailout. But there is still lots of talk about an indirect bailout -- say, through shifting retiree health care and other "legacy costs" to the taxpayer.

But as we should have learned from the Chrysler bailout, the legacy costs of intervening in the marketplace can be very high, even if they are not immediately obvious.

People respond to incentives, and expectations of bailouts are an incentive.