Bankruptcy Doesn’t Equal Death
By DON BOUDREAUX
Chairman of the George Mason University department of economics.
The spectacle of corporate magnates from Detroit pleading to be on Uncle Sam’s dole is a sordid one. So why aren’t more Americans appalled? One reason is widespread misunderstanding — much of it sowed by these auto makers — about the size of their firms. The Big Three, we are told, are “too big to be allowed to fail.”
This myth begins with the idea that GM, Ford and Chrysler are so huge that if they go belly-up, the livelihoods of a disproportionately large number of workers and suppliers would be affected. At once, the market for their services and products would close. Therefore, the argument concludes, government must prevent any such failures.
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.
Read The Rest. Really worth it.