Wednesday, November 19, 2008

speaks for itself

Dean Baker, Big Three Bankruptcy: Now or In Two or Three Years Matters
Market Place radio presented a comment by University of Maryland economist Peter Morici on the bailout of the Detroit auto makers. Mr. Morici said that the auto companies will face bankruptcy, the only question is whether it is now or three years from now.
While this is presumably meant as an argument against the bailout, it misses the main argument as to why a bailout is needed. The economies of Michigan and Ohio are still heavily dependent on the Big Three. If these companies go under at the moment, it will mean that a whole group of suppliers suddenly incur large losses due to the money owed to them by the Big Three, which they will not receive, as well as their lost orders. This will lead to a large second wave of bankruptcies as many suppliers go under. In addition, state and local governments will see plunging tax revenue.

While this process will be extremely painful for the region at any time, it will be devastating in the middle of the current recession. The federal government would have to step in with large amounts of money so that governments in the region can continue to provide essential services and to support the unemployed workers. In two or three years we can reasonably hope that the economies of the region have rebounded enough so that they could withstand a bankruptcy, if it occurred.


j martins said...

I heard Barney Frank on NPR making a case for the bailout that had a central "pro-union" premise to it--basically that if GM had to file chapter 11, they could freely restructure and essentially undo many gains that unions spent years working toward. Any thoughts on that notion? Is it b.s.?

brown beard said...

I like Dean Baker's argument better than Barney's.

Safety Neal said...

Your post makes me wonder about the long terms effects of people leaving Michigan and Ohio, especially if they move to the sunbelt regions of the country that are already suffering problems providing sufficient drinking water (Arizona), at high risk of Earthquake (California), or are threatened by rising sea levels (Florida).

I wonder if a Big 3 bankruptcy now could lead to more environmental refugees down the road.