For a baby boomer who grew up in the Midwest it is odd that questioning Mitt Romney about how generous he would have been with taxpayer help for General Motors is considered a winning issue for Democrats.  General Motors was the number one company in America for 22 of the first 25 years of the Fortune 500 list of the largest companies in America.  The only three years that General Motors was not number one was in the early 1970’s when gasoline prices spiked and GM ranked second to Exxon.  A Federal bailout of General Motors was as unthinkable in 1980 as it is today to imagine a presidential campaign in 2052 in which candidates argue about how much taxpayer money should have been used to bail out Apple or Google.

General Motors and successful tech firms in Silicon Valley have (or in the case of GM had) an advantage over their competitors based on their size and geographic location.  The important work of Paul Krugman, and others, explained that companies and countries can have an advantage over their rivals based on increasing returns and geographic concentration.  Google, Apple, Facebook and other tech firms in Silicon Valley have an advantage because of the available supply of engineers, software developers and programmers which lowers the cost of hiring and turnover.  For General Motors and other automakers in Michigan and Ohio, the advantage came from a location near parts suppliers and the suppliers of other intermediate goods and raw materials.

Krugman’s work explained that firms benefit when they are located near similar producers.  This is true for automakers in Detroit and tech firms in Silicon Valley.  When automakers in Detroit or tech firms in Silicon Valley fail the market test they have done so despite their advantages over competitors in other areas.  The bailout of financial institutions was based on a notion of “too big to fail.”  The systemic risks of allowing a large financial institution to fail were perceived to be too high; there would have been too much collateral damage.  The rationale for bailing out manufacturing firms advantaged by their size and proximity to key suppliers and human capital is much more sketchy.  It establishes a dangerous precedent for future recessions when other large American companies, who faced advantages similar to those enjoyed by GM, will also file for bankruptcy.

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