Auto-Bailout for Big Three?

December 2, 2008 |  Tagged | Comments Off on Auto-Bailout for Big Three?

In response to Kevin’s post, I have to take sides with the bankruptcy opinion.  The bailout, explained by Richard Shelby (thanks Oliver), seems to be providing a short-term solution.  The American auto industry is not even confident they will be able to pay the federal loans back.  The need for a major reconstruction of these companies, however, is certain.  The amount of reconstruction necessary is simply not attainable by a mere bailout.  These companies need to file for bankruptcy in order to really change how the American industry functions.

Steven Levitt (author of Freakonomics) puts the problem clearly, arguing that American car manufacturers are not profitable because of their high cost of labor.  Levitt contends that allowing the “Big Three” car companies to file for bankruptcy will allow bankruptcy judges to breakup auto unions, and finally allow these companies to compete with foreign manufacturers.

Obvious objections to these contentions can be raised:

  • Is this not an unfair tactic for the blue-collar workers?
  • Will consumers continue to buy American cars after they have filed bankruptcy?
  • And why did we not do this with the banks?

On the first worry, filing for bankruptcy will admittedly result in decreased wages for most all workers of the company, and will end in some employees being laid off.  On the other hand, a bailout that does not restructure the employee contracts could result in the Big Three outsourcing much more after these contracts expire.  These manufacturers cannot be competitive with such high expenses in the labor category, and will consequently be forced to seek out cheaper labor overseas.  The Big Three already outsource some of their labor, but increasing that percentage will result in fewer jobs in the U.S. as compared to a complete restructuring.  Sure, saving every job and every salary would be best, but that play is not in the cards.  We should be choosing the lesser of two evils here and saving as many U.S. jobs as possible for the future.

In the same Charlie Rose interview, Barney Rose Frank argues that a bankruptcy will weaken the American auto industry’s reputation to the point where they will not be competitive.  This reputation is crucially important in the auto industry, as opposed to the airlines industry for example, because consumers buying cars often maintain a continuing relationship with the producer—for instance, dealership repairs and leases.  Although reputation is important, it is hard to see how filing bankruptcy can be seen as so much different from a major bailout in the public eye.  After all, a $25 billion bailout is quite extraordinary.  Again, it would be great to save these companies’ reputations completely in order to bolster the American industry, but we do not have that choice.  The Big Three are in trouble and everybody knows it.  There is not a substantial distinction between an enormous bailout and bankruptcy.

Rose also brings up the question of why the Federal Government did not allow the Wall Street banks to file bankruptcy.  His view is that bailing out the banks while not reducing contracted salaries (which are comparatively much higher than the auto industry) and not bailing out the Big Three (the majority of their employees are blue-collar workers) would be unfair.  We should treat “Wall Street” and “Main Street” at least on equal grounds, Rose contends.  This reasoning, however, is not the most sound.

First, the banks and the American auto industry are two very different industries that are failing for different reasons.  The American auto industry is failing because people are buying cars from other manufacturers, namely foreign companies.  American banks are not failing because foreign banks are giving out better or cheaper loans; rather, people are not taking loans out at all.  Basically, different problems may warrant different treatment.  Furthermore, if you disagreed with the financial bailout, then agreeing with the auto bailout merely for consistency is ridiculous.  As the saying goes, “Two wrongs don’t make a right.”  Making one mistake does not mean we should make another just to be consistent; cutting our losses would be the wiser choice.

In sum, a bailout for the auto industry would simply put off a problem and could potentially make the problem worse.  The relative labor cost of the American worker in the auto industry, compared to the foreign autoworker is much higher.  This extra cost is requiring too high a price for a product that results in reduced sales.  In essence, the American industry is in need of a large overhaul to cut costs, which demands legal actions via bankruptcy.

Photo courtesy of Flickr user public citizen.

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