Rescue Packages & the Automobile Industry

Smart takes from Manzi and McArdle. A question: I understand the political argument for an automobile industry bail-out. Unions are a valued Democratic constituency, and many of the potentially affected employees and suppliers live in swing states.

But is there a good argument for the bail-out on policy grounds? If GM can’t convince investors to buy additional equity or debt in the corporation, why should the U.S. government tax other companies (struggling in the same economy) to make an investment the market is unwilling to make? Is Congress better at spotting good investments?

Update I: See also Ryan’s comment on the National Money Hole” thread.

Update II: Blackadder has a good post up about the administration of the bailout.

23 Responses to Rescue Packages & the Automobile Industry

  • Gerard E. says:

    Where the September Financial Sector Meltdown has gone. If certain banks are too important to fail, what about this company what about that company what about GM. Trading around 3 bucks as we speak. But what about those jobs the economy of Michigan the American way cue Stars & Stripes Forever. What lingering bad feelings about the 08 election were removed by laffs. At the sight of two distinguished figures on the Obama Economic Team- 1. our VP-elect- how nice Joe was let out of the attic for a few hours; 2. Michigan Gov. Jennifer Granholm. We will temporarily restrain our feelings about this Catholic pro-abort sellout. Only that she has been as incompetent as one in her position can get. In a state that fosters old-skool New Deal answers to 21st century positions. So now We Are All Michiganders. Bellying up to the public trough when our bank/auto company/lemonade stand suffers from largely self-inflicted wounds. They might want to chat up Philly Mayor Michael Nutter- libraries and pools to close, city employees laid off, no more cash for Mummers Parade awards, taking 10 percent pay cut. Chitown Mayor Rich Daley did similar presentation- more vague, but strongly warned of similar fiscal surgery. In spite of this, neither gent- good Dems both- are terribly willing to cry Mr. President Elect Save Us. Philly and Chi-Town are too big to fail. But they got- so soon after the elevation of the Dollar Store Messiah- that around their way, The Era of Big Gummint is over. Done. History. During my recent visit to SoCal, I saw loads o’ Toyotas, Infinitis, a Beemer or two. Very few manufactured by the Big 3 Welfare Cli- uh…. Detroit Auto Makers. GM makes great vehicles- Chevy Silverado, Caddy Espilade, anything with GMC logo. But way too little and way too late. Two Words for them- Chapter. Eleven.

  • John Henry says:

    “Try national security/strategic: we can’t afford to lose that part of the manufacturing base.”

    That is a good point, but it raises the question: would that base necessarily go away without a bail-out? Companies frequently use Chapter 11 to restructure their contractual obligations, create a more sustainable business model, or to maximize the value of the company in a sale. If GM is sick enough that bankruptcy wouldn’t help, then it may not be much of a strategic national resource.

  • rob says:

    Would they really be shut down? Wouldn’t successful carmakers (the ones that didn’t keep making tremendous gas-guzzlers even with the rise in gas prices) buy up a lot of the factories and use them eventually? It seems like we should allow smart companies, even if they are Japanese or German, to profit at the stupidity of our own carmakers. Anyway, I don’t beelive anything is really “American-made” anymore. Everything is from everywhere anymore.

  • Dale Price says:

    That’s silly.

    That’s a Pythonesque response.

    More to the point, no, it’s not. The United States could not have geared up for WW2 without the Big 3. Nor could the Allies in general. Case in point: the Russians wouldn’t have reached Berlin without Chrysler’s 2 and a half ton Dodge trucks. I grant that an epochal, nation-shattering struggle along those lines is not currently on the menu, but that doesn’t mean that it won’t in the future.

    History happens in ways we don’t expect. I’d rather have mass-vehicular production capacity to hand if it does.

  • blackadderiv says:

    The United States could not have geared up for WW2 without the Big 3.

    The U.S. isn’t going to be gearing up for another WW2 any time soon. One might as well suggest that we need to keep GM around in case of a Martian attack.

