Friday, November 21, 2008

Missing Trees for Forest in Auto Maker Bailout

For the past week, the heads of the three largest auto makers in the United States have made their way to and from the halls of the United States Congress desperately seeking a financial aid package to help bail them out of their financial woes. Critics of the bailout argue that bailouts are wasteful and rarely do more than prolong the inevitable collapse. Supporters argue that, despite the repugnance of providing a bailout to yet another sector of the U.S. economy, a bailout is preferable to a collapse of the auto industry.

Clearly, both sides have it wrong in this issue, at least as far as the bottom line is concerned.

Those arguing in favor of a bailout--led by House Speaker Nancy Pelosi (D, CA), Senator Carl Levin (D, CA), and some venerable Republican members of Congress--argue that failing to provide a bailout will result in massive unemployment, not only in the automobile production business, but also in related fields, most notably among businesses that provide parts to the big three.

After listening to the appeals of the CEOs of the big three auto makers, Pelosi and Senate Majority leader Harry Reid (D, Nev.) rebuffed calls for immediate legislative injection of liquidity into the auto industry, opting, instead, to draft a list of conditions that the big three must first meet before Congress will entertain such overtures. Those conditions, though not yet public, are said to focus on CEO pay and bonuses, government interest on loans, government oversight of the industry, and a requirement that the big three jointly and individually draw up plans for righting their businesses.

Opponents of the bailout argue that now is the wrong time to provide assistance for an industry that began showing signs of wreckage many years ago and that has steadfastly refused to adapt to a changing environment in which higher gas mileage and alternative fuel-sourced cars are both more sensible and in greater demand. These opponents largely argue that the big three failed while others, most notably Honda and Toyota, forged ahead, allowing them to remain viable in the new world order.

Proponents of the bailout thus contend that, given the likely harm to workers, a bailout probably is inevitable, but that the terms ought to be favorable to the party providing the bailout. Opponents, meanwhile, generally argue that Congress ought to take a pass on the opportunity to bailout a failing industry, allowing the wheat to fall from the chaff.

While the two primary sides to the bailout debate offer sensible points in support of what appear to be their final positions on the matter, neither side is both looking at the practical problems suggested by the big three failings and addressing those problems.

Contrary to what opponents of a bailout suggest, a failure of the big three is more than a mere market correction. Tens of thousands of jobs will be imperiled by the collapse of the big three with the majority of those losing their jobs going first to the unemployment line and the public dole and then who knows where when the benefits run out. While Darwinians might have little sympathy for those trained in nothing other than riveting auto panels to an auto's frame, they ought at least to have some concern for what becomes of tens of thousands of people who have no job and no legal source of income. Clearly, outright opponents of a bailout of the big three have some things to consider before making their absolute statements against the bailout.

Similarly, proponents of the bailout of the big three have questions that they ought to be asking of their own position. For, as they took turns deriding the CEOs of the three auto makers for flying corporate jets to Washington, they failed to recognize the primary issue is not whether the big three survive, but how those whose livelihoods are attached to the success of the big three will make do should the big three go under.

What members of Congress ought to be discussing right now is not how to save the big three, but how to ensure that if and when any or all of the big three succumb to their own shortsightedness and greed, those who depend on the big three for their livelihoods do not go down with the ship.

How does that happen? That part is actually fairly simple and, though expensive, no more expensive than what the big three is now proposing as a bailout, with future pleas certainly in the offing.

The answer is that, rather than provide the big three with bailout money, Congress ought to put money into an interest bearing trust to invest in the aftermath of a possible collapse of the U.S. auto industry. The funds from the trust will be used to ensure that non-executives, who rely on the big three for an existing pension plan and health plan, retain those benefits if and when their company ceases to cover those benefits. The trust also will be used to extend unemployment benefits for workers laid off of work as a result of the downsizing or bankruptcy of any of the big three, with the condition that workers of non-retirement age obtain retraining in a viable field.

The solution is not a perfect one as, more likely than not, it will include considerable waste and bureaucracy. But it is far preferable to simply doling out money to an industry that has been sinking for some time with the objective of propping up companies rather than focusing on the harms that would result were the companies to fail. This is particularly true when one considers the outsourcing that has become the hallmark of the big three.

The guess here is that Congress is neither far-sighted nor brave enough to allow the big three to fail while saving only those left in the wake.


MN said...

I would like to point out that various dealerships and suppliers that the big three use are actually trapping them. It costs them incredible amounts of time and money to consolidate operations because of a patchwork of state laws offering higher protection to local car dealerships/suppliers. Why? Because these suppliers generate a significant portion of the municipal tax base and local and state officials want to protect revenue generators.

publius said...

It clearly is a two-way street and the Big Three have considerable leverage on their side. Either way, however, it is merely another argument for allowing the Big Three to rise or fall on their own merits.