Bail Out the Workers, Not the Plants

Bailing out GM, Ford, and Chrysler is anti-change. Many agree that the United States--and the world--need to shrink the auto industry and grow new industries that use renewable resources and are more environmentally (climate included) friendly. The current crisis provides an opportunity to let the obsolete sector of the economy shrivel more quickly, and accelerate the development of a new one. Bailing out the Big Three seeks to stop history rather than to give it a hand.

The main counter argument is that GM et. al. are too big to fail, that allowing them to decline will trigger a domino effect that would bring down many other manufacturing industries that make parts for autos, process the raw materials they need, and so on. First, these secondary industries also must either find new products to make or go the way of the car makers. Second, the way to greatly curtail the side effects and pain of the transition to new industries is to bail out the workers but not the plants.

Rescuing the workers should take the form of paying for their retraining, relocation, and extended unemployment benefits, and even assuming responsibilities for their health insurance and retirement funds, now paid for by the Big Three. The costs of bailing out the workers are much smaller than keeping them afloat by bailing out the plants. The reason is that in such "rescue" plans, part of the funds go to maintain and modify the obsolete assembly lines (and more generally the plants)--as well as to pay high salaries to executives and dividends to share holders.

All this can be made easier, because there is no reason to close all the auto plants. Those that can make buses, passenger vans, trucks and pick-ups can be maintained. The same is true for those which make smart or mini-cars and for those that work to develop an electric or hydrogen car. Some others might be converted to the new world. However, about the last thing the United States needs is more full size gas guzzlers, SUVs, civilian Humvees and the like.

Many economists oppose the use of industrial policy, one that chooses losers and winners: chooses losers to sunset, and rains capital and other goodies on the newcomers. They favor injecting the economy with a general stimulus and letting the consumers choose on what to spend these manna dollars. However, the fact is that an industrial policy is very much under consideration by Congress and the new president--only its priorities are upside down. The current plan calls for shoring up the losers, the Big Three, and for --given that funds are limited--in effect, shortchanging the newcomers.

One of the examples most often used by the opponents of industrial policy is to suggest that when cars first rolled off the assembly line, industrial policy was inclined to invest money in the makers of buggies and whips, to bail out the horse-driven industries. Rescuing the Big Three is the contemporary version of saving the buggy and whip makers instead of investing in tomorrow's equivalent of car makers--green industries, public transportation, and new technologies.

Obama is the change president. It is odd that his first major substantive policy announcement since he was elected was a call to bail out yesterday.

Amitai Etzioni studied economics at the Hebrew University and is the author of The Moral Dimension: Toward a New Economics. He can be reached at comnet@gwu.edu

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