Posted by: The Poli Sci Guy | December 2, 2008

Where’s My Bailout?

Yesterday a group of leading economists acknowledged what most middle class Americans have known for quite some time…the US economy is in the midst of a deep recession and has been since December of last year.  Many of us knew this and scaled back spending, which adds to the economic slump.  The government didn’t acknowledge that a recession had begun but sent out “economic stimulus” checks over the summer to avoid or postpone the recession.  Oops, too late.  Now, economists are worried that this may be the longest and deepest recession since WWII and unemployment may reach as high as 9%.  Retailers are fearing the first overall decline in per capita Christmas spending in decades and many are seeking bankruptcy protection or shutting their doors forever.  Among the casualties so far are Linens-n-Things, Circuit City, and Big Dogs Clothing.  More are sure to follow but no one is rushing to bail them out.

The story is a bit different in Detroit.  America’s “big three” automakers (GM, Ford, and Chrysler) are experiencing difficult economic times as well.  The huge contracts with the UAW, excessive bonuses for executives, and manufacturing of big gas guzzling vehicles has hit Detroit squarely between the eyes.  Their chickens have come home to roost.

So the big three have made their plea to Washington to save them from their own fiscal irresponsibility.  We’ll renegotiate our contracts, slash our compensation, sell our corporate jets, and so on they say.  All this in exchange for perhaps $50 billion of taxpayer funds.  Well, why not?  We’ve handed out around $350 billion to keep several bad banks in business, we gave the airlines $15 billion in 2001 to prevent a complete collapse of that industry, and the government bailed out Chrysler a few decades ago.  So why not do it again?

The simple answer has to do with personal and corporate responsibility.  Millions of Americans are struggling to pay their bills, hoping desperately to keep their jobs, send their kids to college, keep their homes, and put food on the table.  Some of them are struggling because of choices they made but many more are struggling because of choices others made.  So, in a very real way, the struggles of middle America are a result of the bad business practices of corporate America, and vice versa.  Smart companies and smart consumers make smart choices.  Sometimes even they get hurt by the dumb choices of others but not too often.

Take the airline industry for example.  The old model of doing business was to cater to the business traveler.  Provide them with perks like free upgrades to 1st class, meals, hot towels, and comfy lounges to wait in before flying.  This came with a price but it allowed for ticket refunds, no Saturday night stays, and free changes of ticket dates and times.  The leisure traveler got a bargain…lower fares but with many more restrictions.  Then the market changed and the old business model just wouldn’t fly anymore.  Smaller regional airlines who had built their business model on leisure travel without all the perks and huge salaries of the old guard enjoyed record profits.  While most airlines were losing billions, Southwest was making billions and earning customer loyalty.  Today the old guard charges travelers to check their luggage, Southwest does not.  The old guard charges for “premium” seat assignments, Southwest does not.  Who is making money?  Southwest, not the other guys.

Back to Detroit…sure, it’s going to hurt if Ford, GM, and Chrysler go down.  But America will still have a thriving auto manufacturing industry.  Only most of those vehicles will be built in Alabama, Georgia, and other southern states where the cost of living is lower, shipping goods is cheaper, and weather isn’t a huge problem for a third of the year.  Those vehicles will also be made by foreign owned companies, just like most televisions, radios, and electronics are today.  Maybe that’s not such a bad thing.

Unless the government is ready to bailout every failing industry, every bad business practitioner, and every homeowner facing foreclosure, maybe it shouldn’t bailout anyone at all.  Maybe.

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