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  • Auto Bailout Update: Drove My Chevy to the Levee...

    The news of another auto bailout was met with a whimper last week. Surely, the little noticed request for an additional $22 billion was partly overlooked because $22 billion just doesn’t seem like a large amount of money after President Obama spent $787 billion of your borrowed dollars the week before. But the fact remains that many questions remain unanswered by Detroit, and unasked by Capitol Hill. For example:

    How much money is the Federal Government committing to GM and Chrysler?

    With the $39.4 billion in loans to GM and Chrysler, the auto suppliers asking for $25.5 billion, and the $25 billion in federal loans for automobile manufacturers to develop more efficient and cleaner vehicles, the total comes to $97.4 billion.

    Are sales improving, giving Americans hope that the bailout will end soon?

    For the month of January, GM’s sales plunged 49 percent, and Chrysler’s fell 55 percent. Non-Detroit companies did not perform much better. As sales continue to worsen, there is little doubt that the U.S. Government will be forced to either continue bailing these companies out, or admit this effort to be a failure. Having the government prop up a failing industry does not signal to consumers that these two companies are on the road to recovery.

    Moreover, the companies’ plans for long-term viability do nothing to assuage that recognition. Senator Richard Shelby (R–AL) recently remarked, “The plans fail to demonstrate that either GM or Chrysler can reduce its labor costs to match its competitors. They also fail to show that the companies can reverse the decades-long slide in their market share.”

    Are the United Auto Workers (UAW) making any concessions to help the Big Three become competitive with their foreign counterparts?

    Ironically, the UAW reached a deal on labor concessions with Ford, the only U.S. automaker that is not taking federal money. In this deal, Ford can contribute equity, rather than cash to a union-run health care trust for retirees. Some may wonder why Ford was able to extract a union concession, albeit small, before Chrysler or GM. As Kristen Dziczek of the Center for Automotive Research points out, “The role of a federal partner at GM and Chrysler make it more difficult.” Ford Vice President Joe Hinrichs said, “The agreements, if finalized, will allow Ford to become competitive with foreign automakers’ U.S. manufacturing operations…”

    UAW President Ron Gettelfinger said “The modifications [with Ford] will protect jobs for UAW members by ensuring the long-term viability of the company.” It is surprising that this principle of long-term viability protecting jobs is finally understood when a deal is reached but ignored when Senator Bob Corker (R-TN) tried to negotiate small wage concessions in 2009 as part of the original bailout, and Gettelfinger walked away offering nothing.

    Won’t the Presidential Task Force help fix Chrysler and GM’s problems?

    Well, this is assuming that the one thing stopping Chrysler and GM from being competitive in the past was a number of government bureaucrats with no automotive experience overseeing their manufacturing and sales. In fact, the 10-member Presidential Task Force on the Auto Industry is primarily environmental and labor activists, and does not include one person with one day of automotive manufacturing experience. Additionally, most of the members and policy aides have been highly critical of the auto industry. Some of the names include Gene Sperling, a counselor to Treasury Secretary Geithner who has publicly stated that the union does not need to make any wage or benefit cuts; Ron Bloom, a special assistant to the President of the United Steelworkers; Lisa Heinzerling, senior climate policy council to EPA administrator Lisa Jackson; and Heather Zichal, a former Obama campaign aide, and deputy director of the White House Office of Energy and Climate Change.

    And today, it was reported that out of the eight members of the task force, and the ten senior policy aides who will assist them in their work, there are only two American cars among them. Only two. So not only do they not know how the U.S. auto industry operates, they don’t even support it.

    Clearly, this Task Force was designed to make U.S. car companies more eco-conscience. Isn’t that a good thing?

    If you are going to give $100 billion to two failing companies, it would make sense that reasonable oversight is conducted. However, that does not include micro-managing a free market from the ivory halls of the nation’s capital. Consumers demanding cleaner automobiles will do that without mandate, and with more success. Which is exactly what has happened. Recently, both USA Today and Car and Driver tested the new Ford Fusion Hybrid against the Toyota Prius and other competitors and found it to be the “best gasoline-electric hybrid yet.” It delivers over 34 mpg, better than all competitors and as Car and Driver states, “Ford has pulled off a game changer…” This game changer wasn’t developed because government got in the game.

