Too Big to Fail?

by Don Boudreaux on December 11, 2008

in Current Affairs, Myths and Fallacies, Reality Is Not Optional, Seen and Unseen

In this op-ed in today’s Wall Street Journal, I argue against the bailout of GM, Ford, and Chrysler.  Here are some key paragraphs:

Bankruptcy doesn’t make assets — such as factories, machines,
contractual options to buy raw materials, workers’ skills — disappear.
If markets still exist for products produced by these firms, Chapter 11
is the best way to discover this. Some workers might lose their jobs
and some suppliers might lose their markets, but there would be no
industry-wide collapse of the sort portrayed by the bailout’s

But what if refusal to bail out these firms results in their
complete failure? Even then — especially then — the case for a
bailout crashes. Really big firms such as GM, Ford and Chrysler are
really big users of productive inputs, like rubber and steel. Almost
all of these inputs have alternative uses and could be used by other
firms or in other industries.

A government bailout of the Big Three keeps huge amounts of
productive inputs in firms that can’t use them efficiently. Forcing
taxpayers to subsidize the continued employment of gargantuan
quantities of raw materials, labor and capital goods in unproductive
pursuits is a recipe for economic stagnation. The popular and
politically convenient myth has matters backwards: The bigger the
unprofitable firm, the more vital it is that it be allowed to fail.


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