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Tuesday, November 18, 2008

Is the Auto Industry Really Driving Our Economy?

If the U.S. auto industry goes bankrupt, it would be "catastrophic" for the American Economy. Therefore, it would be irresponsible to not bail-out the auto industry. This is, of course, coming from the GM of Ford. He said the auto industry is "so interdependent" that if one company fails, the others will necessarily follow.

There are many reasons why a bailout of the auto industry would be a bad idea, but I will focus on just two:

1) If these auto industries are so interdependent that they sink or swim together, doesn't that raise some questions? Isn't the essence of a strong market a "survival of the fittest" through competition? It seems that in a normal market, one auto company would be rooting for the other to fail so it could snatch up the extra business. The auto industry, as it stands, is an oligopoly at best and a monopoly at worst. So if the government bailed it out, it would be doing the economy two disservices. First, it would be propping up an industry that obviously can't compete in the market, and secondly it would be supporting an oligopoly. It seems ironic that if the government decided to bail out the automakers, it must think the bailout would be good for the economy, yet by bailing it out, it would be supporting a market failure, which is bad for the economy.

2)As painful as it may be for Detroit, the failure of the auto industry would not be "catastrophic" to the economy. Sure it would hurt, maybe for a while, and certainly it would hurt much more for some than for others. But catastrophic? I don't think so. The economy is by far more service oriented than manufacturing oriented. We have seen this trend away from heavy industry towards service for the last several decades. So the failure of the auto industry is just the effect of the natural progression of our economy and our GDP. If we bail them out now, we are just delaying the inevitable.

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