No Auto Industry Bailout [Updated]

Not a chance in hell should Congress be giving money to the Big Three. If ever there was an industry that deserved to fail, it’s this one.

The American auto industry is currently balanced on a giant Iron Tripod of Suck:

  • The union, specifically the UAW, a/k/a the Cosa Nostra of automaking. I remember learning in Civics class (back when they had Civics classes) that principle of the strike was supposed to be “the workers must band together so as not to be screwed by the company,” not “nice little auto company ya got here, be a shame if anythin’ happened to it.” Believe me, I understand that there was a righteous social goal to unionization — back in the day of Samuel Gompers. I can even maybe get behind the idea of the 1935 Wagner Act, which established the National Labor Relations Board and pretty effectively put the Federal Government Stamp of Approval on “whatever the unions want, the unions get.” Maybe there was a good reason for that seventy years ago. But we’re not in the same economy anymore. Giant sclerotic featherbedding vindictive unions that make the New York City Mafia-controlled garbagemen look like a model of efficiency and serve merely to drive companies toward bankruptcy so their high-school-diploma members can have an eternal gold-plated medical plan and pay for a second house have no particular place in today’s world. (And don’t get me started on public-employee unions!)
  • Management. Oy. Seven layers of middle managers. Design teams that take five years to turn around a car design that nobody likes. Refusing to market wildly popular European models in the United States. Acting like they believe it’s still 1952, when what was good for General Motors was good for the country. Giving themselves enormous bonuses even when the stock declines. Well, the writing’s been on the wall since at least 1977, which was when my dad bought his first (inexpensive, safe, reliable, fuel-efficient) Japanese car at the age of fifty. You can’t run a giant car company, or even a merely large car company, the same way anymore. Saturn was a step in the right direction, but GM neutered it by folding it back into the same union contract and supply chain as the rest of its brands. Now instead of operating state-of-the-art factories, they import re-badged Opels from Belgium.
  • The dealerships, which have successfully lobbied state governments to make their franchise contracts virtually unbreakable. Apparently it cost GM something like two billion dollars to close down their Oldsmobile dealerships. And that was only one nameplate! The dealerships are also responsible for making it illegal to buy a car online — imagine if you could go to a Ford Test Drive Center that had one of each model in the parking lot, and then order your car customized to your tastes off a website like you do for your computer, delivered to your house within 30 days. With so much less overhead and inventory and just-in-time manufacturing, imagine how much cheaper cars would be. Except there would be no dealerships. Oops. Can’t have that.

And of course, underlying everything and supporting each leg of the tripod in a huge iron base of Suck, is, you guessed it:

  • The Government. From the aforementioned NLRB, to the sweetheart dealership-protection laws, to the wilderness of state-specific emissions laws, to the never-ending Carnival of Moving Goalposts called CAFE standards. (Look, internal combustion engines are just about as efficient as they can get already; squeezing out more and more fuel efficiency and emissions reductions is climbing the steep part of the curve and costs more and more for less and less improvement.)

Obviously, there’s lots and lots of blame to go around. No one entity was responsible for driving the industry into the ground. But there it is. Now Ford and GM have barely enough cash on hand to make it to the end of the year; Chrysler maybe until next summer. What are we supposed to do about that?

  • If we the people outright give them the $25 billion they’re asking for, they might make it until next fall, and then what? Another $25 billion? And another?
  • If we take the “legacy costs” (i.e. outrageous pensions) off their hands, then you and I be paying for 55-year-old “retirees” and their motorboats for eternity, and there’s absolutely no guarantee that the management will suddenly figure out how to design a car Americans want to buy or that the union won’t coerce the company right back to where they are now.
  • If the government just buys up the stock and nationalizes the companies, then not only will we taxpayers be paying the legacy costs for ever, but the companies will be like those Chinese state-run industries that exist only to keep social unrest down in their benighted factory towns while producing nothing of value.

Free markets have upsides and downsides. The upside is that it’s the best way known to humanity to generate stupendous amounts of wealth and capital and provide clean healthy comfortable lives for the citizenry. The downside is that bad decisions lead to failure and hardship, but then what’s left over from failure gets recycled back into the economy — that’s creative destruction, and it’s a good thing.

The Big Three need to go bankrupt, immediately. In Chapter 11 bankruptcy, they could reorganize — shed dealer contracts, close superfluous brands and factories, and renegotiate their union contracts and pension plans — and come out with a chance at being viable companies. If they all went at the same time, no company would have a competitive advantage over the others, the way it happened with the serial airline bankruptcies. There’s no particular reason they would have to go with Chapter 7 breakup and liquidation, but even if they did, the assets — factories, tools, intellectual property, skilled workforce — are still valuable and would be bought up/hired by one of the car companies that do successfully build cars in the United States. Like Toyota, Honda, or Volvo.

