Make no mistake.  Although the auto bailout bill died in Congress last week (thank goodness for those conservatives who voted against cloture), there will, nevertheless, be an auto deal/bailout.  It simply is a question of when.  President Bush may allocate some of the TARP funds to bailing out the Big 3 automakers in order to save his legacy.  If he doesn’t, an Obama administration certainly will.

Still, I feel compelled to bring up a brief lesson because, believe it or not, these circumstances have occurred before.

In the 1970s, a British vehicle manufacturing company called British Leyland faced similar financial woes.  When it was successful, it controlled over 40% of the British car market (much like General Motors at its peak). 

Despite its success, British Leyland fell behind.  Following several mergers, it found that it had too many models, and it never modified its production.  Its business model became outdated, flawed, and unreliable. 

When the oil crisis emerged in the 1970s, British Leyland ran out of cash, and its credit went south.

In 1975, the British government faced a difficult choice.  Should it let a company that employed over 180,000 people (and that produced over one million cars) go belly up?  Or should it throw money at it to keep it afloat (and keep its employees employed). 

The government chose the former and nationalized British Leyland.  From 1975 to 1988, it gave over 3.6 billion pounds (11 billion in today’s inflated-adjusted values) to the automaker. 

Despite this heavy influx of cash, British Leyland’s market share continued to dwindle during that time.  It was not a quick drop, but its shares declined steadily.

Eventually, it was renamed in 1986 as the Rover Group, which later became the MG Rover Group, which then went bankrupt in 2005.  Mass car production by British-owned manufacturers ended as well.  MG became part of Chinese Nanjing Automobile.  Other parts of the company went to BMW and Ford, which then sold the Jaguar and Land Rover models to India’s Tata Motors in 2008.

This British bailout should resonate heavily today.  Like British Leyland, today’s Big 3 automakers are premised on flawed business models (and bad tax and regulatory policy).  Like British Leyland, the Big 3 employ hundreds of thousands of people. 

Should the U.S. government throw billions of dollars at these companies?

History should teach us that throwing money at a problem only serves to prop up that problem.  The best auto deal is no deal at all.  The better solution is to let bad businesses fail.  It will be painful, for sure.  But the pain will be quick and will end sooner.  An auto bailout, on the other hand, will bankrupt this country and create years of British Leyland-like pain.

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