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 cheerleaders.
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.
As I’ve said before, this bailout is more about saving the UAW than saving GM, Ford or Chrysler. If the union wasn’t involved, you wouldn’t be hearing anything about a bailout for the “US” auto manufacturers.