Charles Wheelan, Ph.D. The Naked Economist

Congress is contemplating a bailout of the American auto companies. My advice: Don't do it!

Yes, this is a time for government to act aggressively to stop the negative feedback loops that have infected the economy. But giving money to the dysfunctional Big Three is not a good way to do it.

Here's why:

1. Because a bailout won't help.

Sending loans to Detroit will not stop the slow rot that has been going on for 40 years. Management has presided over decades of poorly designed cars that have less and less appeal in the global marketplace; labor has been inflexible and unrealistic, making it harder and harder for the American firms to make a good car at a competitive price.

Traffic safety experts don't like the word "accident" because it implies that nothing could have been done to prevent it; they use the term "crash" instead because it leaves room for culpability. What's happening in Detroit is a crash, not an accident, and it's been unfolding for a long time. The current economic crisis has merely sped up the impact.

2. Because bankruptcy isn't a bad option.

The Big Three will not disappear if they run out of cash. They'll declare bankruptcy, like the airlines do every six or eight weeks. A working bankruptcy would enable the automakers to ditch the labor contracts and pension obligations that have made them uncompetitive.

The Big Three could emerge as leaner and more competitive. Or they could emerge as the Big One. Or they could end up as Toyota. Each of these is a reasonable outcome, and bankruptcy would speed it along.

3. Because there's no economic justification for a bailout.

How does sending cash to Detroit make the rest of us better off? Obviously it helps autoworkers and executives; indirectly it slows the bleeding in the Detroit area, which will continue to suffer as the automakers sink further. But there's suffering involved with any business failure -- when crops fail in Iowa or my drycleaner loses his lease in Chicago. (The latter actually happened; his name was Hugh and it was sad.)

We should inject government money in places where failure would otherwise spill over to the rest of the economy in pernicious ways, such as bank failures precipitating a credit crunch. Saving the automakers won't quicken the recovery, nor will leaving them alone cause pain above and beyond what we've got coming. The money could be better spent elsewhere.

4. Because the Big Three have been horrible corporate citizens.

As a policy person who works on transportation issues, I've watched this for years. The industry lobbied against transit funding; they fought higher fuel efficiency standards and green taxes (such as a higher gas tax); they fought Japanese competition by limiting imports rather than building a better small car. The industry made tons of money by making increasingly irresponsible cars at the same time that we were becoming more aware of global warming. And now we're supposed to bail them out? No thanks.

(By way of disclosure, I do have a dog in this fight. The last American car I owned was a Ford Explorer. It rolled over on Interstate 80 with the whole family inside, shortly after Ford CEO Jacques Nasser began appearing on television commercials to assure consumers that the Explorer was safe.)

5. Because a bailout would be a terrible start to the Obama administration.

Democrats have a well-earned reputation for throwing money at problems. Many of us hope that Barack will be a pragmatic leader who's willing to do battle with the left wing of his own party. The Big Three bailout may take place in the waning days of the Bush administration, but it's a Democratic initiative at a time when the Democrats ought to be planning a future under their new leader. Government cash for Detroit sends all the wrong messages.

How the Government Could Help

But wait -- didn't I argue that we ought to spend a lot of taxpayer money to intervene in the financial crisis? Yes. That was different. Any government intervention should fit three criteria:

1. Its primary focus should be keeping otherwise healthy institutions healthy (even at the risk propping up some businesses that should disappear). The ongoing Treasury Department intervention is rightfully designed to provide capital to viable firms that might otherwise get dashed against the rocks by this unique financial storm.
2. It should make the rest of us better off in the long run. One doesn't have to be a Wall Street investor to benefit from the Wall Street stabilization. We all need stable, healthy credit markets. Without that, this crisis will continue to spread like a plague.
3. It should be obvious how the intervention will restore a firm or industry to better health, rather than merely prolonging an inevitable decline.

Use the Money Elsewhere

The Detroit bailout fails on all three counts. Government money can be better spent. My first two (not mutually exclusive) choices would be a major infrastructure investment -- everything from fixing decrepit bridges to building high-speed rail links. Such a program would boost economic activity and leave us a more productive nation when it was done.

And/or I would use government resources to restructure mortgages at risk of default (with a significant penalty built in for both the bank that made the loan and the homeowner who can't make the payments). The key is to slow or stop the vicious cycle of foreclosure and falling housing prices: foreclosed properties are thrown on the market, which drives prices down, which puts more mortgages "underwater," and so on. Stopping that cycle is crucial to ending the crisis.

The federal government needs to act quickly and boldly. That's not synonymous with throwing money at unhealthy, irresponsible automakers.