Comment & Debate
Gwyn Morgan. “Why taxpayers should spurn bailout pleas from Detroit Three”. Globe and Mail. 24 Nov. 2008 – Second, virtually no one thinks North American big auto can survive without radical surgery. These firms are burdened with legacy union agreements that make the cost of a line worker uncompetitive, and they face billions of dollars in unfunded pension liabilities. Caught in a downward spiral, layoffs to save costs only increase pension liabilities. On the management side, the Big Three failed to move on from the big vehicles and aging technology that the car-buying public no longer wants. Even in the best of circumstances, this would take years to remedy, and in the meantime the outlook is for global overcapacity. The hard reality is that global car production will rationalize to those with superior technology and lower costs than the Detroit Three. Radical surgery may save them, but that won’t occur if the government puts up cash. A case in point is Air Canada, where the really tough changes to union contracts took place during bankruptcy protection.
A fundamental strength of market capitalism is that businesses no longer viable disappear, while businesses with new ideas that meet changing needs and wants, thrive and grow. Fundamental restructuring almost never occurs until a business faces the prospect of its demise. This is creative destruction, and virtually every attempt by government to interfere with this natural evolutionary adaptation process ends up wasting limited resources on businesses whose life cycle is ending, rather than creating and encouraging the enterprises of the future.
“Bailout won’t cure what ails Big Three”. USA Today. 13 Nov. 2008 – Bankruptcy need not mean that the company disappears. The Chapter 11 reorganization process has been used many times over the past several decades, notably in the steel and airline industries, to accomplish objectives such as those that the Big Three, GM in particular, need to do now. These steps include trimming labor costs, dropping product lines, eliminating dealerships and focusing on making popular, high-quality vehicles.
Many of these changes would be much easier in bankruptcy because a judge could simply approve what would otherwise entail tedious negotiations with dubious outcomes. To be sure, customers might be reluctant to buy from a company whose future is in doubt. But, by the same token, this would be an incentive for all parties involved to reassure consumers by completing the reorganization process quickly.
A bailout would delay this reckoning and reorganization, not avoid it. Lawmakers can place conditions on the aid, but they’d still be propping up companies with bloated cost structures and a history of making gas-guzzling trucks and SUVs. Detroit’s record of resisting fuel-economy standards makes it hard to swallow the carmakers’ contention that they are suddenly now ready to lead the nation to energy independence. Congress could also make matters worse with political meddling in corporate management.
Daniel J. Mitchell. “Commentary: Say no to the auto bailout”. CNN. 13 Nov. 2008 – A bailout also would be bad for General Motors, Ford and Chrysler. The so-called Big Three desperately need to fundamentally restructure their practices. More specifically, the car companies need to endure some short-term pain in order to restore long-term viability. But that won’t happen if politicians raid the treasury.
Getting access to taxpayer money would be akin to giving an alcoholic the key to a liquor cabinet. It also would be bad for American taxpayers and the American economy. For instance:
Jack Kelly. “Auto Bailout Won’t Prevent Bankruptcy”. Real Clear Politics. 2 Dec. 2008 – General Motors (19 percent) and Toyota (18 percent) have about the same share of the U.S. car market. But Toyota has enormous efficiency advantages. GM has eight product lines, Toyota three. GM has 7,000 dealers, Toyota, 1,500. Toyota pays its workers in the U.S. an average of $48 an hour. GM, Ford and Chrysler pay their employees an average of $73 an hour. For GM to have a chance to become competitive, it must cut its product line by at least 50 percent, its dealer network by at least 50 percent, and its labor costs by at least 30 percent.
But any bailout that’s acceptable to the United Auto Workers — and thus to the Democrats in Congress — will be designed to avoid the pain such cutbacks would inflict.