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The Right Way to Bail Out the Auto Industry
Let Detroit get its money — but only after Democrats, the Big Three, and the UAW admit their failures.
There is a way to bail out General Motors, Chrysler, and Ford that free market advocates can enthusiastically endorse.
In fact, given the potential exposure involved in an open-ended bailout ($125 billion, maybe more), this proposal might even make those who would otherwise be reluctant willing to structure the bailout funds as grants instead of loans.
What a principled bailout requires is a signed list of admissions, written into the bailout law and incorporated into all underlying agreements, by:
- The creators of what I have been calling the POR economy — namely Nancy Pelosi, Barack Obama, and Harry Reid.
- The CEOs of the Big Three.
- The United Auto Workers.
There should be no bailout unless all admissions are made.
* * *
Admissions by Pelosi, Obama, and Reid
We acknowledge and admit that:
- In June, our statements (Pelosi, Obama, Reid) opposing any expansion of exploration or drilling for domestic energy resources caused businesses large and small to cancel or defer expansion and hiring plans, and consumers in general to curtail their spending.
- Our consistent advocacy at that time, and throughout the election campaign, of punitive increases in Social Security and federal income taxes on the nation’s highest earners, to take effect as soon as possible, have led those who would be affected to seriously curtail their spending and investing.
- Our political party’s decades-long insistence that banks approve mortgage loans which violated prudent lending standards led to the collapse of government-sponsored enterprises Fannie Mae and Freddie Mac and insolvency at many financial institutions, thus creating the conditions that led to the blackmail-driven passage of the financial services industry bailout in early October.
- The three items just mentioned have transformed what had been a difficult but manageable economic situation in early 2008 into a serious downturn.
- The election of Obama as president, and the concurrent increase in Pelosi and Reid’s House and Senate majorities, are the primary reasons why employers reduced payrolls by 634,000 in November, compared to hiring over 300,000 during November 2007.
- The collective effect of the aforementioned actions and events have caused sales at the Big Three automakers, which had already been falling at double-digit rates on a year-over-year basis (12% to 22% in May), to decline calamitously (30% to 47% in November), gravely damaging the companies’ already difficult positions and leading two of them to the brink of bankruptcy.
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Tom Blumer owns a training and development company based in Mason, Ohio, outside of Cincinnati. He presents personal finance-related workshops and speeches at companies, and runs BizzyBlog.com.
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10 Comments
1. IndyEnigma:Would make an excellent spectacle & perhaps make Conservatives feel good to see the mighty grovel but all of that will have absolutely NO bearing on success or failure of the Detroit 3! Humiliating these executives, the ruling trio & the union toad Gettelfinger would be fun, no doubt. Giving them money on the basis of a meaningless document is just another episode of the same political play that you criticise, sounds good tho!
Dec 18, 2008 - 4:32 am 2. Brian:There should be a bridge loan with major concessions from the Detroit 3 and the UAW.
1) This is primarily an economic crises hitting the auto industry. Honda is set to lose over a billion dollars in 2008. Toyota and Honda both had sales decline of over 30% last month. Coupled that with the significant sales declines in Japan and it will not be long before Toyota and Honda are requesting a bailout from their government. I bet before June 2009.
2) If the Detroit 3 go down, the economic depression to hit Michigan will be very long lasting. Decades long.
3) I would not be surprised if Toyota rescues GM. The Japanese manufacturers have stated that if any of the Detroit 3 fail, it would be detrimental to their business.
Dec 18, 2008 - 6:21 am 3. David Thomson:“If the Detroit 3 go down, the economic depression to hit Michigan will be very long lasting. Decades long.”
Nothing could be further from the truth. Michigan merely needs to drop its tax rates and become more business friendly. The problem will take care of itself in a few years. And the same holds true for Ohio and the other economically troubled blue states. They are paying the price for electing Democrats and “moderate” Republicans.
Dec 18, 2008 - 7:15 am 4. Maggie:I wish elected leaders would articulate the issues as clearly as this. As for me, the bailout has highlighted the UAW role in politics – so I will not be buying another UAW product.
