Editorial: What's A Bailout to Do?

David C. Holzman
by David C. Holzman
editorial whats a bailout to do

General Motors is on a crash course towards bankruptcy. The company once known as the world’s largest automaker is burning cash so rapidly most experts agree that it won’t last through next year. Although Ford has more money at hand, having mortgaged everything up to and including its logo, the Blue Oval is also spending its way towards C11. Chrysler? DOA. In response, Congress recently approved massive loan guarantees for the industry. But Motown’s supporters are clamoring for another, equally massive handout. As our duly elected representatives argue how best to save Detroit, its champions warn of looming disaster. Still it must be asked: should The Shrinking Three be left to face market forces unaided by Uncle Sugar?

The D2.8 are huge, their supporters say. The domestic automakers supposedly account for six outside jobs– dealers, suppliers, service station attendants, and hosts of others– for every job within. In a worst-case scenario, two million jobs could disappear, says David Cole, head of the Center for Automotive Research in Ann Arbor. Through unemployment and/or Medicaid, those workers would quickly soak-up tax money, Cole claims.

“Because of the fragile state of suppliers, a dying GM or a Ford would take key suppliers with it,” says Cole. That would bollix the supply chain for the transplants. But Cole says that a mere $10b worth of prevention could be worth $100b of cure– his estimate for the costs of bailout and cleaning up the mess, should the companies be allowed to fail, respectively. (This is a downsized estimate; Cole’s Center’s “catastrophe studies”predicted a $200 – $300b hit to the economy from an automaker’s failure, equivalent to 2 percent of GNP.)

An odd consequence of failure to bail might be to hamper environmental protection, says Greg Nowell, a political science professor at SUNY Albany. Since the early 1980s, when the US gave the Japanese an offer they couldn’t refuse (“voluntary” import quotas), the Japanese manufacturers have always more than met US environmental standards. They’ve “let Detroit do the foot-dragging” in the political arena, says Nowell. With Detroit gone, however, they might resist tighter regulations by threatening to take their marbles and go home. “In terms of environmental regulations, [the demise of the US industry] would be a game-changer,” says Nowell.

Nonetheless, neither Nowell nor three other experts interviewed by TTAC favor bailout. “Cole assumes that [following bailout] they will start getting a positive cash flow, which is not a foregone conclusion,” says David Dapice, an economist at Harvard and Tufts Universities. “It’s one thing to have a cash transfusion so you can keep operating at a loss, and another to have a game plan for profitability.”

Cole insists US cars are improving. “My wife has the new Saturn Outlook,” he says. “The execution has improved dramatically.” But the December issue of Consumer Reports recommends against the Outlook, and says GM is a “mixed bag,” while “Ford’s reliability is now on par with good Japanese automakers.”

Dapice suggests that socializing health care costs might be a better approach than helping the auto companies directly. This would eliminate the transplants’ advantage of having younger workers with lower health care costs, and far fewer pensioners. According to the Detroit consulting firm Harbour-Felax, for each car it manufactures, GM spends $1,635 on health care for both current and retired American workers. For Toyota, the comparative figure is just $215.

Socializing health care costs would also have the advantage of avoiding picking winners, or in this case, losers. “I don’t think the US does well with industrial policy since it’s so political,” says Dapice. And “If you want a stimulus package, it might make sense to give money to [the city of] Detroit, or the state, so they can keep their bridges from collapsing. But I don’t think it makes sense to just pump money into failing companies.”

Regarding Cole’s warnings about key suppliers going under, Chris Knittle, a professor of economics at UC Davis isn’t worried. He says that if GM goes out of business, other manufacturers will pick up the slack.

If past is prescient, the demise of the shrinking three would brook no loss to automotive innovation, says Knittle, Volt notwithstanding (its projected price, 40 Gs, insures scant market penetration). The U.S. industry has not exactly been on the cutting edge for at least the last half century.

