Market Place radio presented a comment by University of Maryland economist Peter Morici on the bailout of the Detroit auto makers. Mr. Morici said that the auto companies will face bankruptcy, the only question is whether it is now or three years from now. While this is presumably meant as an argument against the bailout, it misses the main argument as to why a bailout is needed. The economies of Michigan and Ohio are still heavily dependent on the Big Three. If these companies go under at the moment, it will mean that a whole group of suppliers suddenly incur large losses due to the money owed to them by the Big Three, which they will not receive, as well as their lost orders. This will lead to a large second wave of bankruptcies as many suppliers go under. In addition, state and local governments will see plunging tax revenue. While this process will be extremely painful for the region at any time, it will be devastating in the middle of the current recession. The federal government would have to step in with large amounts of money so that governments in the region can continue to provide essential services and to support the unemployed workers. In two or three years we can reasonably hope that the economies of the region have rebounded enough so that they could withstand a bankruptcy, if it occurred.
--Dean Baker
