The Many Problems With Bailing Out Big Auto
Resplendent in their private jets, Detroit’s auto executives have been pleading to Congress for a piece of the bailout mania. Having seen Wall Street’s success in extracting billions of dollars from Washington to limit the economic damage from the collapse of the housing and financial bubbles, executives from the Big Three automakers have suggested that millions of jobs might be lost unless they receive similar treatment.
The problem is that their case is much weaker. Few dispute that the U.S. auto industry is in serious trouble. As consumers retrench after a summer of unprecedented gas prices and an autumn of credit crunch, the market for new cars has declined precipitously. Moreover, U.S. automakers must bear the “legacy costs” of pension and health care programs that their foreign competitors do not have. The result of this confluence is that all three U.S. automakers may be on the verge of bankruptcy.
What is different from the financial industry, however, are the consequences of collapse. In the financial sector, collapse would lead to a chain reaction, as the bad debt cascaded from the instutitions responsible for bad decisions in the housing and derivatives markets to those that may have invested much more conservatively. The end result might have been a generalized collapse of the U.S. banking system, culminating in a reprise of the Great Depression. The medicine of “socialism” in the form of a bailout was a necessary evil to prevent devastating consequences throughout American society.
Bankruptcy of the auto industry would be unlikely to produce similar second-order effects. While it is true that tens and even hundreds of thousands of workers in assembly and automotive parts plants might suffer job losses, the real effect of bankruptcy would be to force auto companies into restructuring and consolidation efforts that would shed their unsustainable “legacy” contracts and result in a more efficient automobile industry. The idea that the U.S. auto industry would cease to exist is simply not realistic. Already, one of the largest automobile manufacterers in the United States is Toyota — that alone proves that there does exist a market in the U.S. for automobiles and that market can be filled by U.S. workers.
The real motivator for an auto industry bailout is not rich executives, but union bosses who are reluctant to sacrifice the fruits of decades of hard bargaining. Now that the bill has come due for fat life-long pension and health care programs and is producing crippling sticker shock, they hope to prevent the cancellation of those benefits under bankruptcy by simply transferring the costs to the taxpayers and calling it a bailout. This is why we are being treated to the unusual spectable of leading Congressional Democrats appearing to support the auto executives while most Republicans are unsympathetic.
The need for bailouts is real, but not unlimited. A line in the sand has to be drawn somewhere, or else every business facing hard times might seek to salve their pain from the public trough. The auto industry is a good place to draw that line. The restructuring that will result from auto industry bankruptcies will surely be painful, but it is necessary. Pushing it down the road with a bailout won’t solve the problem nor even limit the damage — it will only stretch out the days of reckoning.
“The real motivator for an auto industry bailout is not rich executives, but union bosses who are reluctant to sacrifice the fruits of decades of hard bargaining. Now that the bill has come due for fat life-long pension and health care programs and is producing crippling sticker shock, they hope to prevent the cancellation of those benefits under bankruptcy by simply transferring the costs to the taxpayers and calling it a bailout. This is why we are being treated to the unusual spectable of leading Congressional Democrats appearing to support the auto executives while most Republicans are unsympathetic.”
Well said
The real motivator for an auto industry bailout is not rich executives, but union bosses who are reluctant to sacrifice the fruits of decades of hard bargaining.
Maybe a little research would show that most union contract now have multiple tiered wage structures. New employees at union pats suppliers and supermarkets start at wages a fraction of senior grandfathered employess. The floor sweeper and new grocery clerk make minimum wage to around $15 per hour. Now it is true that union fat cats make over 6 figures, but they’re acting as CEO’s and executives.
Your typically sniping response is (also typically) beside the point, Rudi. What the unions are trying to protect is the legacy costs in the form of pensions and life-long health care benefits that persist for previous generations of workers and are not ameliorated in the slightest by attempts to ramp down benefit levels for current and future generations of workers. Unions tend to take a very long view of their own interest and a very short view of the ability of the company to bear the cost, using their monopoly on the labor supply as a cudgel to extract concessions that are unrealistic and unsustainable. This gross illogic has directly created the current situation.
And the fact that the unions’ senior leadership personnel enjoy lifestyles that are the same as the CEOs only adds to my view of many unions as corrupt and hypocritical. They pose as the friends of the worker while they live large and attack, intimidate, and abuse workers who don’t go along with the program (they are, for example, seeking the right to strip workers of the secret ballot in union elections so that union leaders can detect and punish workers who don’t vote the “correct” way — a baldly authoritarian demand). And they rail about the corporate executives who sign the checks while they are themselves monopolists over the supply of labor.
I think you’re right Jason. The difference between the financial institutions that were bailed out and automakers is this: the former would take the economy as a whole with them in their fall, the latter will not. They will cause some damage, yes, but the economy as a whole will overcome it (quite fast) and will eventually be stronger with either reformed automakers or no automakers.
Lets also not forget that automakers have been bailed out many times in the past. Their problem is different from financial institutions in so far that automakers cannot compete. They are a dying industry (except for when they reform and the unions stop getting ridiculous deals), the financial industry is not.
I was addressing the HIGH wages canard. Two tier contracts ended the $30/hour janitor.
What is to be done with retirees who were promised these pensions and benefits(by legal contracts)with a chapter 11 filing, the federal government will be liable for the pension and most retirees use Medicare and the Big Three insurance to cover most medical expenses. Pensions for white collar employees ended around 2000, good luck with the 401K’s and the stockmarket. The foreign transpalnts are in their infancy, what will happen when these current employees retire?
Rudi, perhaps the union leaders should think about whether or not a company can possibly sustain the promises that are being made when they force the management to accept such terms? Why is anyone entitled to $75 plus benefits, including pension, for unskilled labor? This is way more than I earn with a doctorate level education, for which I invested six years and tens of thousands of dollars.
We’re not talking about unions preventing sweatshop conditions here, we’re talking about trying to force companies to a wage structure that the market won’t support. Meanwhile, foreign automakers hire non UAW workers at wages they’re apparently content with, and these companies are thriving because they produce a quality product that consumers want at a price they can afford. Unions and union workers need to face reality- either accept what the market will bear in compensation or they’ll no longer have jobs at all.
After the oil crisis in the 1970s, the American auto industry pleated that it ?needed time to grow strong enough to compete with the imports on the free market? and the Reagan Administration agreed to limit auto imports. The auto industry did not respond with the promised development of more fuel-efficient cars but merely increased its price an average $2,600 per new car and achieved record profits while selling fewer cars than in their record sales year in 1977! (Hudgins, Edward, 1985, The Heritage foundation, The costly Truth About Auto Import Quotas, http://www.heritage.org/research/energyandenvironment/EM74.cfm). This incident indicates that governments have to be more critical prior to interfering as they cannot only hurt consumers but can also ruin international relations with import restrictions.
Despite of this fact that we got screwed, I believe that our politicians in Washington will bailout the American Auto Industries. Why you asked? Because they already sent their lobbyists carrying bags full of money up capitol hill and deposited into those politicians? campaign contribution funds.