“What is fundamentally wrong with the US automobile industry?” Nobel economist Robert Solow asks rhetorically. “Why has it been unable to compete adequately, even with American plants owned by Japanese, European, and Korean automakers?”

“[American automakers] have a lot of corporate inertia,” says Knittle. And “when they can always fall back on the government to bail them, there’s even less incentive to change.” Noting that the market culls the unfit, breaking ground for new companies, he says that through bailouts, “You are taking out one of the mechanisms in which a market economy improves productivity.”

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  • Geeber Geeber on Nov 06, 2008
    matt51: Nothing personal, but we won, you lost, so I don’t really care if you are happy or not. The front page of our local paper - which endorsed Obama, by the way - noted that his agenda faces rough going in Congress. A lot of those Democrats are of the "Blue Dog" variety. Meaning that they were elected by conservative-leaning districts. While President-elect Obama's stimulus package will be relatively easy to enact, the union card check legislation and other bills near-and-dear to the heart of liberals face rough going. There will be a honeymoon, but Blue-Dog Democrats aren't going to risk antagonizing their constituents. The simple truth is that the domestic auto industry is no longer limited to Ford, GM and Chrysler. The only reason to bail out one or two of them is to preserve a sclerotic and dying union, or allow the hysterical "buy American" types to continue to delude themselves into thinking that because they buy a Chevy instead of a Toyota, the money somehow "stays here." Never mind, of course, that the Chevy is built in Mexico or South Korea, while the Toyota is built in Kentucky or Texas. It's silly and downright reactionary to limit the domestic auto industry to GM, Ford and Chrysler. Educated, sophisticated consumers - not to mention voters - have moved beyond that narrow way of thinking. We'll be fighting every step of the way. I remember the euphoria when President Clinton won. He and his liberal supporters soon received a very rude awakening. matt51: I have worked the defense industry all my life, much of what we buy is leveraged from basic mass production in the civilian world. So, you'll buy it from a Toyota plant located here in the U.S.A., not one owned by GM. And it still doesn't change the fact that GM, Ford and Chrysler are not necessary for defense production. It's not 1941 anymore.... Even if all of the Big Three collapse - which is highly doubtful - there is still plenty of "basic mass production" occurring in the United States. This is exactly what Honda, Toyota, Nissan and Hyundai are doing in their North American plants. Of course, they aren't using union members to build those products, which is the real "problem." This isn't about saving America's production base; it's about bailing out dumb management and a spoiled, out-of-touch union with taxpayer dollars. The "we need to save the Big Three to save our industrial base" doesn't wash with those who are better informed. Special interests rule again...so tell me, how does this represent change? matt51: Guess what we hung the Nazis for - Pre-emptive War - they said they struck first before Stalin could invade Germany - Pre-emptive war was held to be a war crime. We also hung them for war crimes and crimes against humanity. There were four main charges brought against the defendants. And please note that Stalin was hardly innocent - he had signed a non-aggression pact with Germany in 1939, which allowed BOTH of them to carve up Poland. He was hardly a complete innocent before the Germans invaded the Soviet Union in 1941. And there is a considerable difference in facts and circumstances that surrounded Europe in 1939-41 versus those that surrounded Iraq in 2003. Which may be why Hillary Clinton and other prominent Democrats initially supported the war. Sorry, but no dice on that one. It's considerably more complicated than that. matt51: Not only have they led us into pre-emptive war; torture; massive increase in national debt; but their economic theories have failed. Except that Senator Obama's proposals, even with the revenue from his proposed tax increases, would not decrease the national debt, and do nothing to solve the looming crises with Social Security and Medicare. Was Rush Limbaugh my source? No...it was CBS News...the well-known source of right-wing thought. matt51: You can whine all you want, but the US has rejected Republicanism the last two elections, 2006 and 2008. McCain was actually doing quite well in the polls until the dominoes began falling on Wall Street. While the public blame the Wall Street fiasco on Bush (which is quite natural - he is the central figure of our government), the simple fact is that the root causes are considerably more complicated than that, and stretch back to decisions made in the early 1990s. matt51: This should provide some understanding as to why Americans cannot afford homes or cars. Yes, it should be mandatory to show that even people at Harvard can fail miserably at attempting to blame "problems" on a totally unrelated government action that they oppose. At least, to those of us who are actually informed about the issues and recent history. As was explained in another thread, people can still afford new cars. They just can't afford $40,000 SUVs and near-luxury sedans, but that has nothing to do with the Iraq war. They never really could those vehicles, but they used home-equity loans and cheap leases to buy them. Now that those sources of credit have dried up, people will have to re-think what they can really afford in a new vehicle. There is still a healthy market for vehicles in the $18-24,000 range. Of course, the problem is that GM, Ford and Chrysler can't make much money from sales of vehicles in that price range, but that is not the Bush Administration's fault. Unless George W. Bush personally forced them to sign lavish union contracts, skimp on product development for smaller and medium-size cars, and retain too much capacity for their market share (thus necessitating the reliance on sales to rental car companies). Regarding housing, the reason people can't afford houses is because of a run-up in housing prices that began in 2000. One cause of this boom was the repeal of taxes on capital gains from the sale of homes (which was signed into law by...President Clinton - was he a Republican?) and the loosening of credit standards for mortgages. We've had a classic bubble for eight years, this time in the real estate sector. Both parties have been happy to encourage it, and please note that it was DEMOCRATS that blocked efforts to tighten control over Fannie Mae, and it was Democrats that initially strong-armed banks and mortgage companies into lending to less credit-worthy customers through a revamped Community Reinvestment Act. Housing prices are now coming back down to earth. We don't need to bail people out of bad mortgages (which both parties have proposed), or listen to people who think that we need to prop up the values of their homes to save their balance sheets. We need to let prices slide, which will bring them back into line with incomes. THIS is what will bring about affordable housing.

