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Lets Be Clear…..Auto Bailout Needed

December 3, 2008

There is a great deal of debate about the automakers need to have federal assistance in order to shore up this industry, which also connects so many other businesses under a huge economic umbrella.   I have read today of those who are trying to make the majority party leery of passing needed funds for Detroit out of fear for the possible political consequences.  The attempt to undermine doing what is right based on political calculations strikes me as the same old way of Washington.  I find that laughable given the nature of the economic hole that this nation now finds itself.  It is time for Congress to feel the metal in the spine and act accordingly.

Wisconsin Congressman Dave Obey is one who knows the plight of the automakers, and the need to pass a funding measure in spite of many who disagree.

The American automotive industry needs government help now during “the most dangerous economic time since the ’30s,” said longtime U.S. Rep. Dave Obey.

“You can’t look at this as though the auto industry is in isolation,” Obey, D-Wausau, said in a meeting with Leader-Telegram editors shortly before proposals from Detroit’s Big Three were released Tuesday. “If this were an ordinary time, you could say to the industry, ‘Sorry, buddy. You screwed up, you go down, and somebody else takes your place.’

“But this is the most dangerous economic time since the ’30s, and we stand at risk of having the whole blasted system collapse.”

Obey added that the automotive industry’s role during previous downturns in the U.S. economy cannot be overstated.

“In my lifetime, we’ve not had such volatility in the markets, and this is also going to be a terribly different recession from the others,” said Obey, 70. “If you take a look at the ordinary recession, it lasts eight months, 14 months, something like that. And when we recover, we’re led in the recovery by the housing industry and by the auto industry. Neither one of those is going to lead anybody out of anything this time.”

5 Comments
  1. Patrick permalink
    December 4, 2008 7:45 PM

    Emily:

    A part of the cost of each car made by the big 3 are legacy costs: these are the costs which are associated with paying for benefits like pensions and health care for retired workers. They do amount in many cases to about $2000 per car–sometimes less. This means that Honda and the others who do not face these legacy costs can put $1500 more quality into their cars and sell them for less than the American models of similar class. You may not like this, but some basic research into the industry will confirm these details. These benefits are mandated by union contracts won for workers when the Big 3 reigned supreme over the American market and profits were huge. That was 30 years ago. Times have changed. Eliminating the union contracts would lower labor costs and increase profits. I guess the choice is lower paying jobs of no jobs. What would you choose?

    As for the suppliers, they would be better off once the Big 3 emerged from ch. 11 because there would be a much greater likelyhood that they would get paid for their supplies and labor. Considering the state of GM today, would you like to be the guy sending them an invoice for ten million in parts for cars nobody is buying?

    The reason we should refrain from increasing taxes on business american companies do overseas is that these taxes come out of the bottom line, essentially stripping companies of profits. Most companies that do business overseas need to have employees in the second country and therefore “ship jobs overseas.” The larger point is that without profits there is no point in conducting business and the big 3 would never be able to pay off any loan.

    Your point about the cafe standards isn’t quite correct either. American companies are better in some sectors of the market. For example, the most excellent and competitive of Ford’s vehicles is the F150 pick up truck. Ford sold a lot of these until recently (when everyone stopped buying cars). While the F150 is a god platform for profits,like the SUV, Ford’s other more fuel efficient models are not. As they are required to have a fleet wide fuel average they are required to produce all the dogs to be able to produce the jems like the F150. Government intervention in industry never produces better results. $4 gallon gas does much more for fuel efficiency than CAFE, so why not let the market decide.

  2. December 4, 2008 4:34 PM

    Patrick – You contradict yourself. First you mention that “Honda and Toyota are both able to build cars in America and make a profit” – but then you go on to argue for the need of the Big 3 to send auto-related jobs overseas so as to do better.

    Tearing up the Union contracts isn’t going to save these companies, and neither is doing away with CAFE-like standards.

    Part of the reason why they’re struggling so much right now is precisely because they’ve spent the last few decades fighting against any and all even reasonable fuel and environmental standards – the very things that companies like Honda and Toyota have made bank out of embracing and improving upon.

    I don’t particularly like the fact that Honda and Toyota don’t have unions, mind you, but until I see some hard-and-fast evidence, I strongly suspect that that factor alone is not what makes them more profitable than those companies that do have unions.

    Look – I don’t particularly want to see a massive failure in the Big 3. I have no love for them or their products, but I do care a lot about their employees and the associated industry’s employees that would be negatively effected by such a large implosion. Is a government bail out the right tack to take, though? I don’t know, but I suspect not. We see how well they’ve handled the bank bail out.

    So maybe full-on, temporary nationalization is the answer in this case. Or perhaps some combination of money to help retrofit the companies for more fuel efficient or alternative-energy technologies, or to re-train employees so they can go to work in newer, greener industries. Whatever it ends up being, it’s going to be expensive and hard–so why not go for the positive long term solution instead of just shoving money into the crack in the dam and hoping it will hold for a few more days?

  3. Patrick permalink
    December 3, 2008 11:40 PM

    It makes no sense for the government to bail out the auto industry. The problem is that since they must carry 1800 to 2000$ in extra costs per car due to pensions and health care benefits for retired workers, they have little chance to compete in the long run. Sure, it sounds bad that one or more of these companies will go under, but there is nothing in any plan that the big three have come up with to convince anyone they could survive. They make good-high quality cars, but can’t make a profit. What a tragedy.

    Perhaps if these companies entered chapter 11, had the government take over pension costs, tore-up the union contract, and eliminated foolish cafe standards–they would have a chance to emerge from ch 11 stonger and more fit. Honda and Toyota are both able to build cars in America and make a profit.

    Assuming they emerged from ch 11, we could also help them by lowering taxes and maintaining tax breaks for profits made overseas. Democrats don’t like companies which ship jobs overseas, but the truth of the matter is that these companies then ship profits back home. Companies operation in foriegn markets–those who compete with American companies–often do so with much lower tax burdens imposed in those foriegn countries. Either way, the big three can’t survive unless they undergo radical transformations. How else do you go from losing billions per quarter to profitability?

    If Obey were actually concerned with preserving jobs in America, these are the measures he would take. He might take a course in economics too.

    This cycle of random bail-outs may well make the entire system collapse because it dangerously creates instability and ignores contract law. He got a bail-out, where’s mine? Where does it stop…Great Depression. When we eliminate the consequences of failure we also eliminate the rewards of success.

    Be very afraid about nationalizing industries. Everywhere its been tried it results in inefficiency and corruption. See Venezuela or Russia, for example. Profit is good. If you doubt that, check your 401K statement. No profits, no retirement.

  4. December 3, 2008 10:28 PM

    For the record I have no problem nationalizing some industries in America.

  5. December 3, 2008 10:18 PM

    For the amount of money GM wants in a bailout, the government could just buy the company outright. The total value of all the outstanding GM stock is 3 billion dollars.

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