    This car was developed long before this Administration took office, using affordable, existent technology to meet customer demand. The car does not need special fueling stations nor is it out of price with what consumers can afford. Both of these conditions may be ignored with new government mandates, which are sure to tax the overwhelming majority of Americans driving gasoline cars into submission. Taxpayers that make up over 95% of drivers currently on the road. It will be interesting to see if future ‘stimulus’ items continue to pick winners and losers among cars, and continue to penalize Americans for choosing a car that suits their family’s economic and utilitarian needs.

    So what is the best option right now?

    The bankruptcy process is often the best way for troubled enterprises to get back on their feet. Debts are reduced or cancelled and contracts terminated or renegotiated, allowing firms to get a fresh start. And if a firm still cannot be made viable, bankruptcy also provides for an orderly and predictable process for getting assets – including plants and equipment – back into productive use by others. There are, of course, losers under bankruptcy. Management is more likely to be replaced, but that might be deserved. Shareholders lose their investment, but stock values are worth little already.

    The most sweeping argument against bankruptcy is that millions of people employed by the automakers and by firms dependent on them will lose their jobs. The reality is just the opposite. The government should not prop up large, failing firms where consumers do not wish to purchase their products. The result would be sales lots full of GM and Chrysler cars and a loss of innovation and efficiency. Imagine if the government propped up the VCR industry while DVDs were available on the market.

    Yes, jobs will be lost under bankruptcy, but these companies must become smaller to survive under any scenario, even with massive bailouts. In their bailout plans, for example, GM and Chrysler proposed to cut 50,000 jobs globally. If the companies were forced to address their problems and make the hard choices now, rather than postponing them through taxpayer bailouts, it will lead to more jobs and a better economy over the long term. Senator Carl Levin (D-MI) said, “Bankruptcy is a non-starter”. It would seem that with a $100 billion of your tax dollars invested in these two companies, all options should at least be on the table.

    So, bottom line?

    According to the Economist, “…it is unlikely that even these measures would be enough to stave off mass bankruptcies were the task-force to allow GM to go into Chapter 11, which in turn would jeopardise the ability of the carmakers so far not seeking bail-outs—Ford and the foreign transplants—to keep their factories open. President Obama has said that the final decisions about the future of America’s automotive industry will rest with him. It is doubtful whether any of the choices his task-force presents him with will be either cheap or palatable.”

    Posted in Economics [slideshow_deploy]

    14 Responses to Auto Bailout Update: Drove My Chevy to the Levee...

    1. Mary Van Hatten says:

      Since Obama has been sworn in, we have seen a daily decline in the stock market, more unemployment, an unimaginable debt levied upon us and banks failing. Could it possibly be that everything is going according to a plan? If Capitalism, as we know it, fails, the Socialist left can usher in all of their porgrams. Maybe that is why our liberal president can laugh at some “trader” who is so upset on the floor of the stock exchange.

    2. Pingback: Change You Can Believe in … Obama Auto Task Farce Owns Foreign Made Cars, Do as We Say Not as We Do | Scared Monkeys

    3. Robert Mississippi says:

      The auto industry has two problems. First there is a substantial difference in the overhead costs associated with its automobiles and those manufactured by its foreign competitors. Secondly there labor costs are not competitive with foreign manufacturers.

      So in reality they cannot afford to make smaller cars because the labor and overhead costs would be 40% of its value and they could not make any money.

      Simple economics says you cannot pay a minimally educated work force $75 an hour and hope to sell that product to professionals like teachers and nurses (many of whom have advanced degrees) making one third of that or about $25 an hour.

      The inverted pyramid scheme has burst. These companies need to reorganize, automate heavily, and reduce labor costs through bankruptcy. It is obvious the UAW is unwilling to compromise.

    4. p.w. says:

      I willnot buy a car from a company who takes money from the government.

    5. Larry in Texas says:

      p.w. …you should continue to trust your intuition…your thoughts are exactly why Ford Motors did not want to be involved in any of the Governments Socialist bargaining!

    6. Amy in Pittsburgh says:

      Every car I've owned in my lifetime has been an American car. I will not buy another car from the UAW and I will not buy another car from a company that takes money from the government.