  • Matt51 Matt51 on Nov 06, 2008

    Geeber - I doubt we are talking to anyone but each other at this point. I am saying, you can't suck 5T out of the economy without a negative economic impact. Just doubling interest on the national debt from 250B per year to$500B per year is a huge economic drag. Yes they were hung for pre-emptive war. Now, think of signing statements - now that Bush has made this popular, just imagine a Democratic President removing any Republican backed parts of bills. Remember in 2005 Frist wanted to remove the filibuster, which was kept only if the Democrat agreed not to do it. No, we do not need support from Republicans to support our agenda. Many may sign up, but Republicans are not driving the car. You get another chance in four years. Our machine tools are leveraged from automotive suppliers, our composite materials, our electronics components, and so much more. From a national security standpoint, there is a difference between US companies, and foreign companies with US plants. It is the entire supply chain, not just the big 3. You may not like the bailout, but I never liked the Iraq war. None of us can get all we want. Best regards (many of my friends and relatives feel the same way you do).

  • Kat Laneaux What's the benefits of this as opposed to the Ford or Nissan. Will the mileage be better than the 19 city, 24 hwy? Will it cost less than the average of $60,000? Will it be a hybrid?
  • Johnster Minor quibble. The down-sized full-sized 1980-only Continental (which was available with Town Car and Town Coupe trims) gave up its name in 1981 and became the Town Car. The name "Town Coupe" was never used after the 1980 model year. The 1981 Lincoln Town Car was available with a 2-door body style, but the 2-door Lincoln Town Car was discontinued and not offered for the 1982 model year and never returned to the Lincoln lineup.
  • Zipper69 Some discreet dwebadging and this will pass for a $95k Lucid Air...
  • Zipper69 Does it REALLY have to be a four door?Surely a truly compact vehicle could stick with the half-door access with jump seats for short term passengers.
  • ToolGuy See kids, you can keep your old car in good condition.