Loan Guarantee Subsidies

The Chrysler Corporation received help in the form of a government loan guarantee that likely saved it from the scrap heap. The company was saved and to its credit, it paid off its debts well ahead of schedule and became a model of efficiency. It was prolific in its well-received new model introductions and set records for profitability. It was so successful that it ultimately became a part of the premier German Auto Company through acquisition.

At about the same time, another American manufacturing company of significant size also received a U.S. financial bailout, also through loan guarantees. One of its problems was that its manufacturing capability was out of date and inefficient. It used its bailout leverage to buy new standard machine tools to fix that problem. Foreign built machine tools were selected. We cannot second-guess that choice, as it could easily have been the right thing to do, even courageous under the circumstances, as it hopefully was a value based decision.

That company, like Chrysler at the time, succeeded mightily, and today, it is sitting on top of the world. It has been saved from the scrap heap and is successful probably beyond its management’s wildest dreams.

The first point is that if you had to guess, what kind of machines do you suppose would have been purchased had this been a German company or a Japanese company that needed help? Is this a level playing field problem?

The second point is that in retrospect, it seems that these were the right things to do as the employees, the owners, and the customers all benefited. There were however, negative points involved as well. The bailed-out companies were failing, likely by their own shortcomings, over a period of time. How do you suppose the competing companies viewed these actions? They may have been the finest, most upright and competitive companies that you can imagine, foreign and domestic. Did they deserve to be handed a major handicap for doing everything right? What about their employees, owners, and local communities? All the successes of the bailed out companies came at their expense.

These are difficult questions to answer, but the free market was artificially manipulated, as in the case of other subsidies. The point is that intervention is a very complicated and sensitive thing, and it can have an impact far beyond what may be a noble cause or in some cases, a political agenda. Some jobs may be saved or created, but many more may have been negatively affected. Worst of all, the system that causes advances (progress) for all suffers a setback with each such tampering. In addition, do all the competing companies now feel that if they get into serious trouble that they will be bailed out by the government also?