The Newest Little Piggies at the Bailout Trough

Another contribution from Jeff Versteeg

Should the Big Three automakers get a piece of the bailout action? Absolutely not. Here's why:

They are not the sort of companies that should get a bailout.
There are two kinds of bailouts that make sense for a government to engage in. The first kind is a loan to a company that is fundamentally sound, but due to circumstances beyond its control, cannot borrow any money to meet its daily operating expenses. The second kind (much more common) is a loan to a company that is such an important part of the financial system that if it were not able to meet its obligations, the financial system might literally grind to a halt as investors lost all confidence.

The automakers are not in either one of these situations. They'd like you to believe that they fit both of these descriptions, though. They claim that they are cutting costs, reorganizing, asking labor for more concessions, and that they are basically well-run and would be able to make it through this rough patch if it wasn't for the current credit crunch. They claim that even though they are fundamentally sound, they are running out of money because no one will lend to them. Nothing could be further from the truth. These companies have been badly mismanaged for decades, and on top of that, are still saddled with massive obligations to retirees and current employees. The automakers have been hemorrhaging money for years now, even in good economic times. All three of these companies are in very bad shape, credit crunch notwithstanding.

Failing this test, the automakers would like to hold us all hostage. They say that if they were to file for bankruptcy, we would lose 3 million jobs, both from the auto industry and from industries that rely on the automakers, and that our current recession would deepen. Oh really? Would Americans simply stop buying cars because the Big Three stopped making them? Of course not. Honda, Toyota, and other foreign car makers would step in to fill the void. They would increase production in America, where they already produce many of the cars that are sold here. They might even buy pieces of the Big Three during their bankruptcy proceedings, and might even use their old factories, in the same towns where they already exist, to build Hondas and Toyotas. And they would hire many of the same workers that the Big Three employed, and use many of the same suppliers. So we wouldn't lose many jobs at all, because Americans' demand for cars would not decrease at all. Many Big Three employees would simply go to work in this country for foreign automakers who know how to run a business. And maybe new, American car companies would sprout up that were profitable and forward-looking. Wouldn't that be something?

Delaying the inevitable does not help anyone.
The Big Three are going bankrupt. They are some of the worst-run companies in America, and they have been for a while. They have been very slow to adapt to changes in the marketplace and in the way corporations do business today. I mean, ask yourself - if you were in the market for a car today, would you be considering an American car? The answer is 'no' for many Americans, and that's why the automakers have lost so much market share in the past 25 years. Giving these failing corporations a $25 billion gift from taxpayers only delays their inevitable bankruptcy filings. This is not a bridge loan for unfortunate corporations - bailing out the automakers would amount to the government propping up companies that are producing inefficiently and being dominated by their competitors. These companies have been run into the ground, and the writing has been on the wall for a long time. This is the reality of capitalism - even very large, old, famous, bellwether corporations fail if they make inferior products and are not profitable. The beauty of capitalism is that someone will always be there to step in and take their place - someone who will do the job more efficiently and more cheaply, which will raise everyone's standard of living. We need to let these companies fail as soon as possible so we can make the transition as quickly and painlessly as possible, or else...

If we bail them out this time, they will keep coming back for more.
The Big Three say they can't get loans because no one wants to lend to them, and that if they don't get money from the government, millions will be out of work. If we give them these loans, and their financial positions worsen over the next few years, as they are likely to in a bad economy, what's to stop them from sidling up to the trough again? They would be able to make the same arguments a year or two from now, and a precedent would be set. If we loan them the money this time, there will be no principled case for not propping them up in the future, and when we do finally decide to cut them off, the move will seem capricious and unjustified. Not to mention the fact that no one will want these guys to file for bankruptcy in an election year. Best to let them fail as soon as possible so that we can start picking up the pieces before the 2010 election cycle.

If I give you a bailout, I'll have to give one to everybody
Already, some suppliers of the automakers have begun asking for bailouts as well. If we bail out the Big Three, how do we justify denying a bailout to other struggling industries, of which there are many right now? Where does it end? Does the federal government exist to keep as many businesses from failing as it possibly can during hard economic times?

What will happen to current retirees that depend on the Big Three for pension and health benefits?
Ideally, universal health care will pass next year before any of the Big Three go under, so that would take care of the health benefits to those retirees who would not qualify for Medicare. As for pension benefits, the government has a body called the Pension Benefit Guaranty Corporation which will pay pensions in the event that the Big Three can't. I would argue, though, that pensions should be paid first out of whatever money is made by selling off the assets of the Big Three - before investors and shareholders get paid, and before executives get their golden parachutes. Either way, retirees are taken care of. These people all vote, remember?

For a good counterpoint, check out The New Republic.

Very quickly, my responses to this excellent article are:
- We might lose millions of jobs, but many if not most of these people would be rehired by other automakers within a year, and this massive dislocation will happen eventually because the automakers are destined to fail. Let's not forget that they were unprofitable long before the current crisis.
- I agree that the automakers were facing some very difficult conditions over the summer, but gas prices are back under two dollars now, so they are simply dealing with the same slack demand and tight credit that all other American corporations are dealing with. Why give them special treatment?
- The automakers may have made some strides in recent years in terms of lowering their obligations to past and present workers and adopting new manufacturing techniques, but their cars are still not as good as the Japanese, and they were waaay behind the Japanese on conventional hybrids, opting instead to build full size SUVs and Hummers, which was a massive mistake.
- I love the Volt, and I think that even if GM goes out of business, they can sell the Volt, its technology, and its engineering team as a stand-alone business. Volt could become a new American car company. There's no reason that we need GM to get the Volt, and I'd rather get it a couple years later without bailing out GM than get it in 2010 while having to cart GM's pathetic corpse around like it was Weekend at Bernie's.