Should We Bail Out the U.S. Auto Industry?

[Crazed Rabbit]

Absolutely not. The american auto industry is chrashing and burning for a reason, they produce inferior cars nobody wants. if you decide to give them money now, you'll just face the exact same situation in a few years.

And because they caved in like sissies to their unions, and are now paying the cost ( about $1500 per car for health care for GM, compared to ~$150 per car for the Japanese companies).

Even buying - nationalizing - these companies won't make them successful, because they operate a fundamentally flawed business models makings cars nobody wants at really high prices because of legacy costs. It'd be like the government buying out kerosene lamp makers after the invention of the lightbulb.

CR

[HoreTore]

It'd be like the government buying out kerosene lamp makers after the invention of the lightbulb.

Then buy their lamps and start making better lightbulbs

[Louis VI the Fat]

Don't forget the union bosses, Louis. Or the congressmen and Senators the Big 3 bought out.

I am just trying to get the most out of my recent sharp left turn.


In fact, more of it:

Lingering effects of irresponsible Union demands and the legacy of high retirement schemes for former employees hurt the US automobile industry. However, I think I'll put some more blame at the Big Corporations and Conservative politicians.

US car manufactures haven't been able to compete with foreign competitors in the small, lean and budget car markets for decades. So the only way to keep profits up was by outcompeting foreign car manufacturers in the Big Car segment. A virtual American monopoly. Detroit's single recent contribution to global automobile innovation: the SUV.
In an unholy alliance with conservative politicians and Big Oil, Washington and Detroit have given US industry fifteen years of respite. Detroit build the big gas guzzlers, Washington kept US gas taxes the lowest in the western world, Big Oil stimulated gas guzzling. The measures were SUV's, foreign entanglement in oil producing regions of the world, anti-environmental measures. 'Kyoto', Iraq, and a bankrupt industry are the result.

Washington HAS been trying to bail out the US auto industry in this way. It proved unsustainable, as has been predicted all this time. Gas prices have soared, the market for SUV's has collapsed, the Big 3 are on the verge of collapse, huge environmental damage has been done.

'Plunder' seems to best describe conservatives and big business. A plunder of the future - environmental costs for the next generation, debt costs for the next generation, unsustainable industry models to be solved by a future generation. While this took place, average wages for CEO's soared from fifty times that of an average employee to 500, 600, 700 times the average wage. In the face of all this, the unions tried to bargain a small share of the plunder for the employees. This they did indeed receive. However, I don't think I would ascribe Big 3's current crisis to the irresponsibility of the unions.

[Lemur]

Good article today by the Freakanomics dude.

I was in a hotel room watching CNBC early one morning. They were interviewing Bob Nardelli, the C.E.O. of Chrysler, and he was explaining why the auto industry, at that time, needed $25 billion in loan guarantees. It wasn’t a bailout, he said. It was a way to enable the car companies to retool for innovation. I could not help but shout back at the TV screen: “We have to subsidize Detroit so that it will innovate? What business were you people in other than innovation?” If we give you another $25 billion, will you also do accounting?

How could these companies be so bad for so long? Clearly the combination of a very un-innovative business culture, visionless management and overly generous labor contracts explains a lot of it. It led to a situation whereby General Motors could make money only by selling big, gas-guzzling S.U.V.’s and trucks. [...]

Nothing typified this more than statements like those of Bob Lutz, G.M.’s vice chairman. He has been quoted as saying that hybrids like the Toyota Prius “make no economic sense.” And, in February, D Magazine of Dallas quoted him as saying that global warming “is a total crock of [expletive].”

These are the guys taxpayers are being asked to bail out.

[Hosakawa Tito]

'Plunder' seems to best describe conservatives and big business. A plunder of the future - environmental costs for the next generation, debt costs for the next generation, unsustainable industry models to be solved by a future generation. While this took place, average wages for CEO's soared from fifty times that of an average employee to 500, 600, 700 times the average wage. In the face of all this, the unions tried to bargain a small share of the plunder for the employees. This they did indeed receive. However, I don't think I would ascribe Big 3's current crisis to the irresponsibility of the unions.

