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  • The Auto Bailout: So Wrong in So Many Ways

    There’s been a lot of good discussion on the auto bailout over the past day or so. And by good discussion, I mean pointing out how utterly ridiculous an auto bailout is. Our own James Gattuso lays out Congress’s plan in his latest paper:

    “Eligibility for the program is limited to firms that submitted restructuring plans to Congress on December 2–thus limiting participation to General Motors, Ford, and Chrysler, since they were the only firms asked to submit such plans.

    Aid would be provided in two stages: an immediate bridge loan to forestall possible bankruptcies, and longer-term aid, with repayment over at least seven years. Nevertheless, at current loss rates, the $15 billion would not last long, keeping General Motors and Chrysler afloat only a few months, meaning further funding would likely soon be needed to continue the program.

    The program would be overseen by an individual to be designated by the President. This so-called “car czar” would authorize disbursement of money, determine how much goes to each firm, and establish measures for assessing automakers’ progress toward restructuring. This czar would also have extraordinary powers over participating firms, with approval authority over all corporate expenditures over $25 million.”

    David Harsanyi makes the public choice, rent seeking argument as to why bankruptcy isn’t an option:

    “Many people are asking: Why can’t these companies go bankrupt and reorganize like everyone else? In bankruptcy court, the process allows the auto industry to negotiate with creditors, stakeholders and unions. Well, the auto industry spent nearly $50 million lobbying Congress in the first nine months of this year while unions spent hundreds of millions to put Democrats in Washington. Those are two reasons.”

    Here’s Portfolio’s Felix Salmon take on nationalization leading to even more money for Detroit:

    “On the other hand it’s bad news for taxpayers, who will pony up billions of dollars now, just to get the Big Three into the new year, and then billions more in January, as part of the restructuring plan, and then untold billions on top of that in the years to come, as no one in Washington wants to take any responsibility for pulling the plug.

    And of course it doesn’t stop there. Just for starters, think for a minute about the car czar’s responsibility for Opel, and the negotiations which are going to start up between the US and German governments over the European marque’s fate. On the one hand, Opels are clearly the kind of thing which Congress wants GM to make more of. But they want GM to make those cars in America, not in Europe. And GM has already asked the German government for money to keep Opel going.”

    The Baltimore Sun’s Dan Neil thinks nationalizing GM is a good idea because “without big subsidies, there is no way in the near term to build these [electric] vehicles and make a reasonable profit, because of the stubbornly high cost of advanced batteries” GMU economist Don Boudreaux discusses the seen and the unseen of this idea:

    “Neil makes several wrongheaded assumptions. For example, he assumes that the future benefits of such a battery would outweigh the current costs of using them. But there’s no way he can know this to be true. These batteries cost a lot today because their production requires an extraordinary amount of resources today.

    Using these resources to produce an unprofitable battery means that we sacrifice, TODAY, a great deal of profitable outputs and investments in other industries. Perhaps resources artificially forced into advanced-battery development would otherwise have helped cure cancer, or encouraged development of more fuel-efficient jet engines, or deployed to keep millions of retired Americans more financially secure. Neither Neil nor Uncle Sam can know the value of what would never be created as a result of subsidizing unprofitable production in Detroit.”

    I don’t know about you, but I don’t trust Members of Congress or a car czar to make business decisions. Last time I checked we have managers and business leaders who have a comparative advantage in that sort of thing. Good business decisions are rewarded with profits and bad business decisions are punished with losses. Good business decisions create jobs while bad business decisions lose them. And now the government wants to provide taxpayer money to reward the bad business decisions made by Detroit. That being said, bankruptcy is a much better option, as explained by another GMU economist, Walter Williams:

    “What happens when a company goes bankrupt? One thing that does not happen is their productive assets go poof and disappear into thin air. In other words, if GM goes bankrupt, the assembly lines, robots, buildings and other tools don’t evaporate. What bankruptcy means is the title to those assets change. People who think they can manage those assets better purchase them. How much congressional involvement do we want with the Big Three auto companies? I’d say none.”

    I’d second that.

    Posted in Economics [slideshow_deploy]

    8 Responses to The Auto Bailout: So Wrong in So Many Ways

    1. Barb -mn says:

      Agreed! No congressional involvement! In fact, is there a way to know if and what businesses (of course, besides the big 3) is subsidized by the government? If not, it needs to be insisted. We will not give money to businesses that are unable to run it on their own. Every business the government subsidizes we want full notification before we choose to enter that business. We have a right to know.

