Wednesday, November 19, 2008

an auto bailout: a really, really bad idea

The Big Three already have $25 billion in loan guarantees (read: grants-- if they go bankrupt).

Now, they're back for $50 billion more.

That works out to more than $1,000 from the average family of four-- and a transfer of about $312,500 per Big Three worker. Even if spread out over $10 years, this works out to more than $30,000 per worker per year-- a staggering subsidy!

At stake? The jobs (&/or the compensation levels) of 240K workers at the Big Three. Beyond that, there are the ripple effects on related production and service-- e.g., parts, service, and dealerships. Of course, much of the direct and indirect job effects would be absorbed elsewhere in the industry-- as has occurred in the U.S. throughout the previous two decades-- moving from the Rust Belt to other states and largely, from union to non-union labor.

The base problem? Not revenue, but amazingly uncompetitive labor costs. Without addressing that, a bailout can only be temporary. In a reasonably competitive market, one cannot survive with such rank inefficiency (without continuous subsidies).

Aside from the practical problems with a bailout, there are a number of ethical problems as well:

-Why take money from some workers to support other workers?
-Why subsidize inefficient car makers (stockholders, management and employees) at the expense of efficient car makers (stockholders, management and employees)?
-Why take money from average Americans to subsidize upper-income auto workers?
-If you're going to subsidize the Big Three, what other businesses should you subsidize? (In other words, will the bailouts ever end-- or at least, before we bankrupt the country?)

George Will has some nice lines in his essay today...

GM's statement comes as the mendicant company is threatening to collapse and make a mess unless Washington, which has already voted $25 billion for GM, Ford and Chrysler, provides up to $50 billion more -- the last subsidy until the next one... ludicrous as the mantra that GM is "too big to fail." It has failed; the question is what to do about that.

The answer? Do nothing that will delay bankrupt companies from filing for bankruptcy protection, so that improvident labor contracts can be unraveled, allowing the companies to try to devise plausible business models. Instead, advocates of a "rescue" propose extending to Detroit the government's business model for the nation -- redistributing wealth from the successful to the failed, an implausible formula for prosperity.

"the last subsidy until the next one...[GM] has failed; the question is what to do about that...redistributing wealth from the successful to the failed, an implausible formula for prosperity"

Some great phrases!

Some opponents of bankruptcy say: GM must not be allowed to fail before it perfects batteries for its electric-powered Volt, which supposedly is a key to the company's resurrection. This vehicle was concocted to serve GM's prolonged attempt to ingratiate itself with the few hundred environmentally obsessed automotive engineers in Congress. They have already voted tax credits of up to $7,500 for purchasers of such cars -- bribes that reveal doubts about consumer enthusiasm for them at a price that would reflect cost....

Some opponents of bankruptcy stress that it might terminate health care coverage enjoyed by UAW retirees who are too young for Medicare. Think about that. If people want to retire before 65, or 35 for that matter, that is their business. But there is no public interest in protecting the luxury of retirement in the prime of life just because in palmy days a private contract between a union and a corporation established it as an entitlement for all seasons....

After being restructured through bankruptcy, the Detroit Two, or One, might flourish. Let's find out. The ruinous alternative is to squander, in a doomed attempt to "save jobs," more scores of billions of scarce capital that will then be unavailable for job-creating investments in rising industries.


At November 19, 2008 at 8:44 PM , Blogger William Lang said...

A bankruptcy sounds like a good solution, as long as it enables the automakers to keep in operation.

It might make sense to subsidize GM's plug-in hybrid the Volt, if we were concerned about the national security implications of our reliance on petroleum.

At December 25, 2008 at 8:30 AM , Blogger Fairy said...

I got a grant from the federal government for $12,000 in financial aid, see how you can get one also at


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