More Myths About the Detroit Bailout

There's an idea going around that a bailout for the Big Three in Detroit is actually a bailout for small businesses.  Most notably, Sandy Baruah, acting administrator of the Small Business Administration, made the argument in an op-ed for the Detroit Free Press yesterday that "thousands of small businesses" and "millions of workers" would be run into the ground if nothing is done for the Big Three.

And John Tozzi of Business Week, after doing the math on how many small businesses depend on the auto industry, argued that we should not look at this as a bailout just for the Big Three, but the "Small 50,000."

I have written earlier in this blog about the number of small businesses that are linked to the Detroit auto industry. I don't deny that if one or all of the big corporations were to shut down, many jobs would be lost and many businesses would close.

But this argument makes sense as a reason to support the bailout only if you make a conscious effort to NOT think like an entrepreneur.

Let me explain. Entrepreneurship is by definition a creative process. Every entrepreneur, even those who closely emulate existing businesses, is to some extent creating something out of nothing. The entrepreneur can't just look at the profit opportunities that are already out there--he or she must at least consider what opportunities are missing or unseen, in order to create something new.

Proponents of the bailout (like this op-ed in today's DC Examiner) only look at the existing opportunities. They look at the businesses currently dependent on the domestic auto industry, and count them all as losses if there's no bailout.

What they don't consider are all the potential opportunities that small businesses and workers would lose if there IS a bailout.

Take this recent piece by Matthew Slaughter of Dartmouth College, for example. He (persuasively) argues that bailouts for the domestic industry would deter investment by foreign companies into the U.S.  This has historically been significant: Foreign car manufacturers that insource work to the U.S. employ 402,800 Americans. Toyota alone manufactured $1.66 million cars in the U.S in fiscal year 2008.

Furthermore, a bailout would (rightly) be seen around the world as a protectionist attempt to shore up domestic industries against foreign competition.  This would encourage countries around the world to continue or expand protectionist policies of their own, locking out access to foreign markets at a time when they have been one of the few bright spots in the U.S. economy.  Slaughter points out that U.S. multinational companies employ 22 million Americans.

There are many more not-immediately-apparent, unseen costs of doing the bailout. I'll probably touch on more in future posts. The key to identifying them is thinking like an entrepreneur and considering what we can create and not merely what we already have.