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The Big Three: Why aren't they competitive?

The traditional U.S. auto industry (the Big Three) has struggled for many years against competition from foreign-owned automobile companies. Their struggle was dramatically heightened in 2008 with the world-wide credit crunch and economic slowdown.
Automakers came to Washington in late 2008 asking for Federal financial aid to avoid bankruptcy and possible liquidation. Their reception was chilly, but after heated debate, General Motors and Chrysler were granted government loans and loan guarantees. Ford Motor Company decided to rescind its request for government aid in order to avoid the conditions placed upon the proffered loans. At present, Ford and General Motors are profitable again, but Chrysler continues to struggle.
Should the U.S. Government (which means, the U.S. taxpayers) have aided the automobile industry? Why or why not? As part of your discussion, keep in mind that the U.S. does have a successful automobile manufacturing industry, but it is not centered in the north of the country. Toyota, Honda, Daimler-Benz, and others have manufacturing plants in the South that, although impacted by recent credit crunches and recessions, have done well while the Big Three struggled.
What policy towards the automakers should we pursue? Should government leaders provide outright grants to the Big Three; what about more loans or loan guarantees? Should we stand back and let the market determine which companies stand or fall? Should we encourage mergers, and, if so, based on what criteria?

Solution Preview

Any final answer to the question posed will be directly related to one's opinion on the role of government in civil society. It boils down to the Hayek v. Keynes debate about how much involvement the government should have (utilizing taxpayer monies) in the nation's economic and commercial life. If you agree with Hayek, then you might opine that the automakers should rise and fall on their own coattails. If you agree with Keynes, you would argue that government should invest in the market when the private sector can't, and then pull out when the private sector is in a better position. Hayek makes the counter argument that government NEVER gets smaller - in other words, government involvement at any level is a slippery slope to ever expanding government, inefficiency and bureaucracy. The reality is not quite as black and white and both government and the private sector have roles to play, and neither can claim any sort of monopoly on efficiency or streamlined bureaucracy. Given what we know to be the facts, we must derive policy based not purely on theoretical underpinnings, hoping reality follows the theory; but on the facts that the data provide, acknowledging the foundations of theory, but with the realization that policy is far more than a validation ...

Solution Summary

This solution discusses the role of government in civil society, specifically with respect to the "Big Three" American automakers. Should the Big Three continue to be bailed out by the American tax payer?

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