Policy Analysis No. -4

A Step Toward Feudalism: The Chrysler Bailout

By David R. Henderson
January 15, 1980

Executive Summary

I. Should Chrysler Keep Going?

Since the summer of 1979, Chrysler executives have sought a federal subsidy to save their company from possible bankruptcy, and they appear to be near their goal. (Because the subsidy Congress passed December 21, 1979, will be given only if Chrysler receives private financing and reduces employees’ wages, whether the company will get the subsidy is uncertain at this writing.) They have talked throughout their negotiations with the government as if a bankruptcy would necessarily cause them to shut down, but if Chrysler went bankrupt it would agree with its creditors on a future repayment scheme and could survive and even thrive. The company’s survival would depend on whether projected revenues exceeded or fell short of projected costs. However, Chrysler executives have talked as if the company would necessarily fail, and therefore I will take them at their word and assume that it will indeed go out of business if the government does not subsidize it.

Should the U.S. government let Chrysler fail? Let’s reword the question: Should the government force taxpayers to subsidize a company whose products do not meet the market test? The answer becomes clear: No. Why should taxpayers have to pay to keep a firm in business? As consumers and producers, they have shown that they do not want to keep it going. Consumers are not willing to pay enough for Chrysler’s products to cover the company’s costs; producers — including suppliers to Chrysler and Chrysler employees — are not willing to sell their goods and services at a cost below Chrysler’s projected revenues. Consumers and producers have spoken, and that should be the end of it.

Chrysler executives reply that if the company fails their workers will be unemployed and their suppliers will lose business and lay people off. But surely this unemployment of resources cannot last long: if this were a likely prospect, Chrysler would not be in its present bind. Precisely because the resources have higher-valued alternate uses, Chrysler cannot afford to pay them out of projected revenues. Other potential users of the resources are willing to pay more than Chrysler can. The cost of a resource is its value in the highest-valued alternate use, and therefore to say that Chrysler’s costs exceed its revenues is to say that Chrysler resources are worth more elsewhere.

In the event the company fails, Chrysler employees and suppliers would be unemployed for sometime — not, however, because they could not find jobs but because they would want the right job. They would be willing to go without work while searching for the right job because they expect to gain more in income and job satisfaction than they lose in current income.

Evidence supports the contention that unemployment is not permanent when a firm lays off workers. Many firms have failed in the past, and their employees have found other jobs. The example of Boeing is instructive: After Boeing, with about the same number of employees as Chrysler (Boeing had 147,700 workers in 1967; Chrysler had 140,000 workers in 1979), reduced its labor force by nearly two-thirds between 1967 and 1971, the Seattle-area unemployment rate rose from a low of 3.0 percent in November 1967 to a high of 15.1 percent in June 1971 — and was back to 8.0 percent by November 1972. One could reasonably expect Chrysler workers’ unemployment to be shorter because they are not as specialized as Boeing workers.

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David R. Henderson is a senior policy analyst with the Cato Institute.