Since the summer of 1979, Chrysler executives have sought a federal subsidy to save their company from possible bankruptcy, and they appear to be near their goal. (Because the subsidy Congress passed December 21, 1979, will be given only if Chrysler receives private financing and reduces employees’ wages, whether the company will get the subsidy is uncertain at this writing.) They have talked throughout their negotiations with the government as if a bankruptcy would necessarily cause them to shut down, but if Chrysler went bankrupt it would agree with its creditors on a future repayment scheme and could survive and even thrive. The company’s survival would depend on whether projected revenues exceeded or fell short of projected costs. However, Chrysler executives have talked as if the company would necessarily fail, and therefore I will take them at their word and assume that it will indeed go out of business if the government does not subsidize it.

Should the U.S. government let Chrysler fail? Let’s reword the question: Should the government force taxpayers to subsidize a company whose products do not meet the market test? The answer becomes clear: No. Why should taxpayers have to pay to keep a firm in business? As consumers and producers, they have shown that they do not want to keep it going. Consumers are not willing to pay enough for Chrysler’s products to cover the company’s costs; producers — including suppliers to Chrysler and Chrysler employees — are not willing to sell their goods and services at a cost below Chrysler’s projected revenues. Consumers and producers have spoken, and that should be the end of it.

Chrysler executives reply that if the company fails their workers will be unemployed and their suppliers will lose business and lay people off. But surely this unemployment of resources cannot last long: if this were a likely prospect, Chrysler would not be in its present bind. Precisely because the resources have higher-valued alternate uses, Chrysler cannot afford to pay them out of projected revenues. Other potential users of the resources are willing to pay more than Chrysler can. The cost of a resource is its value in the highest-valued alternate use, and therefore to say that Chrysler’s costs exceed its revenues is to say that Chrysler resources are worth more elsewhere.

This is from David R. Henderson, “A Step Toward Feudalism: The Chrysler Bailout,” Cato Policy Analysis No. 4, January 15, 1980.

An excerpt on the political/economic implications of the bailout:

If Chrysler receives the subsidy, its executives will soon learn that the man who pays the piper calls the tune. They will find that some of their business decisions require the approval of a federal official. Then, if they do not object (and how can they?), they will find more decisions subject to government approval. There will even be a push to have the federal government receive shares in Chrysler in return for the subsidy. John Kenneth Galbraith has started this offensive already. He asks in a letter to the Wall Street Journal (August 13, 1979) “. . . if as taxpayers we are to invest one billion dollars in Chrysler, could we not be accorded an appropriate equity or ownership position? This is thought a reasonable claim by people who are putting up capital.”

And that’s not all. The executives will find themselves on much weaker ground fighting off increases in government power that hurt them. They cannot use moral arguments (no one would take them seriously) or arguments of any other kind against big government. John Kenneth Galbraith makes this point in the same letter: “Could we not,” he says, “ask that all corporations and corporate executives that approve or acquiesce by their silence in this expansive new public activity, refrain most scrupulously from any more of this criticism of big government.” If Chrysler receives the subsidy, one more barrier to the growth of government will have crumbled.

Read the whole thing.