Next Up...The Auto Industry

Posted: Nov 18, 2008 1:31 PM
Fresh off the $700 billion-plus financial service sector bailouts, including the most recent dole to AIG that upped their bailout total from $85 billion to $150 billion, the Democrat-controlled Congress is trying to rationalize a new $25 billion bailout for the auto industry.

For years, the American auto industry has struggled to keep up with foreign manufacturers like Toyota, Honda, and Nissan. CEOs at Ford, GM and Chrysler  have operated using outdated business models, failed to invest wisely in new products and technology, and were not prepared for the massive rise in gas prices that scaled back their truck and SUV sales dramatically. 

But besides the Big Three’s lack of innovation and mismanagement problems, the Big Three have labor costs that are far higher than their global competitors.  Their CEOs failed to take on union bosses – and as a result millions of jobs could be in jeopardy.  Ironic, isn’t it?

The Big Three pay out an average of $30/hour more than their competitors, including pension and health care costs for hundreds of thousands of retirees.

Take GM for instance, as Michael Levine from NYU School of Law wrote in the Wall Street Journal yesterday:  “GM is contractually required to support thousands of workers in the UAW’s ‘Jobs Bank’ program, which guarantees nearly full wages and benefits for workers who lose their jobs due to automation or plant closure.  It supports more retirees than current workers.”

Taxpayers are once again being asked to throw their hard-earned money behind a short-term, unproductive investment which will only prolong the companies’ failures at a cost that could be even greater later on down the road.  Throwing taxpayer money at Detroit’s spiraling problems will not fix their long-term management and productivity problems. Any urgency that would force the Big Three to make tough restructuring choices would be lessened if federal money is available. Like AIG, they will be back at the taxpayer’s trough in no time.  Let’s not forget that Congress already approved $25 billion in auto industry loans only a couple of months ago.

There are alternatives.  For instance, if the Big Three were able to restructure and reorganize under the protection of the bankruptcy courts, they could be saved without a taxpayer bailout and could fix many of their long-term management and labor problems.  Filing for Chapter 11 bankruptcy does not mean a company has gone belly up, that it will be broken up and that all jobs and productivity are lost – it means a company actually has the ability to make structural changes to keep it afloat without the threat of outside lawsuits and through a comprehensive payment plan.

Once you cross this line and bail out the auto industry, where does it end? Are the airlines next?  We have already spent more than a trillion dollars in bailouts this year.  We must take a hard look at why the auto industry is in this position in the first place. Only then will our economy regain the stability it desperately needs.

Cross-posted at the Hill's Congress Blog