It is exactly 100 years since Henry Ford released the Model T car in Detroit, Michigan. With his pioneering combination of assembly line production and high wages, Ford changed manufacturing forever. These glorious beginnings only heighten the poignancy of the impending collapse of the American automotive industry.

General Motors, Ford, and Chrysler are currently lobbying the US legislature for a $25 billion bailout. In general, Democrats have been more willing than Republicans to oblige such requests. However, on November 20, the House and Senate postponed decisions until the car companies make a better case for themselves.

Why are firms asking for a bailout in the first place? Car manufacturing is particularly reliant on credit because of the high cost of investment and time needed for production. However, as a result of the financial crisis, share prices have dropped and credit has dried up. So firms have had to instead rely on reserves. GM?s reserves are down to $16 billion, and they claim they can afford to maintain their capital for only one more year.

To make things worse, demand is down. This again hits car companies disproportionately since they face high fixed costs whether they make one car or ten thousand. Attempts to raise cash by selling subdivisions have proved insufficient. While GM?s sale of its stake in Suzuki will help, it is having a hard time getting rid of its own Hummer line. This is no surprise given the Hummer?s outrageous dimensions: driving it on urban roads is like navigating a DTC bus through Paranthewali Gali.

The car companies argue that a bailout is good for everyone: it will have positive spillovers in other teetering industries that rely on the success of car manufacturers. It will also reduce unemployment, which is already at 9% in Michigan, the home of the car industry. Are these good reasons for a bailout? Perhaps, but not necessarily.

Since the money for the bailout must come from somewhere, it is not sufficient to simply highlight its benefits. We also have to consider the alternative uses of funds and the alternative outcomes for car companies. First, how do we know this is more efficient than dividing the money into several bailout checks for small businesses? The car companies might argue that small businesses have not been vocal about their needs. But this could simply be because there is no umbrella organisation to lobby on their behalf.

Even if we accept that car manufacturers would benefit more than others, there are additional long run costs associated with the bailout. By saving firms from collapse, the government will be setting a precedent. In the future, other firms might operate under the belief that the government will step in under similar circumstances. This immediately leads to problems of moral hazard. If large firms feel that they are effectively insured against collapse, they will be tempted to take on inefficiently big risks .

The second question is this: what will happen to car firms in the absence of a bailout? It has been argued that these firms could improve their finances by reorienting towards Asian markets and streamlining production. It is true that they could learn a thing or two from Ratan Tata and his team. Not only is the Nano engineered for efficient assembly, but Tata has also convinced suppliers to design cheaper inputs. However, these are unlikely to fix the American firms? short-run problems. It is therefore likely that GM, and possibly the others, would have to file for Chapter 11 bankruptcy.

Bankruptcy comes with several advantages. First, this will allow the firms to reorganise production by eliminating unprofitable plants without having to fully pay off shareholders. Second, firms will be able to renegotiate contracts with unionised labour. This is not great for labour but will make production more sustainable for the firms. Furthermore, some of the disadvantages are less acute than the firms suggest. It is true that loans from the credit market are not going to be any easier to find, but there will be some relief through Debtor-in-Possession financing, which is reserved for Chapter 11 bankruptcy cases.

There are still some valid concerns. It is possible that consumers will be wary of buying cars from a bankrupt firm. This is because the relationship between a consumer and the firm does not end at the time of purchase. Without a reasonable assurance that the firm will be around to provide after-sales service, it will be hard to pull people away from foreign brands.

Nevertheless, the US Congress has done well to not give in yet. The Republicans must take some credit for this. They have been opposed to transferring money from taxpayers to car manufacturers. This is probably more pragmatism than ideology. Since Republicans dominate in the southern states, and since these states house major Japanese and European car plants, it has made sense for these Senators and Representatives to give patriotism a rest.

If the bailout is ultimately extended to car manufacturers, one hopes it will come with some strings attached (perhaps an insistence on fuel-efficient technologies?) and that it will not be spent on caviar for senior executives. Until then, GM still has one lucrative commission to work on: Barack Obama?s new bulletproof limousine.

The author is a post-doctoral fellow and instructor in economics at the University of Chicago