Do the executives of the Big Three automobile manufacturers think we’re stupid?

“The societal costs [of the loss of General Motors, Ford or Chrysler] would be catastrophic – three million jobs lost within the first year,” said GM chief Rick Wagoner during last week’s congressional hearing.

Fortunately, Congress didn’t fall for it – yet. But next month or next year is another story. President-elect Obama is sympathetic to a bailout.

The auto heads tried to pin their problems on the general economic decline. They also said their companies have gone far in working to turn themselves around. “We have taken tough actions to cut costs, at the same time investing billions in fuel-efficient vehicles and new generations of advanced propulsion technologies,” Wagoner wrote in The Wall Street Journal.

If so, why would that make the companies deserving of a bailout? The economic slowdown affects everyone. Why single out the carmakers?

And if GM and the others have done so much to raise productivity and improve their products, they would attract private capital. Investors are always looking for profitable ventures.

What Wagoner and his colleagues hope we’ll overlook is Frederic Bastiat’s lesson: Government intervention must not be judged only by the immediate and obvious consequences for the intended beneficiaries but also by the unseen effects on the rest of society. If the automakers get $25 billion from the capital markets because the federal government guarantees the loans, other businesses won’t be able to borrow that money. Resources that go into making cars can’t be used to make something else.

Why should politicians decide who gets those resources? It’s not as though congressmen using government force are better than the decentralized voluntary market at spotting the most promising investments. Far from it. They will make their decisions on the basis of political considerations, such as who gave them contributions or might finance a get-out-the-vote drive in the next election.

Private investors, risking their own money, have an acute interest in separating the economic wheat from the chaff. Their income depends on finding ventures that would have the best prospects of pleasing consumers. We already know that Detroit’s automakers have failed that test against Honda, Toyota, Nissan, Kia, Hyundai, BMW and Daimler.

“The future of the domestic auto business is critical to the health of the U.S. economy,” Wagoner writes. But why should we believe that? Sure, America needs cars. But there is more than one way to “produce” a car. You can produce it directly, or you can produce it indirectly by making something else and trading it for a car. There’s no shame in producing cars indirectly.

Anyway, the Big Three are not the only carmakers in the United States. Foreign automakers have factories in the United States that employ 113,000 American workers. Who cares if the cars have foreign names?

GM, Ford and Chrysler probably wouldn’t even disappear without a bailout. Bankruptcy would most likely mean reorganization under court supervision, protection from creditors and revision of union contracts. The companies would finally do what they should have done years ago: shut down more plants, eliminate some dealerships and get rid of some union rules. It would be a good thing. The companies would come out leaner.

It’s clear that Detroit would prefer to deal with congressmen than bankruptcy judges. Having Congress tell auto companies how to make cars and what to pay executives is offensive. But that’s what will happen if politicians put up loan guarantees. A bailout would be a reverse Robin Hood story: robbing from the less wealthy to give to the more wealthy. As Daniel Mitchell of the Cato Institute writes, “[T]he corporate bureaucrats at the Big Three are among the very richest Americans. The UAW bosses make extravagant salaries as well, and even regular union workers make [more] than the average American.” An economy in recession needs to cleanse itself of bad investments born of years of policy errors and managerial blunders. Keeping capital locked up in failing companies will slow the recovery and extend the hardship longer than necessary.

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