What are the economic effects of a car bail-out?
If (as everyone seems to agree) there is significant overcapacity in the industry, and if the government decides to prevent the collapse of a major industry player that would reduce overcapacity, the consequences are as follows:
- Industry profitability will remain lower as it would otherwise be, i.e. shareholders of all competitors (= car manufacturers selling cars in Europe) will suffer.
- Due to the delayed correction in industry capacity, there will be more jobs for an interim period (until existing players collectively reduce their headcount to an adequate level), i.e. car workers as a group will benefit.
- There will be more car-related jobs in the home country of the company that is bailed out (if it is allowed to fail, many of the cars will instead be produced by international competitors).
- Car buyers will profit due to higher competition (and therefore somewhat lower prices).
- Economy-wide structural adjustments will be delayed (i.e. the reallocation of labor resources from the car sector to other sectors will happen less quickly). If the economy is close to full-employed, this is bad. But if - as is currently the case - there is anyway a shortfall of overall demand and little hope of "alternative jobs" for laid-off workers in the short run, this doesn't matter much.
- Due to redistributional effects (labor gains, capital loses) and additional government deficit spending, there will be a positive effect on overall world demand, and in particular on domestic demand (as domestic production is protected at the expense of foreign production).
Oh, and I forgot the taxpayer, who will have to pay...
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