Dec 18, 2008 - 7:15 am 5. beloml:Maggie,
I think there are millions of people with the same thinking. I certainly will do my best to never give another cent to anyone affiliated with the UAW.
Dec 18, 2008 - 10:02 am 6. saleboter:They can bail out anyone they want. I ahve favored Chevies for over 30 years. Looks like I have bought my last one.
Dec 18, 2008 - 11:45 am 7. Chuckt:Union leadership has been corrupt for decades and the Big 3 (mis)management (with the possible exception of Ford in the early 80s) have ignored W. Edwards Deming’s teachings of building quality vehicles for just as long, all to their detriment. I say let the market play out, the Big 3 can file a structured bankruptcy, so they can renegotiate union contracts from a superior (oxymoronic, I know) bargaining position, see if they can start building better cars and let the chips fall where they may. Toyota, Nissan, & Honda all build quality vehicles that last a long time, are reasonably sized, reasonably economical and hold their value. If the UAW wants to keep their jobs, they must make significant concessions, beginning with the “jobs bank.” If they refuse, then I have zero empathy for them.
Sears was the undisputed retail ruler for decades until a young upstart named Sam Walton came along with a better way, and bumped them off the top spot. The Big 3 could, should and had better learn a few lessons from Sears’ experience and change with the market, or be eliminated. If they fail to do so, then I say bye-bye and good riddance.
Dec 18, 2008 - 2:49 pm 8. DanO:Good comments…especially by David on the “decades long” depression in Michigan…no way…while of course I don’t think even the author believes any of the responsible parties will ever sign on to this document…it IS a factual economic analysis.
(Full disclosure: I live in Michigan, was once a (non-voluntary) member of the UAW while putting myself through school building cars, in the early 70’s…and eventually an MA in Economics from NYU, the most Austrian Economics oriented program I could find).
The economics were clear then, even to an undergrad who had read the right books (outside of class)…it was only a matter of time until today’s situation…but only someone truly interested in (or capable of) long-term thinking, (thus leaving out both union leaders and auto execs) would know that the deals made then were ticking time-bombs that were economically similar to our wonderful Social Security system…
Anecdotal evidence: even then, in the 70’s, temporary layoffs were decided by union seniority…with the more senior workers WANTING to be laid off…why? SUB: Supplementary Unemployment Benefits. You’d get unemployement on the taxpayer’s dime, and the union would make up the difference so you’d get 95% of your take home pay. Layoff? Paid vacation is more like it…maybe today’s “jobs bank” is the same thing…
In any case: I hope for bankruptcy. Allowing for adjustments and true renegotiations, in justice, retirees first…and not a few billion of Fed money put into the sinkhole…until they run out of money again…and come back to the trough time and again…
Does anyone else out there remember when the US had a real steel industry? Is their a difference in the diagnosis, or prognosis?
DanO
Dec 18, 2008 - 3:40 pm 9. G Alston:That’s too complicated. Ford and GM make models that sell well overseas. GM has a car in the UK that gets 55 mpg. Both companies are profitable overseas. Congressional rules re CAFE and diesel and such prevent them from importing them. Simple solution? Rescind these rules.
Dec 23, 2008 - 2:21 am 10. Ronnie Schreiber:“Big 3 (mis)management (with the possible exception of Ford in the early 80s) have ignored W. Edwards Deming’s teachings of building quality vehicles for just as long, all to their detriment”
That’s absolutely not true. More people living in the past as far as Detroit is concerned. Every automobile manufacturer and supplier in Detroit and in the global automotive industry uses statistical quality control. Deming is no longer a prophet ignored in his own land. I know that because I worked for a tier 1 vendor that used statistical QC and had to supply that data to the automakers, both domestic and transplant.
Also, regarding Michigan, it’s a better run state than most. The people of California owe as much money as GM does, maybe more, and California has twice the foreclosure rate as Michigan. Most states have much bigger budget shortfalls than Michigan, which has had a balanced budget since 1963. California will be insolvent before GM and certainly before the state of Michigan.
Dec 25, 2008 - 12:10 am