Ask an Expert: Economic Conundrum - Page 2 of 3

Ask an Expert: Economic Conundrum

total, unreviewable power, but the bill instead required that he report on and justify each decision. All of this is now moot since he has gone the loan/equity route instead.

With this shift, how will Americans directly benefit from the aid that’s part of the plan? For example, will people in default get assistance in repaying student loans or auto loans? Will states be able to apply for the funds and allocate to people who need help in those areas? How will it work?

Harrison: None of the current $700 billion will have any such direct applications. The money will all go to financial institutions in the hopes that it will enable them to start lending again. Critics are worried that this has not yet led the banks to resume lending. They are instead sitting on the funds, building reserves to ride through the recession and/or purchasing ailing smaller banks. At best, if this works, it would help credit-worthy students, small businesses, and consumers get loans and credit again. It will do nothing to help those who are behind in or defaulting on their current loans.

The bailout plan, in more or less whatever form it takes, will be bad news for the majority of Americans. Some individuals will benefit — at a substantial cost to others. The main losers will be middle-class and working class Americans, who will suffer from a weaker economy and thus worse job prospects.

President-elect Barack Obama and key Democratic officials are pushing for an auto industry bailout, how would average Americans be affected if the auto industry doesn’t receive aid?

Morris: The Detroit-based auto industry is currently losing billions of dollars every month. By contrast, the auto industry in Alabama is holding up reasonably well considering the downturn in consumer sentiment. Bailing out the Detroit-based industry would undermine incentives to cut costs, improve efficiency, and develop vehicles that more people want to buy. It would temporarily keep some people in jobs, but at the expense of preventing others from keeping their jobs – and at the expense of new job creation.. The harsh reality is that Detroit automakers will have to reform and adapt to the changing world if they are going to survive in the long-term, regardless of whether they are bailed out this time. The sooner it begins to adapt, the more likely it will survive in the long-term.

What is most likely is that any automaker that failed would go into Chapter 11 bankruptcy and continue producing under reorganization, much as several airlines and retail chains have done. In the auto industry, it is likely that the bankrupt firm would seek concessions from workers, especially on work rules, pension, and benefits. There could be devastating layoffs in the industry, which would create a chain of layoffs among suppliers and hurt retail businesses in localities dependent on auto workers as consumers. But the layoffs could happen even if there is a bailout, unless the bill explicitly prohibits this.

Will a collapse of the auto industry disproportionately impact African