Yes, there would be an economic shockwave. The suppliers would take a hit until things stabilized, and even then many of them might go out of business. (But then again, like I said, the writing has been on the wall for decades, and the lesson of evolution is that being tied to a specific ecosystem is a ticket to extinction.) The employees would take a hit — top management might not be able to pay themselves millions of dollars of bonuses every year (boo hoo), and the workers might find themselves earning market wages for their skill level (gasp). And the dealers — well, screw the dealers. Rent-seeking behavior on the part of people who don’t even make anything is just reprehensible.

If the government absolutely positively must dole out a huge bundle of cash to save the automakers, let it be in the form of a sinking fund to retrain the fired, help people move away from Detroit to a place where there are jobs, buy health insurance and a one-time payout for those who lose their pensions, and make loan guarantees to suppliers until they can adapt. Bring a bankrupt industry in for a soft landing if they can’t stand to see them crash.

Of course, that’s not going to happen. Truckloads of money will be slopped into the automakers’ wallets, maintaining the status quo for a year or so, and then we’ll be right back where we were. And the government will do it again, and again, and again, because the Democratic Party is beholden to the unions for the blue collar vote, and because the politicians and the executives and the dealers and the UAW think that prolonging the agony is better than ripping off the bandage and getting the pain over and done with.

And other industries will use the precedent to line up at the trough, and moral hazards will grow and spread like toxic little mushrooms throughout the economy. How sad. How stupid.

Updated with more relevant links:

Update 2

By chance, this morning GM sent me an email since I’m a Saturn owner (bought before the neutering). In part, it reads,

Despite what you may be hearing, we are not asking Congress for a bailout but rather a loan that will be repaid.

The U.S. economy is at a crossroads due to the worldwide credit crisis, and all Americans are feeling the effects of the worst economic downturn in 75 years. Despite our successful efforts to restructure, reduce costs and enhance liquidity, U.S. auto sales rely on access to credit, which is all but frozen through traditional channels.

[Emphasis in original]

GM has $60 billion in debt (reported here). Assuming they get half of the $25 billion “loan,” and generously assuming a 10% interest rate for their junk-rated debt, half of their bailout money would go toward interest alone in the first year. How the hell do they expect us to believe that they would ever be able to pay the government back?

And then there’s a litany of the awful effects if the industry were to go under:

The consequences of the domestic auto industry collapsing would far exceed the $25 billion loan needed to bridge the current crisis. According to a recent study by the Center for Automotive Research:

  • One in 10 American jobs depends on U.S. automakers
  • Nearly 3 million jobs are at immediate risk
  • U.S. personal income could be reduced by $150 billion
  • The tax revenue lost over 3 years would be more than $156 billion

Sorry, propping up the auto industry for the next three years would probably require pretty near that $156 billion figure, and they wouldn’t end up in any better shape than they are now.

I don’t know about most Americans, but I don’t respond well to blackmail. Short-term economic pain in the service of long-term economic regrowth and rationalization is the best solution.

6 thoughts on “No Auto Industry Bailout [Updated]

  1. Pingback: No Auto Industry Bailout · I Article

  2. Maura

    Word up. One thing that might deter other industries from begging is if the government attaches enough strings to any bailout. Remember CAFE & the EV1?

    Reply
  3. Rob

    There’s no particular reason they would have to go with Chapter 7 breakup and liquidation

    Here’s the problem: Chapter 11 requires debtor-in-possession financing.

    You might have heard about this financial crisis we’re in where banks aren’t making loans, and credit markets are frozen. Care to guess one of the things companies have a problem getting right now?

    There’s also the problem that throwing a big chunk of Michigan (and lots of other chunks elsewhere) out of work is probably not the greatest idea during a recession. The auto industry collapsing might be worth 2-3% of unemployment JUST BY ITSELF. Add that to what’s going to happen over the next few months, and things could get very miserable, on a scale you and I haven’t seen in our lifetimes (I remember the early 80’s, and yes, this could be worse).

    Oh, and FWIW, slagging the unions is popular in your branch of the political spectrum, but they HAVE done givebacks in UAW contracts recently. They aren’t stupid. I won’t say they’ve done everything right, nor should they be exempt from further ones… but it DOES take two parties to agree to a contract.

    Also:

    If we take the “legacy costs” (i.e. outrageous pensions) off their hands

    Google “Pension Benefit Guaranty Corporation”. Guess what? Taxpayers ARE on the hook for pensions from GM, et. al. if things go really south (the short version is the PGBC is the pension fund version of the FDIC). Ruh-roh, Raggy.

    Now, here’s the thing: what MIGHT make sense is to use the $25 billion AS debtor-in-possession financing- basically have the government handle the financing of bankruptcy reorganization in lieu of the private markets. That may make sense, since it might be more cost-effective than blowing the whole thing up, or writing GM blank checks, or even checks with 2454624 different conditions. I am a liberal, but I’m pretty skeptical that the US government should be deeply in the business of industrial planning (A Five Year Plan to Revive GM just gives me hives), and the history of no-condition bailouts in, say, the airline industry isn’t very encouraging- most airlines are still horribly run, and the ones that aren’t are, surprise surprise, the ones that were never bailed out through US government money + bankruptcy.

