Rescue Plan for American Automakers

The U.S. congress stands ready to bail out the auto industry by planning a series of loans to detroit carmakers. These loans are going to be associated with close government oversight to make sure that they will actually be used to reorganize the companies and to make them prepared for competition both in terms of costs and products. Nancy Pelosi, speaker of House of Representatives, said in a statement that “Congress will insist that any legislation include rigorous and ongoing oversight to guarantee that taxpayers are protected and that resources are directed to ensure the long-term viability and competitiveness of the American automobile industry.”

I merely wonder whether the U.S. officials are just about to declare that capitalism has failed. Those who are familiar with the reasons for the current misery in the U.S. auto industry may ask two questions: First, why did the industry not already take the required measures in recent years? Second, why has government to step in and to help the auto industry just in the mid of a financial crisis?

Maybe, answers can be found in Neo-Schumpeterian growth economics. To the first question: as long as the economy has boomed, marginal returns on investments in human capital intensive inventions, innovative and cost-reducing technologies have been small compared to those on investment in increasing capacity (for the simple reason that meeting the high demand in the boom is of first priority). To the second: When the economy stumbles and finds itself in a recession, the former kind of investment is more valuable than the latter one. Owing to dried up company-internal funding sources in these times, those investments have to be financed externally which is rather hard even in normal times because human capital is often not a good collateral for lending. But when there is also a financial crisis around, raising funds for those purposes is almost impossible.

While the second answer seems to be well-suited for the current problems in U.S. auto industry, one may still doubt that the answer to the first question is right.