Chrysler Bailout Revisited

In 1979, the federal government bailed out Chrysler by guaranteeing $1.5 billion of debt. This bailout is generally considered successful because Chrysler survived, and the government made money on the equity stake it received.

Despite this, there is a good case to be made that it proved harmful to the auto industry and contributed to the sector's current crisis.

Absent the 1979 bailout, Chrysler would probably have ceased to be an independent company, probably merging with GM. If so, GM and Ford would have had one less competitor for nearly 30 years, improving their market share and profits - probably making them financially stronger and in less distress today.

Moreover, the Chrysler bailout signaled to the auto industry and UAW that the government would come to their aid in tough times. This would reduce the pressure for the companies and the UAW to make the difficult changes to restructure and improve the industry's viability.

Of course, this is speculative, since even with higher market share and profits, it isn't certain that GM and Ford would be financially stronger today. Perhaps the UAW would have extracted the additional profits for their members. Or the companies might have felt less pressure to enact the changes they have implemented.

But it seems clear the Chrysler bailout didn't help the industry, further demonstrating the dangers from government interference in the market.