  • rob says:

    -The United States could not have geared up for WW2 without the Big 3.-

    We will never have another war in which heavy vehicles will be that crucial. Important, yes, but not as critical as they were in WWII. The Second World War will not happen again. WWIII will be fought along entirely different lines (cybernetic, aerospace, guerrilla). There will be no tank dashes into the heart of Asia or anywhere. Did a blitzkrieg win the war in Iraq? Nope.

    If your goal is to win WWIII, saving big carmakers is waste of time. If there was such a need for them, they wouldn’t be suffering, would they?

  • blackadderiv says:

    I’d also note that, given the current size and capability of the U.S. military, the number of jeeps, tanks, fighter planes, etc. that are currently being produced and maintained (mainly by companies other than the Big 3), and the sheer volume of U.S. military spending, which dwarfs that of any other country, the idea that the U.S. would be somehow defenseless or unable to cope if the Big 3 weren’t around to utilize their 250k employees in the case of an emergency is, as I so Pythonesquely put it before, just silly.

  • Tito Edwards says:

    Being an anapologetic free market capitalist, I’m all for no bailout. Let the market correct itself. If the Big-3 can’t remove the outdated UAW, let them fail. Besides we have Toyota and Nissan car plants in the U.S. that can be converted to war time use.

    IF, and I hope it’s a big IF, the UAW needs to be disbanded, removed, put out of mind and out of sight. In my humble opinion it is they (along with poor management) that is the root cause of why the Big-3 is where they’re at.

  • Dale Price says:

    The U.S. isn’t going to be gearing up for another WW2 any time soon. One might as well suggest that we need to keep GM around in case of a Martian attack.

    The difference being we’ve had two global wars and four regional wars involving deployment of American troops in excess of 180,000 men in less than 100 years. As opposed to zero conflicts with doggedly Red Mars….

    Throw in a Cold War that involved static deployments of additional tens of thousands, along with the necessary logistical support for these.

    The one thing we know about this sunny unipolar moment is that it will end. Holidays from history always do. Nobody foresaw American involvement in WW2 in November 1939, either. I’d like to have a national manufacturing base handy when history starts up again. Who knows? It also might keep Tars Tarkas and his legions quiet, too.

  • I see Dale’s point, but we already have a pretty huge manufacturing base of “non-US” car factories in the US — which in the event of a WW2 scale conflict would doubtless be severed from any foreign entanglements and told to act as US companies.

    I would assume that given the tarrif and shipping costs involved, we’ll continue to have roughly the same number of auto worker jobs in the US whether some or all of the Big 3 go belly-up or not — it’s just a question of who will own the plants and whether they’ll be union shops or not.

  • John Henry says:

    “…we’ll continue to have roughly the same number of auto worker jobs in the US whether some or all of the Big 3 go belly-up or not — it’s just a question of who will own the plants and whether they’ll be union shops or not.”

    Agreed. Bankruptcy offers a lot of flexibility for restructuring union contracts and debt obligations to prepare a business for sale or for continued operation. My inclination would be to allow people who have a vested interest in these matters, rather than Congress, sort out the company’s strategy going forward.

  • Donald R. McClarey says:

    Dale has a valid point, but I would prefer straight defense outlays to bailouts. I also agree with him that holidays from history always do end. I think ours has ended, but unfortunately a majority of the American people do not agree. Our military was stretched fighting in Iraq and Afghanistan. Add in another conflict or two and our military could be on the receiving end of some unpleasant outcomes. Meanwhile many Democrats in Congress are calling for substantial defense cuts. One more costly lesson I think we will learn in the next four years is what happens when a nation weakens its military in turbulent times.

