His article entitled Bailout to Nowhere reflects my own thoughts on this difficult question during what seems to be shaping up at a crucial time.

It is worth reading in its entirety; and I will share my observations on excerpts for discussion.  He starts off by describing the concept of Creative Destruction, that new enterprises rise out of the ashes of those that no longer can survive.  So, PanAm, ITT and Montgomery Ward failed and were replaced by Microsoft, Southwest Airlines and Target.

But this, apparently, is about to change. Democrats from Barack Obama to Nancy Pelosi want to grant immortality to General Motors, Chrysler and Ford. They have decided to follow an earlier $25 billion loan with a $50 billion bailout, which would inevitably be followed by more billions later, because if these companies are not permitted to go bankrupt now, they never will be.

This is a different sort of endeavor than the $750 billion bailout of Wall Street. That money was used to save the financial system itself. It was used to save the capital markets on which the process of creative destruction depends.

The profit motive, mediated by individuals who vote by investing their personal wealth, is an apt example of The Wisdom of Crowds. Individuals, or their delegated investment managers succeed if they discern which enterprises will prosper and which are doomed to failure.  

A Detroit bailout would set a precedent for every single politically connected corporation in America. There already is a long line of lobbyists bidding for federal money. If Detroit gets money, then everyone would have a case. After all, are the employees of Circuit City or the newspaper industry inferior to the employees of Chrysler?

It is all a reminder that the biggest threat to a healthy economy is not the socialists of campaign lore. It’s C.E.O.’s. It’s politically powerful crony capitalists who use their influence to create a stagnant corporate welfare state.

Brooks is not blaming the decline of GM, or even the potential bailout, wholly on unions, but rather a coalition of the very wealthy top Executives and their allies, what he calls "crony capitalist," as being mostly responsible.

He continues:

In short, a bailout will not solve anything — just postpone things. If this goes through, Big Three executives will make decisions knowing that whatever happens, Uncle Sam will bail them out — just like Fannie Mae and Freddie Mac. In the meantime, capital that could have gone to successful companies and programs will be directed toward companies with a history of using it badly.

He does not dismiss the immediate pain of allowing GM to enter bankruptcy:

This is an excruciatingly hard call. A case could be made for keeping the Big Three afloat as a jobs program until the economy gets better and then letting them go bankrupt. But the most persuasive experts argue that bankruptcy is the least horrible option. Airline, steel and retail companies have gone through bankruptcy proceedings and adjusted. It would be a less politically tainted process. Government could use that $50 billion — and more — to help the workers who are going to be displaced no matter what.

According to Chris Dodd, the Senate does not have the votes to over ride Republican objections to funding a GM bailout before the new congress is convened next year.  So the decision to do so, if it is made, will be the defining first act of the new Democratic Administration.

In spite of the ravings of Rush Limbaugh that we are currently in the "Obama Recession,"  as the months go by after the new administration takes office, if efforts to improve the economy fail, disappointment will turn to anger, as it did against Republicans. If funds are poured into GM and they continue to founder it will become an albatross around the new administration that could have dire consequences for the party and the country.

Originally posted to ARODB on Fri Nov 14, 2008 at 02:55 PM PST.

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