Tuesday, November 18, 2008

Bail-out for the auto makers? Please, no!

I have been deeply concerned about the socialistic shift in our government's perspective over the last several months. And so, now, the auto makers are making their appeals to Congress to bail them out. A mere $50 billion. But where does it all end? Are we, company owners who are careful with our money, who make sacrifices to make ends meet, who can afford to pay our employees only relatively "average" wages and stretch to provide them basic benefits like 401(k) plans and health care, . . . are we supposed to subsidize these corporate giants who have been paying their employees unbelievable wages for years, who have promised them the world (and more)?

I remember living in Flint, Michigan, home of GM headquarters, back in the late 70s. Our neighbors, who had done little to develop their skills beyond graduation from high school, hated their jobs, hated GM, but were unwilling to do anything about either situation because, they said, "Where else can I make $25 an hour?" I'm sure that was overtime pay, but they were making a lot of overtime. And, combined with methods they used to game the system--having friends check them in and out while they were off fishing or hunting--they made very good money.

And now we, the ones who have been paying high prices for our cars due to these union members' shenanigans--we're supposed to feel sorry for them and have money taken out of our pockets so they can continue to live high off the hog?

I don't think that's right!

We are told great disaster lies ahead if we do not pay up. "For every job provided by the Big Three automakers," we are told, "there are 10 more in the broader economy." Is that true? And is it true that, if the jobs in the Big Three go away, all these other jobs will disappear as well? I doubt it!

Automobiles will still need to be fixed. There will still be a call for parts for all these used vehicles. If one brand goes down, some other brand will have to replace the vehicles once they die. . . .

I was pleased yesterday to read an article in The Economist that provided a far more elegant argument against further government largesse directed to Detroit:
Bailing out Detroit would be a bad use of public money. It would be bad in principle, because it would be an open invitation to companies everywhere to apply for aid to survive the recession. Banks qualify for help because the entire economy depends upon their services. They are vulnerable to sudden collapses in confidence that can spread to other banks that are perfectly solvent. A good car company does not face the same threat. And although Detroit employs a network of suppliers, which would suffer if production shuts down, nothing would sap a recovery and job-creating enterprise like locking up badly used resources in poorly performing companies.

America’s carmakers accept the principle, but they argue that in practice they too are a special case. . . . [And] with one last shove from the taxpayer, it will be alright.

There is something to this--but not because of what is happening in America. As our special report explains, the global car industry is shifting from the saturated markets of rich countries to the huge potential of fast-growing emerging markets. As recently as 2005, America bought 10m more cars than the total of the BRICs--Brazil, Russia, India and China. This year, sales of cars in the BRICs should overtake those in America. . . .

In the next 40 years, the world’s fleet of cars is expected to increase from around 700m today to nearly 3 billion.

Some greens and pedestrians may find that a terrifying prospect. But for today’s embattled carmakers it is an extraordinarily exciting one--and that includes the giants from Detroit. GM has been as nimble abroad as it has been flat-footed at home, an early-mover in China, Brazil and Russia, it holds strong positions in all three markets. Ford is not far behind.

The next Chapter
But is that justification for a bail-out? Not at all. The United States created Chapter 11 precisely to help companies that need protection from their creditors while they restructure their liabilities and winnow out the good business from the bad. If the North American businesses of GM and Ford filed for Chapter 11, their activities elsewhere would be largely unaffected. Even in North America, their businesses could continue to make vehicles as they shed costs and renegotiated contracts.

The carmakers retort that being in Chapter 11 will poison their business. Buying a new car is a long-term gamble on there being dealers, spare parts and a thriving second-hand market for your vehicle. Drivers overwhelmingly tell surveys that they would not take the risk when Mercedes and Toyota make perfectly good alternatives. But $50 billion is a lot to stake on a hunch. A wiser bet is that whatever consumers say today, the stigma of being in Chapter 11 would fade, obscured by price cuts, advertising and most of all news that the car companies were tackling their remaining problems. Remember that, in many ways, Chapter 11 is more stable and predictable than depending upon the government.

That is an unpopular message. It is almost certain to be ignored by Congress, which is itching to “save jobs” and to counter the public-relations disaster of bailing out Wall Street. If the state is determined to keep the industry out of Chapter 11, it should set up a special fund and demand preferred equity to deter shareholders in other industries from asking for money. But it would still do better to let the car firms fail.
My answer: Amen! Please! Let it be! Let them fail! . . . And let their problems (and private solutions) become a proper warning to other large firms who would like to bully taxpayers into providing their multi-hundred-million-dollar annual salary executives their desired salaries, and their overpaid workers and over-pampered retirees all their desired benefits.

The rest of us don't get to enjoy such benefits; why should they . . . especially at our expense?
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