The biggest part of legacy costs for US companies is health care benefits. Most foreign workers health care is subsidized by their government. This puts US companies at a huge competitive disadvantage. The rest of your statement is on the money.

These are the guys taxpayers are being asked to bail out.

That's the problem with this bailout. Many taxpayers want to save these auto-workers jobs *Joe Assembly Line*. However, handing a wad of cash with no strings attached to the same management bozos that screwed the US auto industry over, and over-paid themselves in the process is unacceptable to me. The worst offenders should be fired and the rest can take a huge paycut if they want my tax dollars. Stop fighting fuel efficiency/environmental/alternate fuel innovations or end up on the trash heap of companies that failed to change with the times. Too bad my equally idiotic & corrupt political representatives don't have the integrity to see past their own personal welfare to force the issue....

[Goofball]

The only possible argument I can think of for bailing out the US auto industry is that it can almost be considered a strategic industry. That is, you want to have a homegrown industry capable of making tanks, hummers, and other things that drive around and go boom.

It's the same reason we Canadians keep throwing taxpayer $$ at Bombardier Inc, because we want to know that we have a homegrown industry capable of making things that can fly around and go boom.

A weak argument, but an argument nevertheless.

[CountArach]

The only possible argument I can think of for bailing out the US auto industry is that it can almost be considered a strategic industry. That is, you want to have a homegrown industry capable of making tanks, hummers, and other things that drive around and go boom.

Yes just what America needs - an even greater war economy...

[Gregoshi]

Yes just what America needs - an even greater war economy...

Of course, how else are we going to sell war machines to our potential enemies allies?

[Lemur]

Tally up the cost and move on, this one's a done deal. Of COURSE we shouldn't -- but its no longer up for evaluation.

All is not lost, my friend.

The chairman of the Senate banking committee said on Thursday that he did not believe there would be enough Republican support for efforts to aid floundering automobile manufacturers, raising doubts about whether Congressional leaders will call the House into a lame-duck session next week.

“Right now, I don’t think there are the votes,” the chairman, Senator Christopher J. Dodd of Connecticut, said, adding that he personally was in favor of using money from the $700 billion financial rescue program to help General Motors, Ford and Chrysler. But Mr. Dodd said he did not believe such a bill would get through the Senate.

“I don’t know of a single Republican who’s willing to support,” Mr. Dodd said. “So I want to be careful about bringing up a proposition that might fail in light of the fact the authority exists, and under an Obama administration there seems to be a greater willingness to deal with the issue. So there are some political considerations to be made.”

And this, of course, is why we need for the Republican Party to not implode, and not wander off into a corner by becoming the White Christian Identity Party. We need those loveable wingnuts.

[Lemur]

Once again, The Onion has us all dead to rights.

[Crazed Rabbit]

Good article today by the Freakanomics dude.

Good article indeed, but I don't think he wrote Freakonomics.

All is not lost, my friend.

What about when the dems get more seats in January? I bet this will still be an issue then.

CR

[Whacker]

I'm honestly a bit torn.

First, I don't want to see our economy slide more down the crapper. The only people who are really suffering are the lower and middle classes, esp. the middle class. It still annoys the living hell out of me that these billionaire corporate fatcats aren't held accountable when they drive a business into the ground. It all screams of more Enron, when tens of thousands of workers lose just about everything they have, and the people at the top plunder what they can and exit stage right, meanwhile their buddies on capitol hill publicly condemn the situation yet do nothing to hold those responsible accountable. I don't know if I'd put the majority of the blame at the union's feet, but I have read enough lately to be convinced to move off of my more neutral position on them. I still think that the idea is good, even if the execution is poor lately. Lastly the US government has made it damn hard to import cars into the US for decades to try and create an artificial advantage for US auto manufacturers.

On the other hand, we are a capitalist society. That part of me is screaming to let em burn for not learning to adapt to the market. Good leadership is having a vision, knowing when and how to change, how to adapt to and overcome adversity, and reading the market and demand correctly. I've seen very little of that from US auto makers over the past years.

