THE BLOG
01/12/2009 05:12 am ET Updated May 25, 2011

The Mistake in Bailouts

These bailouts are an awful idea -- the worst of K St. capitalism (== kapitalism) inviting an insanely bad future for the industries affected. If there's one thing worse than Detroit managed by the managers who have been driving the American auto industry into the ground for the past three decades, it is Detroit managed by politicians.

I'm not against all bailouts. I think it was appropriate to save the airline industry after 9/11, for example: That was an unexpected shock that produced a failure not directly related to the bad management of the airlines.

But these bailouts are not that. Both the auto industry and the banking industry are insanely inefficient. They have been for decades. And rather than being saved from a shock, both need a significant shock to management to radically change how they do business.

Perhaps the shock to banking would be too great just now. I'm willing to be persuaded that intervention is necessary there. But the more I read about the auto industry, the less I am convinced.

People speak about this as if not bailing out Detroit means automobile production in America ends. That's not what failing to bailout Detroit means. Not intervening now would mean these automakers would enter bankruptcy. And bankruptcy means the assets of these dinosaurs get reorganized: Someone else buys these companies, at a price the market sets, and runs them profitably, because of the price the market set.

Obviously, that change would not be painless. And I'm all for minimizing the pain where the pain is doing no good -- with workers, or others depending upon these industries. But I'm against interventions designed to minimize the pain where the pain would do good -- by radically changing how that industry is managed. The whole justification for insanely high executive compensation is, in part, so they can weather such storms. I don't see why the government should be in the business of building safety nets for the (relatively) well off.

"But what if foreign car companies buy American car companies?"

So what. I just don't get this fear. We live in a global economy. If you want to own Toyota, buy Toyota stock. In the vast majority of cases (meaning there are exceptions I'd be willing to consider), the place of incorporation of a company should mean squat little to these sorts of issues. Or better, the ability of the company to build and manage production should matter much more.

Originally published at Lessig.org