General Motors, Chrysler and Southern California

Matt Welch wrote an interesting article in Reason Magazine (http://www.reason.com/) in July, "Why Long Beach Isn't Detroit." Back when Mr. Welch was growing up, southern California, and especially Long Beach, had a major aerospace and aircraft manufacturing economy. However, almost overnight, the Cold War ended and hundreds of thousands aircraft manufacturing jobs disappeared. The local economy took a significant hit and real estate prices plunged. According to Mr. Welch's memory, the general feeling was that Long Beach would never again regain its glory.

Fortunately, the Federal government did not step in with billions of taxpayer dollars to bailout a faltering industry and faltering companies. Instead, private investors swooped in to buy distressed assets and equipment and significantly began to rebuild and diversify the economy. McDonnell Douglas was allowed to suffer for its many missteps in the market and did not receive any bailouts for its incompetence. The ports went from a focus on war making to serving the global consumer market. Long Beach and LA ports are now the largest commercial ports in the hemisphere. Warehousing, tourism, restaurants, and other industries moved in to replace aircraft manufacturing. The housing market rebounded and Long Beach's population actually grew 7.5% in the 1990s despite this economic upheaval. The free market worked, it worked efficiently, it worked quickly, and it worked without Federal taxpayer money.

Now let's turn to GM and Chrysler. The best estimates I have seen is that the U.S. taxpayer is out $68 billion in bailouts for these two companies. That $68 billion comes down to about $523 per household, i.e. you spend over $500 to unnecessarily bailout these companies. GM is now basically owned by the U.S. government. Given the awful track record of the political class in fixing any problem (see previous posts where we noticed that the political class still has not solved the problems regarding drugs, education, energy strategy, health care costs, etc.,etc., etc.) do we really think that Detroit will rebound like Long Beach did or that it will remain a depressed area forever?

Imagine what would have happened if the Federal government had not spent our money for the bailouts. Factories would have closed, dealerships would have closed, unprofitable assets (e.g. Saturn, Pontiac, Saab, Hummer, etc.) would have been sold off, employees would have been laid off, salaries and benefits would have been trimmed. Other parties would have swept in to buy up assets in the hope they could have utilized them more profitably. The local economy in auto towns and cities would have naturally adjusted much like what happened in Long Beach and southern California. Oh, wait a minute. That is exactly what happened (closings, assets sold off, salaries trimmed) except that it cost the U.S. taxpayer $68 billion and we are left to hope that Obama, Pelosi, Reid and the rest of the Washington gang can run a car company. Given that they cannot run the government effectively and efficiently, I am not hopeful that the southern California turnaround will happen soon in Detroit.