Richard Posner and Gary Becker have interesting posts debating the auto bailout. Despite some reservations, Posner supports a bailout. Becker on the other hand oppose it and argues that going into bankruptcy is the best solution to the Big Three's problems. ON balance, I am much more persuaded by Becker's arguments. But both sides make good points and are well worth reading.
This part of Becker's post provides a compelling answer to one of the most important pro-bailout arguments:
GM and the other carmakers have claimed that bankruptcy would have a particularly big effect on sales because consumers would fear that their warranties on the cars they bought could not be honored in the future. Whether this is true or not would depend on whether consumers expect these companies to emerge from bankruptcy in the future as stronger rather than weaker companies compared to a bailout. If they expect bankruptcy to lead to better labor conditions for the company and smaller debts, bankruptcy would give consumers more rather than less confidence that their warranties would be honored in the future. Furthermore, car prices would only have to fall a little to offset any fears about future warranty protection since car buyers are not willing to pay a lot for warranties.
But suppose for this and possibly other reasons, customers did reduce their demand for cars of the bankrupt American car producers. What would that mean? Presumably, they would not stop buying cars, but they would instead shift their demand toward the closest substitutes; namely, American-made cars of Toyota, Honda, Nissan, and other foreign carmakers. Their share of American made cars is over one third and rising, so bankruptcy of the big 3 might speed up this growth in their share. What that mainly means is increased employment of autoworkers in Tennessee and other states where foreign producers congregate relative to employment of autoworkers in Michigan, Ohio, and other Midwestern states where the factories of the American car producers are mainly located.