    2. Eric, Green Bay WI says:

      Amen. I say let them file bankruptcy and reorganize. The things Ford and GM represent in this country will never change. The vehicles will still be made, the people will still buy them because they want to. The workers will be going to work in the moring, just for most likely someone else. Chrysler is not owned by the person that founded it, it is owned by a corporation that bought it when it was weak. Ford and GM face the same fate, like it or not. I will still buy a Mustang because of what it represents to me, not because of who owns/runs the company. The last thing we need is a government that can't even run itself right, running a business that is a backbone to our economy. We need only look at the national debt to realize the government makes more bad decisions than good.

    3. Spiritof76, New Hamp says:

      It is disgusting to read that US through legislation converting its economy to a Soviet style. With Car Czar in place, GM will make cars that nobody would buy, like the cars of the Soviet Union of the past- clunky, poor reliability and shoddy. US Auto manufacturers will die faster with government intervention.

      I say that all those people that talk so fondly about the electric car, should be forbidden to buy fuel powered cars. Let every Congressman drive only those and should be forbidden from flying, waiting for solar-powered airplane.

      It is so stunning to come across so much stupidity among the educated Americans. May be they have another agenda- kill Capitalism and establish socialism!

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    6. William A Flegenheim says:

      I agree with the auto makers filing chapter 11

      the sooner the better. However, that is not the

      question, the question is HOW CAN WE GET OUR OWN

      ELECTED OFFICALS TO AGREE!!!.

      I have been writing them to "let the auto makers

      file chapter 11, like the airlines" and I get back a bunch of stat.about losing all that labor"

      they do not even understand that labor is over 50%

      of the problem.

      It time that the auto makers cut off this "money tree" to the labor unions that is too much greed on the labor unions part of this.

      What do we do about this as regular tax payers?

      the

    7. Marvin Stehr, O&#039 says:

      You are wrong about the so-called bailout, actually a loan, not a gift! While, I tend to agree in principle that the government should not get involved with private business, the core problem is that the government has been overly involved, placing hurdles in front of the domestic automobile industry. for the last 40 years, the United states government has regulated and regulated and regulated the domestic automobile industry, ie; ever increasing standards for: manufacturing plants emissions, automobile emissions, safety standards for automobiles, and fuel efficiency for automobiles. Most of the costs for research and development for these items was born by General Motors, Ford, and Chrysler, NOT the foreign automakers. While the domestic auto industry was held to these standards, the foreign auto imports often were given exemptions from the same standards. The foreign imports, notably Japanese autos, were subsidized by the foreign governemnts (Japan), being dumped in the USA at below cost. This is how the foreing automakers gained increasing shares of the American auto marketshare. The foreign aitomakers have manufactured cars within the United states only in recent years, thus accountin gor lower "legacy costs". Had these foreign automanufacturers been producing cars in the USA for the last 60 to 90 years as have GM and Ford, then they would have more retirees too. Also GM, Ford, and Chrysler naturally evolved and grew within the USA, whileas, the foreign automakers were able to use unfair trade practices to gain a huge chunk of the market share in the USA and then they were able to cherry pick low wage, low cost-of-living, right-to-work southern states in which to build their plants. this is not a luxury that the domestic auto industry had. Since the federal government caused much of the financial problems of the Big Three automakers, it is only right for the government to correct the wrongs by providing financial help to the big three automakers. Then the government MUST get out of the way and quit placing more regulations on the automakers and dictating what kind of products that they must make. As to the claim that GM sells fuel efficient autos in South America or Europe, so why can't they make and sell them in the USA? The reason is the damn Congress and EPA and envirnmentalists will not allow drilling of domestic natural gas or diesel oil, which is what powers these GM product in foreign countries

      To blame and demand that the workers and retirees take a disproportionate cut in wages, pensions, and benefits is also wrong. It is true there should and can be some cuts, but the Repuclicans and conservatives, of whom I thought I was a member until the last couple of weeks, seem hell bent on busting unions and lowering wages, whileas the democrats seem hell bent on demanding more fuel efficiency and environmental, and safety satnadards on the auto industry. As such, both politial parties suck!

    8. Tom Rant says:

      I believe that the auto makers financial problems are caused for the most part by the UAW. The union has strangled the company's to death. Now they are trying to do the same thing to the country. In this town few people doing factory work make more than $14.00 an hour. The UAW expects those people to want there tax dollars spent on a bailout for the auto industry. Most of these UAW workers are unskilled. Someone shows them how to put in a wingshield or grind a casting and they do that day after day. And yet they seek to be paid like bank presidents. Bankruptcy is the best option for the car makers and for the country. You can find contact information for your congressman or women and senitors on the internet. If you oppose this bailout contact them by phone or letter and tell them to stop handing out your tax dollars to the auto makers.

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