    The solution probably means shuffling off some medical and pension costs to Uncle Sam. Yes, I know. To which I respond “this is like the Midas repair commercial- you can pay now or pay later. Not paying is not an option”. Those UAW retirees are going to be Medicare/Medicaid/Social Security/PGBC hits ANYWAY. Might as well see if we can minimize the pain.

    Also, I might point out that the Germans and Japanese have universal health care, pensions, extensive government involvement in industrial policy, AND cars that don’t suck, plus THEIR automaking firms aren’t about to implode- so the idea that the problem with the US automaking industry is “OMG NOT CAPITALIST ENOUGH, GOVERNMENT BAD, FREE MARKET GOOD” doesn’t quite fly.

    Well, to sum up, I think we’re going to have the government do SOMETHING, because it’s just not reasonable to implode a huge employment center in the United States, any more than it was reasonable to let the financial system collapse because of mindless free-market boosterism. The days of Andrew Mellon saying “Liquidate labour, liquidate stocks, liquidate the farmers, liquidate real estate. Purge the rottenness out of the system. High costs of living and high living will come down… enterprising people will pick up the wrecks from less competent people” are long, long gone (plus it’s easy for a multimillionaire to tell the peasants to go eat cake). My hope is that they are sensible about it.

    Reply
  4. Bryan Lovely Post author

    they HAVE done givebacks in UAW contracts recently. They aren’t stupid.

    I understand from comments I’ve read elsewhere that these concessions only apply to new hires within the last two years. They don’t affect the majority of workers nor do they affect existing pensioners. So, assuming they’re correct, I’m not overly impressed by their flexibility.

    Now, here’s the thing: what MIGHT make sense is to use the $25 billion AS debtor-in-possession financing- basically have the government handle the financing of bankruptcy reorganization in lieu of the private markets.

    Exactly. That’s what I’m talking about using the $25 billion for.

    The solution probably means shuffling off some medical and pension costs to Uncle Sam. Yes, I know. To which I respond “this is like the Midas repair commercial- you can pay now or pay later. Not paying is not an option”. Those UAW retirees are going to be Medicare/Medicaid/Social Security/PGBC hits ANYWAY. Might as well see if we can minimize the pain.

    The PGBC has a maximum benefit cutoff, so killing the existing pension plan in favor of a PGBC substitute is better than just assuming the pension plan costs in place. And besides, the PBGC is at least theoretically self-financed, so hopefully the taxpayer wouldn’t be on the hook too much.

    so the idea that the problem with the US automaking industry is “OMG NOT CAPITALIST ENOUGH, GOVERNMENT BAD, FREE MARKET GOOD” doesn’t quite fly.

    Well, no — that’s why I spread the blame out to more than just the union and more than just the government.

    The days of Andrew Mellon saying “Liquidate labour, liquidate stocks, liquidate the farmers, liquidate real estate. Purge the rottenness out of the system. High costs of living and high living will come down… enterprising people will pick up the wrecks from less competent people” are long, long gone (plus it’s easy for a multimillionaire to tell the peasants to go eat cake). My hope is that they are sensible about it.

    But isn’t that what we’re talking about? “Liquidate the bad, recycle it to the good” is the very essence of a laissez faire free market, and barring turning them into some sort of horrible zombie state-owned enterprise it’s what’s going to happen anyway. We’re just trying to figure out what the minimum, appropriate level of government intervention would be to alleviate the total amount of pain.

    I’d like to see the Big Three survive as stripped-down profitable companies that can compete on an equal basis with the foreign companies. At this point, that pretty much requires screwing the union and requiring the workers to actually work for a reasonable, uninflated wage.

    Reply
  5. Pingback: Auto Industry Bailout — Patty Murray Responds | No Clever Pseudonym

  6. Woody

    Great post.

    I work with a guy who used to drive trucks for a living. He says he would deliver at least once or twice a week to the GM plant in our town. There were two people assigned to work the loading dock, a man operating the forklift and a woman checking in all the deliveries.

    Over the two years he worked for the trucking company every time he delivered he says the woman was asleep at a table in the corner of the dock. The male co-worker would unload and then check everything in. This not only reduced his efficiency, but kept the trucker standing around for twice as long as necessary.

    That went on for two years straight!

    My neighbor used to brag about being “on call” at the Ford plant every weekend. She’d drive there, punch in and drive home. When her shift was up she’d drive back and punch out. This was on a weekend, so of course she’s getting time and a half for this “work”.

    Ford closed the plant a few years ago and they had to sell their house, their boat and the restaurant her husband had started. You think she accepts some of the blame for the plant closure? Nah, she blames Bush, because he supposedly “wrecked” the economy.

    No shame.
    No ambition (aside from naked greed and selfishness).
    No accountability.
    No intelligence.

    No place for people like this in the modern workplace.

    Reply

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