One Last Thing: The Big Three don't measure up for a bailout

Another month, another bailout. Detroit's Big Three automakers went to Washington this week looking for a $25 billion taxpayer-funded handout.

It is unclear whether Congress eventually will give it to them. It is perfectly clear that Congress should not.

The thinking behind government bailouts is never strictly, or even mostly, ideological. Conservatives and liberals do not have consistent views on the subject. Instead, the logic of bailouts is pragmatic, based on three key principles:

Bail out generally viable companies.

Bailouts should go to otherwise healthy companies that have been crippled by unexpected or uncontrollable external events. They should not go to dying companies that are in decline because of structural problems.

On this score, the beggars from Detroit do worse than the financial institutions that got the government's help last month.

The financial crisis was precipitated by imprudent lending in the subprime-mortgage business. Lenders gave mortgages to people who had no realistic way to pay them off. They then sold these mortgages to other financial institutions as "investments." These institutions resold the mortgages - now bundled together as "structured investment vehicles" - to other institutions. And so on.

The end result was bad debt leveraged several times over, and spread around enough that it infected much of Wall Street. When the housing bubble popped, this caused a financial earthquake. And, as economist James Surowiecki put it, this earthquake triggered a tsunami that swamped the entire global credit market.

But the root of the problem was always those subprime mortgages. Companies such as American International Group Inc. were pushed to the brink of bankruptcy by their subprime exposure. But the other parts of their businesses, such as AIG's insurance arm, were perfectly healthy.

This is not the case with General Motors, Ford and Chrysler. True, like the rest of the world, they've been hurt by a financial crisis beyond their control; their sales for the first nine months of 2008 were down 45 percent.

But Detroit's long-term trend has been inexorably downward. Market share for the Big Three has decreased steadily. GM, for instance, has gone from 42 percent of the U.S. market in the 1960s to 20 percent today. Profits have declined consistently, too. Meanwhile, Detroit's overhead - namely, its labor agreements and facilities costs - is simply too expensive to maintain.

And unlike AIG, the Big Three already have sold off most of their other, profitable businesses. GM, for instance, sold its Electronic Data Systems arm for $27 billion in 1996, and in 2003 it sold off its Hughes Aircraft division, which by then had evolved into DirecTV.

Bail out the first to fail;

make an example of the second.

Part of the point of a bailout is to try to stop an industry's bleeding before the damage spreads. By preventing one failure, you hope to save the larger industry (or economy). The chief drawback is moral hazard: More and more companies come looking for public money once they see it being handed out.

That's why the government rescued Bear Stearns in March but allowed Lehman Brothers to fail in September. And in the context of the entire economy, you might say Wall Street got its $700 billion Hank Paulson-Nancy Pelosi bailout because it was the first industry to fail.

The automotive industry is No. 2. If it gets money too, there will be an even bigger crush of businesses looking for free candy.

Bail out companies that are too big to fail.

This is the rule that trumps all the others. If a company or an industry is so big that its failure would trigger catastrophe in the wider economy, the government has no choice but to bail it out. That's why, despite all the downsides, the Paulson-Pelosi plan had to pass: If the credit markets had frozen solid, it would have been Armageddon for middle America.

The automakers are plenty big. They suggest that up to three million jobs are at stake, if you include all the companies that sell, service and produce parts for U.S. cars.

Surely there would be economic ripples if a large portion of these workers were left looking for jobs. It would be devastating for Michigan and a handful of cities that are home to large factories.

But GM, Ford and Chrysler are no longer integral to the U.S. economy as a whole. Their failure would not trigger the kind of national meltdown that would have resulted had the financial sector failed.

By every prudent measure, the Detroit automakers should be left to their fate. Of course, President-elect Barack Obama and the Democratic Congress may choose to do otherwise. Politics often trumps prudence.