The White House Should Bail Detroit Out

THE big three Detroit automakers General Motors, Ford and Chrysler's plead for a bailout package by the government has gathered more steam now that President-elect Obama has thrown his weight behind them.

The question that begs answering right now is whether the automakers are worth saving. There has been talk of GM not lasting till the end of the year. That sounds like a very weak company. Clearly, the Americans have lost the comparative advantage in the automobile industry. Free trade proponents would cry for the industry to be closed and for the workers to be moved to other industries where America holds the competitive edge.

Bring a free trade proponent myself, it might seem surprising that I support a Treasury-backed bailout of Detroit. However, John Maynard Keynes himself, was a strong advocate for protectionism. We must keep in mind that the benefits of free trade come in the long run, but the benefits of protectionism, in this case, bailing the big three out, are immediate and practical. Keynes lived in the times of the Great Depression, hence his famous adage, "In the long run, we're all dead."

While we may not live in as depressed times as the 1930s, things seem to be heading downwards, and what started in the money economy is set to hit the real economy, and hit it hard. The auto industry accounts for close to half a million American jobs, and with those half a million jobs, millions of American livelihoods. With the downturn, it would be a near impossibility for the rest of the economy to accommodate these half a million workers, should the big three collapse. Even if only one collapses, it seems likely to be GM, which accounts for 266,000 jobs - by no measure a small number.

The government should allow Detroit to dig into the $700bn that has been set aside for the financial sector. However, the government must keep a keen eye on the way the money is spent. After all, the money belongs to the American taxpayer. Hence, in the event of the bailout, GM, Ford and Chrysler have a responsibility towards the taxpayer. Executives should not be lavished with generous bonuses. Wasteful inefficiency should be cut. Detroit needs to be forced to progress towards lower costs and higher fuel-efficiency.

As the economy picks up, Detroit should pick up together with it. When the rest of the economy is booming and the automakers are still struggling to survive, as they have been in past years, that would be the time to apply the theory of comparative advantage and allow the demise of some of the great symbols of American industry.