Sunday, November 16, 2008

Don't Bail Out the Big Three

GM, Ford and Chrysler are in big trouble. The Feds recently authorized a $25 billion loan, now they are debating another $25 billion infusion for the cash strapped automakers. The Big Three have caved to union demands for decades, driving up their cost for each automobile. They pay workers over $70/hour on average plus enormous health and pension costs. Similar, non-union workers making Honda and Toyota cars (in the U.S.) make $40-50 an hour. Honda and Toyota are making better cars and they are making them cheaper. Another $25 billion isn't going to change that. The Big Three will continue to hemorrhage money (GM lost $7 billion in the third quarter of this year) and before long their lobbyists will be back on the Capitol steps asking for more.

Democrats favoring this new bailout paint doomsday scenarios resulting from a collapse of the Big Three. However, these companies wouldn't close their doors and layoff all their employees. They would file bankruptcy and restructure their organization. This would allow them to get out of the ridiculous union contracts that are weighing them down. They still have valuable brands and could emerge from bankruptcy with a much better chance for long term success. The airline industry went through this a few years ago and is much stronger for it.

An essential element of capitalism is "creative destruction". Once successful firms are often outmaneuvered by newer, smarter, more innovative firms. The 8-Track was replaced by the cassette, then the compact disc, and now by the MP3 player. The Big Three's way of doing business was once very profitable, but now is causing billions in losses every quarter. Creative destruction is usually a painful process, as people may lose jobs. However, the process leads to more opportunity and productivity in the long run. Propping up the automakers with taxpayer money is unfair to its competitors and the larger population that benefits from economic growth and lower taxes. And if we prop up the failing domestic automakers, who else should we bail out? Should any failing business of a certain size get a multi-billion dollar bailout? We can't afford to manage the economy in this way.

The Democrats are in a tight spot. Do they do what's best for the country and allow the Big Three to go bankrupt or do they side with the powerful unions that are an important part of their base? Pelosi and House Democrats are crafting a bill that would provide the cash, but force the automakers to accept fuel efficiency standards that would make them even more unprofitable. If making smaller cars is good for business, they will do so without a mandate. However, their best competitive advantage over Honda and Toyota are their trucks and SUVs. It appears that Pelosi is using this bill to placate two special interest groups: the unions and the environmentalists.


Kyle Hommes said...

I agree with you, but what happens to all those you are laid-off. If the U.S. keeps manufacturing less and less, isn't our economy going to shrink?

I think the Auto Industry has made stupid decisions and put themselves in this mess. They shouldn't get a handout, but where is the balance? Is there a point where the government has to intervene in order to less the blow of the recession?

Jon Vander Plas said...

Very good questions. I'm not a libertarian, there are probably situations where government can do some good, but this is not one of them.

The laid off workers will have to find new jobs. They may have to move to find them and/or acquire new skills. This is the pain that comes with creative destruction.

Losing manufacturing jobs is a great fear for a lot of people. However, the same things were said as we moved from an agricultural economy to an industrialized one. Keep this analogy in mind. Think of the jobs that support a certain product as the curve of a smiley face. On the top left, you have the R&D, designing how the product will look and work. A little lower: the detailed engineering plan. On the bottom - actual manufacturing, assembly and shipping. On the right side you have distribution, marketing, retail sales, service contracts, and sales of parts and accessories. The bottom of this curve is the least profitable area to be in and employees here have the lowest wages. Our economy can grow substantially if we replace manufacturing with jobs on either side of the curve. The economy also grows by increasing our exports to countries who are "taking" our manufacturing jobs.

We live in a global economy. Manufacturing jobs are going to continue to leave. People must take advantage of the opportunities they have as Americans and learn to do things that can't be done efficiency by unskilled people in other countries.

Two interesting books if you're interested in this topic: The World Is Flat - Thomas Friedman and the Post-American World - Fareed Zakaria (both are liberals, if that makes a difference).

Jon Vander Plas said...

While we're on the topic, here's a video from the Onion: In The Know: Should the Government Stop Dumping Money Into a Giant Hole?