    7. Sil from Florida says:

      Iwill never by a car from the small BIG 2 that takes money from a socialist goverment my next car is a FORD FIESTA IN 2010 the last brand new (gm) I bought was a 1967 (396)325 h.p.chevy chevet for 3,197.00 good old days,,,,

    8. M.L.P. Bellingham, says:

      It appears congress is the problem. They are at what 22% approval or is it now lower. If the cheats are in charge of the nations spending how will it ever improve? Earmarks, pork, are the order of the day still! Our President calls all spending, even wasteful pork, stimulus! There is no wonder people are hanging unto what resouces they have. My 401k is -50% since Obama became president! I have no sense the bleeding is finished yet because of the government interference into business and the economy. Milton Friedman and R. Reagan were correct in assessing that government is the problem rather than the solution.

    9. Thomas Gray, South C says:

      The lawmakers in Washington had nothing to do so they tinkered with our economy and broke it, so now they have something to do,'' when '' they get done spending all they can borrow of tax money,

      they may take a little time to see if they can fix it and then again they may not.

    10. Michael in Washingto says:

      I am a small business owner engaged in the Auto Wholesaling business. Let me assure you the "helping hand" of Uncle Obama, Pelosi, and Reid, will hasten and kill-off GM and Chrysler, and possibly Ford too.

      They have no sense, saavy or understanding of what it takes to produce a product or service, market it, or meet a payroll. They are all professional politicians that have never met a payroll or probably even received a check that wasn't issued by a government entity or organization. But they are here to save us, and tell these Auto execs how to save their Companies?

      These manufacturers must meet the demands of the market. That market demand right now? Full size SUV's and Trucks. That is what people are buying, new and used, and all that they want in todays market.

      Used, late model Full size Diesel trucks in my area right now are bringing several thousand dollars over Kelly Blue Book Wholesale at Wholesale dealer auctions…. if you can find any to buy. This is the complete inverse of the market just 6 months ago.

      Toyota Prius, Corolla's, Honda Civics, and all the other Hybrid or economy cars like them, (foreign or domestic) are stacking up on New and Used car lots everywhere and if they manage to be sold at auction, they are well below Kelley Wholesale, THOUSANDS below. Pre-owned Prius right now is $4-5 THOUSAND below Kelley Wholesale book as are Honda Civic's. Do you think it was an accident that Honda dropped it's ice cold Accord Hybrid model last year?

      Obama and his "Car guru Dream Team" of know-nothings will have them retool for what people will not buy. This will enusre their demise. And that our tax dollars were completely wasted.

      We need a viable domestic auto industry, and the only way they will survive is to re-organize top to bottom through bankruptcy or via the serious and imminent threat of it to ensure the UAW comes to the table with the understanding that their Democrat enablers can't help them. They must come to the stark realization that there is no UAW without GM, Ford, and Chrysler.

    11. steve Jax Florida says:

      The Nazis,Japanese,Fascists, Communist Soviet Union, could not defeat the U.S.A.Our defeat could be only be accomplished from within. Study your history,

      Great Nations Crumble from within.

      The ECONOMY is a National Security Issue.

      "In Loving Memory of the United States of America.

      7/4/1776-1/20/2009

      WELCOME TO THE UNITED SOCIALIST STATES OF AMERICA

      circa 2009-????

    12. m.t. says:

      did you people vote, are did you set at home on your a– and let this happen ?????

    13. Todd WI says:

      I have owned nothing but FORD or CHEVY and many of them, and several new. I WILL NEVER buy another ford or chevy as long as the UAW runs them. Every penny spent on a business advertising on CNN or MSNBC or supporting the liberalism and socialism of AMERICA doesn't deserve a bailout of a hand out from the AMERICAN public put em out of work go bankrupt this life long AMERICAN car owner will never buy another as long as the UAW runs the workers……….I don't even buy UAW made parts for my cars after market china or somewhere else never UAW or LIBERAL made!

    14. geoprime73 says:

      Dont fool yourelves people… Ford takes money from the Gov. just like the other BIG 2. It just doesnt happe through Bailout money, it happens through Gov. Loans and incentives. To say you will never buy a vehicle from Chevy and Chrystler because they took bailout money means you wont buy from Ford either… Do some research and you will find out that Ford owns the Gov. money too… and in fact Ford reps were there with Chevy and Chrystler lobbying for bailout money but they were smart and turned down the money after they found out about potential Gov. involvment in the company. Again, Dont be fooled Ford is not better than the other BIG2, I own one and I will own one again. Ford is not great and not perfect anymore than the others…

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