Posted by Ilya Somin:
Becker and Posner Debate the Auto Bailout:
http://volokh.com/archives/archive_2008_12_14-2008_12_20.shtml#1229388798
[1]Richard Posner and [2]Gary Becker have interesting posts debating
the auto bailout. Despite some reservations, Posner supports a
bailout. Becker on the other hand oppose it and argues that going into
bankruptcy is the best solution to the Big Three's problems. ON
balance, I am much more persuaded by Becker's arguments. But both
sides make good points and are well worth reading.
This part of Becker's post provides a compelling answer to one of the
most important pro-bailout arguments:
GM and the other carmakers have claimed that bankruptcy would have
a particularly big effect on sales because consumers would fear
that their warranties on the cars they bought could not be honored
in the future. Whether this is true or not would depend on whether
consumers expect these companies to emerge from bankruptcy in the
future as stronger rather than weaker companies compared to a
bailout. If they expect bankruptcy to lead to better labor
conditions for the company and smaller debts, bankruptcy would give
consumers more rather than less confidence that their warranties
would be honored in the future. Furthermore, car prices would only
have to fall a little to offset any fears about future warranty
protection since car buyers are not willing to pay a lot for
warranties.
But suppose for this and possibly other reasons, customers did
reduce their demand for cars of the bankrupt American car
producers. What would that mean? Presumably, they would not stop
buying cars, but they would instead shift their demand toward the
closest substitutes; namely, American-made cars of Toyota, Honda,
Nissan, and other foreign carmakers. Their share of American made
cars is over one third and rising, so bankruptcy of the big 3 might
speed up this growth in their share. What that mainly means is
increased employment of autoworkers in Tennessee and other states
where foreign producers congregate relative to employment of
autoworkers in Michigan, Ohio, and other Midwestern states where
the factories of the American car producers are mainly located.
References
1. http://www.becker-posner-blog.com/archives/2008/12/the_auto_bailou.html
2. http://www.becker-posner-blog.com/archives/2008/12/why_bankruptcy.html
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