SHOULD THE US GOVERNMENT BAIL OUT THE US AUTO INDUSTRY?

• First, this issue is highly politicized issue.  During years past, the Democratic Congress railed against the Big Three when it imposed tighter emissions standards on GM, Ford and Chrysler, denouncing them as well for producing evil SUVs.  But the UAW provided considerable support for Barack Obama and other Democratic members of Congress.  Therefore, Speaker Nancy Pelosi and Senate Majority Leader Harry Reid have met with company and union officials and subsequently asked Treasury Secretary Paulson to provide funds from the $700 billion Troubled Asset Relief Program.  Obama has also strongly advocated some kind of help for the American auto industry.  There is little doubt that this is a payback to the unions for their support of the Party.  Such a bailout would be to avoid bankruptcy for the Big Three but such a bailout will not address the fundamental problems of how these companies produce cars.  The simple fact is that Americans are not buying American made cars and the incredibly lucrative labor contracts make the Big Three unable to compete in the marketplace.  So logically, Congress should insist on systemic changes before money is given.  To not do so would be irresponsible government and would simply mean more money would need to be given in the not too distant future.  Furthermore, such a bailout would be grossly unfair to other companies that make cars in the US.  Honda, Toyota and the rest employ over 113,000 American auto workers who make nearly 4 million cars a year in Alabama, Kentucky and Tennessee.  Highly skilled American workers can produce good cars that Americans will buy without being members of the UAW. 

• Second, let’s think about the bankruptcy option.  The Big Three have made clear that whatever does happen, pension obligations to their 479,000 retires are largely financed.  Furthermore, shareholders in these three companies have already lost much of their equity in their stock; GM stock, for example, has lost 90.5% of its value over the last 12 months.  So, bankruptcy will have little real effect on GM stockholders.  Furthermore, history has shown that companies in industries like airlines, steel, and retail that go through bankruptcy have the opportunity for a fresh start with a more competitive cost structure.  William Ackman, a prominent investor who runs the Pershing Square Capital company has argued that “The way to solve that problem is not to lend more money to GM.”  Instead, he advocates that GM should submit a prepackaged bankruptcy, laying out steps it plans to enact once in Chapter 11 protection.  He continues, “I’d rather the government’s money be used to train people for other jobs.  The bankruptcy word scares people.  It’s simply a system.”  Furthermore, as David Yermack argues, “large numbers of jobs may be at stake, perhaps as many as three million if one counts all the other firms that supply the Big Three.  [But] this greatly overstates the situation.  Americans are not going to stop driving cars, and, if GM, Ford and Chrysler disappear, other companies will expand to soak up their market share, adding jobs in the process.  Many suppliers will also stay in business to satisfy the residual demand for spare parts even if Detroit manufacturers go under.  If the government wants to spend $25 billion to protect auto workers, it would do better to transfer the money to them directly (perhaps by cutting each worker a check for $10,000) rather than by keeping their unproductive employer in business.”  Additionally, David Brooks makes a compelling observation:  “These companies are not innocent victims in this crisis.  To read the expert literature on these companies is to read a litany of miscalculation.  Some experts mention the management blunders, some the union contracts and the legacy costs, some the years of poor car design and some the entrenched corporate cultures.  There seems to be no one who believes the companies are viable without radical change.  A federal cash infusion will not infuse wisdom into management.  It will not reduce labor costs.  It will not attract talented new employees. . . . In short, a bailout will not solve anything — just postpone things.”  The greater danger in all this is a fundamental one:  Is the US sliding into a culture of “progressive corporatism, a merger of corporate and federal power that will inevitably stifle competition, empower corporate and federal bureaucrats and protect entrenched interests?”  Tom Friedman poignantly observes that the blame for this unbelievable mess extends beyond the corporate leaders of the Big Three and the UAW, it “must be shared equally with the entire Michigan delegation in the House and the Senate, virtually all of whom, year after year, voted however the Detroit automakers and unions instructed them to vote.  That shielded General Motors, Ford and Chrysler from environmental concerns, mileage concerns and the full impact of global competition that could have forced Detroit to adapt long ago.”

• Finally, what do we do?  Should we rescue the Big Three?  If the Congress comes to the rescue of these ineffective, incompetent companies, then that aid must be at a stiff cost.  I appreciate the suggestion of Paul Ingrassia of the Wall Street Journal:  “In return for any direct government aid, the board and the management [of GM] should go.  Shareholders should lose their paltry remaining equity.  And a government-appointed receiver—somewhat hard-nosed and nonpolitical—should have broad power to revamp GM with a viable business plan and return it to a private operation as soon as possible.  That will mean tearing up existing contracts with unions, dealers and suppliers, closing some operations and selling others and downsizing the company. . . Giving GM a blank check—which the company and the UAW badly want, and which Washington will be tempted to grant—would be an enormous mistake.”  Here are the brutal facts:  GM’s hourly compensation—wage plus fringe benefits—totaled $71 in 2007, compared with $47 for Toyota’s US plants.  Health benefits for retirees (many in their 50s, having retired after 30 years) are expensive.  But the UAW opposes concessions.  A bailout cannot simply be to support union welfare.  That is not just nor is it fair to all other US workers.  If there is a bankruptcy, a judge can modify labor contracts and debts, just what GM and the others need.  So, if the Big Three are to avoid bankruptcy, there cannot be the status quo.  There must be significant pain and sacrifice and that begins with the Big Three’s management, shareholders and labor.  There must be fundamental and systemic change or the US will simply be pouring money down a bottomless hole—and that is not good stewardship of taxpayer money.

See Robert Samuelson in the Washington Post (17 November 2008); Tom Freidman in the New York Times (12 November 2008); David Brooks in the New York Times (14 November 2008); Wall Street Journal editorial (10 November 2008); Micheline Maynard in the New York Times (13 November 2008); and David Yermack in the Wall Street Journal (15-16 November 2008).

Print