Five Reasons Why Bailing out the Auto Industry is a Bad Idea

In the midst of the current economic maelstrom, we find banks asking for government help to cover bad mortgages that should not have been offered. We have insurers looking for help to deal with losses related to the mortgage crisis. We have two federally managed agencies that offered these mortgages and then encouraged people to buy securities backed by them needing huge infusions of government money to cover yet more losses.

Out of a desire to help, Congress responded to the Treasury Secretary's pleas and created a $700 billion program where the the secretary could exercise broad authority to intervene and help the economy. Everyone assumed he would buy up bad bank assets and stabilize the market. Now he has said he probably won't buy those assets after all, and would instead give money to institutions to encourage them to free up credit. A good lesson to learn: before giving someone three quarters of a trillion dollars to spend, make sure you know how it will be spent.

Meanwhile the Big Three automakers (we should say U.S. big two and a half, since Chrysler isn't really as big and until its recent spinoff was owned by German Daimler Motors. The real big three are, of course, Toyota, Honda, and Nissan) have come, hat in hand, saying they won't be able to pay bills by the end of 2008 without a major "loan" from the government.

I'm not sure I understand the wisdom of the first steps taken above (although I was not favorably inclined toward the bailout, the sense of panic created by the media required something happen). Many of the steps already taken do not seem to have helped. Maybe other steps will. However, I can tell you that helping the automakers ought not to be done, at least not without major stipulations that they probably wouldn't accept. Here are the reasons I hold this view.

1. Autoworkers' compensation is twice the national average for manufacturing jobs. Executive salaries may be outrageously high (how much one should make for failing to make your company profitable is a tough question). However, what is killing the industry is high labor costs. A recent study I read showed autoworker compensation cost at nearly $80 an hour, by the time all employer costs are added to wages. That is twice what factory workers in other manufacturing jobs in America make. The UAW leader has said flatly, "no more concessions" and said the solution is to get the economy going, which to him means freeing up credit so Americans will pony up the big bucks to buy new cars whose labor costs make them more expensive than imports, while quality concerns continue to abound--just examine almost any issue of Consumer Reports to see test data that ranks imports ahead of domestic cars.
2. There is already protection for businesses that can't cover expenses--it is called bankruptcy. Our various U.S. airlines have made this a revolving door of protection, and the big ones are still around. Bankruptcy would allow the companies to reorganize, free themselves of current labor costs, renegotiate realistic contracts, and emerge healthier, even if smaller.
3. Chrysler is about to disappear. Daimler couldn't make it profitable. GM (as bad off as it is) has been trying to buy it, which would remove it from independent operation. Let it go the way of the Studebaker, the Nash, the Packard, and other auto companies no longer in existence. In a free market economy, companies do not have a divine right to exist. Bad management, poor products, and bloated costs are not a good business model. If those are the facts related to any company it will sink. It should.
4. Short term pain is not a reason to avoid good decisions. Yes, our economy will take a hit if the automakers go into bankruptcy. Some will lose jobs. Wages will probably decline for remaining auto workers. But while these are political landmines, they are economic realities. If the government becomes the protector of all failing or struggling businesses, propping them up and making sure wages stay at unsustainable levels, we will become the same kind of economic powerhouse that Britain and France are--strong, but certainly not of the same caliber as the U.S. economy. It is a move toward what is called social democracy, and a repudiation of free market capitalism.
5. How long have people known that U.S. cars needed to be more economical and more reliable? Decades? How long have imports been eating U.S. automakers' lunch? Yet, who set the pace on introducing more economy, more quality, more hybrids? The import companies did. I have often repeated the old line, "Doing the same thing that failed over and over again and expecting a different result is not persistence, it is insanity."