Extended Essay

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K.International School Tokyo
Extended Essay

To what extent was the interventionist approach of the U.S. government towards the auto industry in 2008-9 justified? Samkit Shah
DP Candidate No.: 002120-028
Supervisor: Mark Cowe
Date of Submission:
Word Count: 3951

Abstract

The global recession along with the soaring gas prices hurt the auto-industry very badly. It was so severe that two out of the three American automakers, General Motors (GM) and Chrysler, would fail and liquidate without government intervention. About 1.1 million people were hired in the American auto industry (Welch, 2010), making structural unemployment a big issue. However the two firms were burning through billions of dollars in months, making proper government intervention vital. Hence the research question ‘To what extent was the interventionist approach of the U.S. government towards the auto industry in 2008-9 justified?’ In the case of GM the government could have taken three approaches: letting it fail and liquidate, funding (by bailouts) till rise in sales or funding along with structural reorganization (through chapter 11 bankruptcy). Similarly in the case of Chrysler the approaches available were letting it fail and liquidate, forcing a merger and funding till a rise in sales or funding along with a merger and structural reorganization. By comparing the approaches it was concluded that the government intervention in GM was completely justified, due to the devastation that can take place due to the ripple effect. Conversely in the case of Chrysler, letting it fail was the better option. Partly the reason for this is that it is a relatively smaller firm. So the overall conclusion derived was that the government intervention in the auto industry was not completely justified. However on a scale of justified to unjustified, it leans more towards justified.

Keywords: government intervention, auto industry, bailout, Chrysler, General Motors Table of Contents

Government intervention in the Auto industry by America4
Introduction4
The events that led up to the government intervention5
The events of government intervention in the case of General Motors5
Introduction of the economic theory7
Case study of General Motors9
Case study of Chrysler12
Conclusion15
References17

Government intervention in the Auto industry by America
Introduction

The global recession of 2007-8 hurt all industries in America, including the auto industry, which made the wise use of the government budget for intervention important. Since the auto industry hired thousands of people of people but made losses of billions of dollars, the government intervention in this case is questionable. Hence the research question: ‘To what extent was the interventionist approach of the U.S. government towards the auto industry in 2008-9 justified?’

The significance of undertaking this subject lies in the understanding of what makes government interventions justifiable. Further the government can intervene in various ways, which could have different results, some being more (cost) efficient than the others. Since the money being used is that of the taxpayers, knowing the different intervention approaches and their effects is necessary. Further since an economic crisis was going on, huge stimulus was required in various industries, resulting in budget deficit and hence being cost efficient was extremely important. Since everything is theoretical and the perfect outcome cannot be known without actually trying it out, this subject is worthy of research.

The American auto industry consists of three main firms General motors (GM), Chrysler and Ford. Ford did not require government assistance at any point. Since GM and Chrysler were the ones in which government intervention took place, the two firms are focused upon in the investigation. I am extremely motivated, as someone considering a career in business, to understand the issues of...
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