  • M.Z. Forrest says:

    For folks that get up tight about a 2 point increase in the marginal rate for income over $250K, you seem rather nonchallant about the impact to the economy losing annual allocators of $170B (F), $190B (GM), and whatever Chrysler does. Sure, maybe someone out there would buy the assets out of bankruptcy and in an optimistic scenario eak out 80% when all is said and done. That would only be annual cost to the econony of $70B, or if we do it how Congress does it, $700B over 10 years. That of course is an optimistic scenario. Take GM’s plant in Janesville. There are only so many things that can be produced there, and my guess is that even if that plant gets occupied relatively quickly, there will be nothing approaching the equivalent of a $40,000 SUV leaving there every minute. The worst case scenarios involve losses of 80%-90%. When you start talking about ripping $300,000,000,000 from the economy with no immediate prospects of recovery, you start having cascading effects. By itself, it would be a 2% decline in GDP. The whole Great Lakes region could start looking like Michigan real quick. Once that happens, other states will be affected. After 30 years, the steel belt has still only partially recovered from the collapse of that industry.

  • John Henry says:

    M.Z.,

    The problem I have with this approach, apart from a natural aversion to any parade of horribles argument, is that I think the U.S. automobile industry is structurally unsound. The steel industry provides a useful comparison; if we had propped up and rescued every major steel company in the U.S., I doubt the industry would have been that much better off in the long term. But, even if it was marginally better, this would have hurt a lot of other companies because the capital allocated to the steel industry by the government could have been put to a thousand better uses (preferably by investors rather than whoever has the most influence in Congress). The steel industry circa thirty years ago was not a good investment; that’s why it was failing. The same seems to be true of the automobile industry today.

    I am not opposed to programs that provide additional unemployment benefits and/or money for education and re-training that may help to mitigate the direct impact on affected individuals. But indirect effects matter, and, if the industry has an unsustainable cost structure, it is bad policy to devote scarce resources to bad investments.

  • blackadderiv says:

    Mr. Forrest,

    I think your “optimistic” scenario is unduly pessimistic. Even if not all of the assets sold during a bankruptcy are valuable, those that are will tend to be used more productively than in there current capacity. In any event, paying the Big 3 around $200,000 for every single employee in order to stave off the inevitable for who knows how long does not strike me as sensible.

  • Ryan Harkins says:

    M.Z.,

    More likely what you’ll find if the government does not bail out the Big 3 and the Big 3 fail, is that someone will come along, buy out those companies, reorganize the whole structure to be more efficient, and in a couple of years, Ford will no longer stand for “Found On Road Dead”. (I don’t know any witticisms for GM or Chrysler.)

    The result? A number of people lose their pensions, but hopefully will have been bought out at a reasonable price. A number of people will lose their jobs, but once the companies are up and running more efficiently and hopefully recapturing a share of the market, then that will balance itself out. I’m not saying that it will be easy for those who no longer have pensions or jobs, but here’s a couple of ways to look at it.

    A) The Big 3 are bought out and people lose pensions and jobs. B) The Big 3 just go under anyway, and then people are still out of their pensions and even more people are out of jobs.

    I’m not throwing in any condition of C) Government bails out the Big 3, and the Big 3 don’t go under, because I don’t see that happening. The problem is that the Big 3 simply aren’t conducting good business. A bailout won’t fix that; at best, it would delay the inevitable.

  • Gerard E. says:

    Amendment to previous post way above this one- Philly Mayor Michael Nutter got on Amtrak Express this morning to DC. Brought tin cup. Joining Mayors Shirley Franklin of Atlanta and Phil Gordon of Phoenix to get into Begging Line. Hope the wait is short and bottled water available before reaching the Anointed One’s chosen apostles.

  • M.Z. Forrest says:

    Based on what expertise are you claiming that the big three will be reorganized even stronger. Cerberus attempted it with Chrysler, and as of a month ago, Daimler wrote off the rest of its investment that it hadn’t sold to Cerberus. BA, the problems go deeper than than the OEMs. Some first tier suppliers have been bailed out or went through bankruptcy already once in the past couple years. (Delphi and Visteon.) More importantly, many of these first tier suppliers don’t have markets for their goods outside vehicles.

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