Wednesday, December 03, 2008

Why Automaker Bailouts are Bad, Except for Maybe the One I Propose in this Post

Allow me to be the 80 millionth person to put in my two cents against the proposed U.S. automaker bailout. This is one of those issues where I strip off all my Democratic/Socialist clothes and swim in Ron Paul's kool-aid. But I'm completely in agreement with all the most curmudgeonly conservative politicians on the issue of federal bailouts. If a business is about to fail because it can't adapt to the current market, because it made poor choices in the past about how to spend its capital to yield the greatest profitability, or because it's in deeper debt than it can possibly ever pay back, the bad business should just be allowed to fail, regardless of how many people the bad business employs or what percentage of market share it has. People will find a way to replace whatever the bad business produced with something more efficient. This is capitalism doing its thing with its invisible hand. As Ron Paul said, "An essential element of a healthy free market is both success and failure must be permitted to happen when they are earned."

People give many reasons why the "Big 3" have arrived at this point where they need to beg Congress for money. The American automakers don't make cars that Americans want to buy. Reliability and quality have been demoted down from job 1 to job 347 or so. They didn't foresee how high gas prices would lower demand for their large energy-inefficient vehicles. They pay people not to work all day. They pay high health care, high wages and high pension costs because they are unionized. They have too many brands and too many dealerships to be efficient. The interest in the debt they have already accumulated is dragging down the companies. These reasons are all absolutely true. So why should the federal government hand these companies a free Christmas bonus for a job so poorly done? It's going to take some massive restructuring to turn GM and Ford around (Chrysler should just cease to exist), restructuring that can only happen under Chapter 11 bankruptcy. Delaying the Chapter 11 filing with a federal bailout is like setting $25 billion dollars ablaze, equivalent to the average annual salary of 370,000 GM employees.

There are many arguments put forth in favor of the U.S. government giving money to the automakers. Some say that going into Chapter 11 bankruptcy would cause consumers to avoid Detroit's products because of a fear that their warranty would not be upheld. I believe bankruptcy is unavoidable, but consumers don't buy cars for the warranty anyways. If they did, the Big 3 automakers would have a much larger market share than Toyota since the American automakers' warranties are usually much better than those of foreign manufacturers. In other words, people prefer buying cars that are reliably built and don't even need warranties.

Many put forth the argument that the American automakers are such a large part of our economy that their failure would be devastating (the same argument used two months ago for the financial services industry). These people also frequently use inflated employment numbers that count people who deal not only with the Big 3 but also with foreign automakers. And it assumes that all 240,000 people directly employed by American carmakers and the other million or so in businesses reliant on the Big 3 wouldn't be able to find other jobs in industries that aren't tanking. But it is true that no member of the United Auto Workers would be able to find a job with such sweet benefits, and as cushioned as their salaries and benefits are, it would still produce many undue hardships on those employees.

I may not be in favor of handing GM and Ford free money to spend however they want, but I am in favor of helping out GM and Ford tackle some of these union benefits. Okay, so here's my plan: I propose the federal government assumes responsibility for the health care benefits and pension benefits enjoyed by UAW members. Instead of asking for wage concessions from UAW, I propose that the automakers be allowed to set wages based on the market, like the foreign automakers operating in America do. I would also propose eliminating by executive fiat the state franchising fees that make it difficult to eliminate car brands and dealerships that aren't profitable, like Pontiacs, Mercuries and everything Chrysler makes. In exchange, I would raise corporate taxes on the Big 3 as well as personal income taxes on their employees in order to offset the costs of the medical care and pension benefits. If they choose to continue making vehicles that drive consumers to purchase more reliable higher quality foreign brands, the Big 3 should be allowed to fail.

Since this whole system would be inherently unfair to the hard-working foreign-owned manufacturers here in the United States, I would offer the same deal to them: health care and pension benefits in exchange for higher taxes. And then when it becomes clear that this gives an unfair advantage to employees in the auto manufacturing industry, I would extend health care coverage, pensions and higher taxes to every citizen of the U.S. Then when it would become clear that health insurance is horribly inefficient, I would urge the government to use its massive leverage to reform the health care system so that hospitals and health clinics, like schools and fire departments, are owned and managed by the government on a not-for-profit basis.

Now that's a bailout!

1 comment:

Jacob said...

I would also propose eliminating by executive fiat the state franchising fees that make it difficult to eliminate car brands and dealerships that aren't profitable, like Pontiacs, Mercuries and everything Chrysler makes.

Possibly unconstitutional. I'd have to reread "Article IX: Fiats" to be sure, though.

Usually, when the federal government doesn't like a fee/tax that a state government is charging, it counteracts it by making those payments exempt/deductible on one's federal taxes.