As an aside, from Lemur's quoted article:

Nothing typified this more than statements like those of Bob Lutz, G.M.’s vice chairman. He has been quoted as saying that hybrids like the Toyota Prius “make no economic sense.” And, in February, D Magazine of Dallas quoted him as saying that global warming “is a total crock of [expletive].”

That's hilarious. The Prius comment is both priceless and sad. The global warming bit though I don't care about, even I'm a bit convinced the whole global warming thing is somewhat of a crock after reading quite a bit about it.

[Lemur]

Good article indeed, but I don't think he wrote Freakonomics.

You're right, of course; he wrote The World Is Flat. My bad.

What about when the dems get more seats in January? I bet this will still be an issue then.

Yuppers, but that will be months from now and the situation may be changed. As long as they aren't shoveling our money into a hole right now I'm happy and hopeful.

[rasoforos]

I think its a no brainer

If we go back to some good old Keynesian economics and throw all the extra bits away, we see that it all comes down to peoples' expectations...

...now what will people think if Ford Chrysler and GM, the proud giants of the US motor economy, fail? Their expectations of a recovery will severely diminish. You might even get bank runs and stuff...


I think it is vital that the US starts working on a more mixed model of economy. They should bail em out but also influence their production and sales policies because due to isolationism these companies have lost their global competitive edge. More proper cars, less huge problem-ridden dinosaurs of a car and an emphasis on foreign sales.

Facing a recession is all about moderation. If u bail everyone out then everyone will fail or be careless (example: The Japanese bank sector during their 10 yr old recession). However if the government refuses to help then people will just panic, start saving their money under their mattress so to speak, banks will collapse and jobs will be lost.

[Lord Winter]

Facing a recession is all about moderation. If u bail everyone out then everyone will fail or be careless (example: The Japanese bank sector during their 10 yr old recession). However if the government refuses to help then people will just panic, start saving their money under their mattress so to speak, banks will collapse and jobs will be lost.

I can see that the arugment working with the bank bailouts, but with Ford and GM? No way. Yes, they employ thousands of people. Well the short term game outweigh the precedents like you talked about of a government saftey net? Its time we actually trust in capitalism or else we need to change to socialism. Which, I'm not even sure our government could handle at this point. Lets start showing some fininical responsiability for once instead of gambling with companies that have long been obsolete.

[CountArach]

Its time we actually trust in capitalism or else we need to change to socialism.

Trusting in a failing system, I can see that working

[Lord Winter]

Its just our implantation of it, not the system its self. Socialism transfered over to america would have equal problems. The only question there is. is which system does less damage.

[CountArach]

Its just our implantation of it, not the system its self.

I must, respectfully disagree.

Socialism transfered over to america would have equal problems. The only question there is. is which system does less damage.

Keynesian Interventionism isn't such a bad system and represents the middle ground. I am betting that is what Obama starts to implement.

[rasoforos]

I can see that the arugment working with the bank bailouts, but with Ford and GM? No way. Yes, they employ thousands of people. Well the short term game outweigh the precedents like you talked about of a government saftey net? Its time we actually trust in capitalism or else we need to change to socialism. Which, I'm not even sure our government could handle at this point. Lets start showing some fininical responsiability for once instead of gambling with companies that have long been obsolete.

They employ tens of thousants of people, and if you count all their suppliers (both US and World) then you have hundreds of thousants people. Considering that some companies rely almost 100% on contracts from these big firms , it is quite possible that a chain reaction of firm failures will occur. The modern economy is so interconnected that the impact will be global.

As for capitalism. We gotta stop thinking that capitalism means no government interference. The 'invisible hand' never works and Dubya certainly didnt turn socialist when he bailed out those companies. Modern economic theory takes failed markets into account (i.e. health) and there is no capitalist country in the world today that doesnt implement at least a minimal level of market control.

Lets hope we ll come out of this unscathed and with low low property prices :)

[Lemur]

They employ tens of thousants of people, and if you count all their suppliers (both US and World) then you have hundreds of thousants people.

Actually, GM directly employs 100,000 people all by itself, so your numbers are off by a factor of ten. If we let these companies die as they deserve, the consequences are going to be huge.

Good article on the situation from the Economist.

