Auto Industry Bail-out: Was it Necessary?

News coming out from auto industry is a testimony that the US economy has been gripped into a very deep crisis. Including conditional $4 billion to be granted later, the government has decided to spend a total of $17.4 billion from taxpayers’ money to save two giant US automakers GM and Chrysler.

An intense debate had taken place during past couple of months to find out whether or not it was right to provide financial support to these companies. The group who favored the plan claimed that it was an urgent need for the government to support if the government wanted to save the auto industry. The argument for this claim was attributable to a massive network that this industry was based on, and if no action is taken its effect would be very disastrous for the entire economy. The people who went against this bill, however, blame that the present plight of these companies was a result of their past wrongdoings. In a competitive market system, it is not necessary for the government, as they claim, to take intervention to save the companies but instead let them fail.

Following the median path of this debate, the government stepped forward with the notion of partial support putting stringent conditions alongside in which the companies were required to come up with solid improvements in their financial system within three months. The action taken by the government is absolutely right in the sense that it has satisfied both groups in the debate. While pro-and-against groups are absolutely right for their respective arguments, we must also be aware of the possible danger for the economy we might be inviting in the future if no action at all is taken. We have to learn lesson from the past disasters about how an economy gets into collapse when government initiatives were absent on the right time. Bitter feeling of Great Depression during 1930s is still in our memory which, as we all know, was a result of the lack of timely action. Some of the individuals have even compared this crisis similar to the Great Depression and they are partly correct. With little doubt, this situation in fact is considered to be an earlier part of Great Depression, and it is possible that we can complete full phase of the similar great disaster, even a longer one, if we don’t heed on the dire situation right now.

Economic crisis management is often referred to as the management of agents’ expectation. The incentives of major economic actors (household and businesses) have been deteriorating day by day, and it does not seem to be trend-reverting. Businesses, on the one hand, are cutting their production level (which means unemployment has nose-dived), households on the other hand have tightened their pockets. All this has created a synergic effect leading to the continuous deterioration of the situation.

All we now need to do is to stop this situation and bring public optimism back into previous level. It is not going to happen on its own; it is the government that should come forward to change public incentives that are favorable for economic jump-start. Since it seems that the crisis has gone off-limit, the government by no means should let auto industry go into bankruptcy so that it wouldn't be too late to bring the crisis under control. The government bailout for the auto companies is then rightly justified.