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June 12, 2009

Nothing Learned from the Airline Bailout and Forced Innovation in the Auto Bailout

In a recent WSJ article, a discussion ensued about the state of the airline industry. While airlines have scraped by the global recession, the industry still needs to do more restructuring to become leaner, the WSJ reports.

This article kind of reminded me of the auto industry in 2004 and 2005 when industry experts said that the Big Three needed radical restructuring in order to adjust to the global market changes. Yet, these requests went largely ignored and have led to an $85 billion (and counting) bailout of the industry.

I have long argued that government bailouts are bad because it creates incentives for bad business. Now that the airlines are facing long-term debt problems, do you really believe that they are more likely to responsibly handle the situation after already having a bailout? They are more likely to go to the government when the crisis strikes and ask for money because while it may be more humiliating to ask for a bailout, it's easier to do than restructure debt and labor contracts, and easier when half of the industry is doing it.

The industries that receive government money also receive government-style accountability. They operate much like the Post Office, Social Security Administration, the IRS, and the government's own privately held company, Amtrak. These industries continue the same old practices while costs mount up with customer service complaints and lower employee productivity.

Now, President Obama is going to try something new, forced innovation. He is going to force the auto industry to produce green cars for purchase. THIS IS A HUGE MISTAKE!!

Granted, SUVs are not the wave of the future, but neither are all alternative energy vehicles. An all electric car currently runs for $40,000. This isn't a hot ticket item for the middle class. Green? Yes, but not economical. The way to go is with smaller cars that run 35 mpgs or better and can be sold for $12,000 to $15,000.

Alternative energy is still years away from matching the economical production of standard compact cars. Let's allow that segment to grow naturally by 5% per year until it becomes the norm. Innovation takes time. It requires consumer demand, acceptance, and no government interference.

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