Another good article:

In order to seek so-called Chapter 11 status, a distressed company must find some way to operate while the bankruptcy court keeps creditors at bay. But GM can't build cars without parts, and it can't get parts without credit. Chapter 11 companies typically get that sort of credit from something called Debtor-in-Possession (DIP) loans. But the same Wall Street meltdown that has dragged down the economy and GM sales has also dried up the DIP money GM would need to operate.

That's why many analysts and scholars believe GM would likely end up in Chapter 7 bankruptcy, which would entail total liquidation. The company would close its doors, immediately throwing more than 100,000 people out of work. And, according to experts, the damage would spread quickly. Automobile parts suppliers in the United States rely disproportionately on GM's business to stay afloat. If GM shut down, many if not all of the suppliers would soon follow. Without parts, Chrysler, Ford, and eventually foreign-owned factories in the United States would have to cease operations. From Toledo to Tuscaloosa, the nation's assembly lines could go silent, sending a chill through their local economies as the idled workers stopped spending money.

[Banquo's Ghost]

Once again, it is shown that the Achilles Heel of free market capitalism is the "too big to fail" corporation.

These behemoths are not subject to market forces any more than governments are. Just as governments are traditionally awful at making market-based decisions, so are monopolies and giant multi-national corporations. Both tend towards corruption and greed, because there is never the accountability - the decision makers are never the ones to suffer.

In my opinion, throughout the Western world, this collapse is a good chance to allow these dangerous creatures to die off like the dinosaurs they are. Let the market work, and take the pain. Remove the cotton wool of incorporation and limit by law the size of companies and their market share. Require that boards have an equal proportion of independent, private shareholder members to institutional investors, and that remuneration committees are composed entirely of individual private shareholders.

Then the market will work as a real market, and government, having set the regulation framework, can remove itself from the business of business.

[rory_20_uk]

Good article from the Economist.

The workers need to understand that they are competing against Korean, Chinese and Indian workers. They have to cost less per unit of production. No, it's not nice, but that's reality. The 1970's are over: Britain has realised that striking doesn't work, the rest of Europe is building more, and they're a drop in the ocean compared to the far East. Trying for isolationism might work, but will make exports extremely difficult to sell.

I think that the government should take a large holding in the company, and if there's a way of taking most of the value from the head of the companies' salaries so much the better. The seeds of failure were sown with the packages that the workers received 30 years ago: extremely generous health and almost impossible to sack. When anything else starts to go wrong, having a fixed, expensive work force limits all possibility for evolution.

Dinosaurs did adapt, just not to the massive shock to the system. about 90% of all life on the planet was destroyed, and it took a long time to recover. Destroying the world and hoping the pieces will make a better whole at some future juncture seems... daft.

To force boards to take on directors who have a tiny minority of shares (one British bank has 4% of private ownership) is not workable.

Employing a management consultancy company who specialises in human management to decide on salaries would be better than expecting Joe Public to understand that making the top tiers work for £60k a year means that either the company moves off shore, or there's a brain drain of able talent.

[Banquo's Ghost]

Employing a management consultancy company who specialises in human management to decide on salaries would be better than expecting Joe Public to understand that making the top tiers work for £60k a year means that either the company moves off shore, or there's a brain drain of able talent.

I can guarantee you that management consultancies are an integral part of the problem. If you end up in that career, you will understand just why. They don't do what you think they do.

[Lord Winter]

They employ tens of thousants of people, and if you count all their suppliers (both US and World) then you have hundreds of thousants people. Considering that some companies rely almost 100% on contracts from these big firms , it is quite possible that a chain reaction of firm failures will occur. The modern economy is so interconnected that the impact will be global.

As for capitalism. We gotta stop thinking that capitalism means no government interference. The 'invisible hand' never works and Dubya certainly didnt turn socialist when he bailed out those companies. Modern economic theory takes failed markets into account (i.e. health) and there is no capitalist country in the world today that doesnt implement at least a minimal level of market control.

Lets hope we ll come out of this unscathed and with low low property prices :)

I'm not advocating a Lazzie Faire approach I'm advocating a more though out approach. Do we bail out the airlines when they go under? What about any other major companies. In theory I could accept a bailout if:

1. It would actually make the company competive, instead of merely delaying the inevitable.
2. The funding was there.
3. The company going bankrupt would do more harm then any potential side effects the bailout would result in.

Overall I think we can all agree on 2 but three and mainly one aren't as straight forward.

[Alexander the Pretty Good]

Seeing as the Big 3 not only benefit from protectionism but also hold sway over Congress in determining regulation, it seems a little silly to me to say "obviously capitalism doesn't work" - because they weren't competing.

As for the government taking over, that will first and foremost socialize for debt (we obviously don't have enough ). How quickly will the nationalized Big 3 go from producing cars no one will buy to actually competitive ones? If the problem is management, where will the government come up with the hundreds or thousands of managers necessary? I suspect that much less managers are necessary, but to do so would require a radical paradigm shift, one I doubt the government is ready to do - what's the manager to employee ratio in the beauracracy, I wonder?

As for the thousands of people who could lose their job - either they're going to end up on welfare directly or effective welfare if we nationalize these companies, so I don't see it as much of a choice. Why didn't we nationalize the .com burst?

[Lemur]

Wesley Clark makes the national defense argument:

More challenges lie ahead for our military, and to meet them we need a strong industrial base. For years the military has sought better sources of electric power in its vehicles — necessary to allow troops to monitor their radios with diesel engines off, to support increasingly high-powered communications technology, and eventually to support electric propulsion and innovative armaments like directed-energy weapons. In sum, this greater use of electricity will increase combat power while reducing our footprint. Much research and development spending has gone into these programs over the years, but nothing on the manufacturing scale we really need.

Now, though, as Detroit moves to plug-in hybrids and electric-drive technology, the scale problem can be remedied. Automakers are developing innovative electric motors, many with permanent magnet technology, that will have immediate military use. And only the auto industry, with its vast purchasing power, is able to establish a domestic advanced battery industry. Likewise, domestic fuel cell production — which will undoubtedly have many critical military applications — depends on a vibrant car industry.

To be sure, the public should demand transformation and new standards in the auto industry before paying to keep it alive. And we should insist that Detroit’s goals include putting America in first place in hybrid and electric automotive technology, reducing the emissions of the country’s transportation fleet, and strengthening our competitiveness abroad.

This should be no giveaway. Instead, it is a historic opportunity to get it right in Detroit for the good of the country. But Americans must bear in mind that any federal assistance plan would not be just an economic measure. This is, fundamentally, about national security.

[rory_20_uk]

It's $2 BILLION a month that is being lost NET (by GM). Far too little, far too late.

The only way is if the negotiation massively reduces worker's pay and benefits - so the companies make a profit on the cars they produce.

[Kralizec]

If country leaders want to sell the message that capitalism as such isn't about to collapse, they shouldn't start collectivising failing businesses. These companies have problems that are very much structural and the current recession just pushes them over the edge. Capitalism is all about corporations going under, that's the basic premise of competition.

Some existing company might take over part of the production line and put them to good use. If not, it's kind of sad because demand for scrap metal is declining. But it still beats keeping crappy companies on life support for years until they need even more of it.

[HoreTore]

If the problem is management, where will the government come up with the hundreds or thousands of managers necessary?

Steal them from Toyota, of course

Employing a management consultancy company who specialises in human management to decide on salaries would be better than expecting Joe Public to understand that making the top tiers work for £60k a year means that either the company moves off shore, or there's a brain drain of able talent.

*looks at GM*

I'd say a "brain drain of able talent" is just what they need right now....

[King Jan III Sobieski]

People argue that we should, because they're massive employers and so forth. But I pose two questions:

First, where do you drawn the line? Don't employees of Ma and Pa businesses (including the Ma and the Pa) - people who are most likely only making $7/hr - have just as much right to earn a living, regardless of how large or how meager that living may be? Why don't we bail out all of the small businesses around the country, too? Which would lead to another question - why don't we bail out all the one-man (or one-woman) operations...yeah, that's a can of sticky worms...

Secondly, haven't other corporations (namely, the airlines, K-Mart, etc.) gone into bankruptcy? They're still around, aren't they???