Ron Morley's Freedom Blog

This is the place where I do my little bit to explain the evils of the State.

Facts, distortions, and the coming auto company bailout


The debate continues, among the economically illiterate lawmakers in Washington, D.C. About whether or not the Federal government should make some $25 billion available to the Detroit automakers to, supposedly, enable them to remain in business. As part of the theater surrounding this debate the Senate Finance Committee held a hearing today, 11/18/2008, at which the various Senators on the panel questioned executives of the GM, Ford, and Chrysler. During this process Connecticut Senator Chris Dodd, a supporter of wasting the taxpayer's money, trotted out what has become an all to familiar litany of Detroit's supposed sins and bad business decisions.

These bad business decisions include: not building cars that American want to buy; not “looking to the future” for their supposed failure to develop high mileage autos; resisting the imposition of Federal regulations such as higher CAFE mileage requirements, air bags, and ABS; and, of course, paying their executives “too much.” These canards have been repeated so frequently that they have become part of American folklore and few people stop to think about the truthfulness of the statements. On the whole the wide-spread acceptance of these so-called “facts” is further proof that Joseph Goebbels was correct; repeat a big enough lie often enough and people come to accept it as the truth.

Few of the charges against the Detroit automakers hold water when one really looks at them. Take the oft-repeated assertion that Detroit has failed to “build cars that Americans want to buy.” Until gasoline prices spiked this last summer that statement was, on its face, untrue. If Americans did not want to buy SUVs and large fuel-inefficient pickup trucks, why were so many of them being sold? And they were being sold not only by the Big Three. Honda, Toyota, Nissan, and other companies were also busily cranking out this type of vehicle by the tens and hundreds of thousands. And guess what? The fuel efficient cars that Americans supposedly wanted so badly to purchase sat on dealer's lots. Even Toyota's ballyhooed Prius failed to set sales records because Americans wanted to, and did, purchase larger vehicles that they perceived as being better able to meet their day to day transportation requirements.

Only when gasoline prices went above $4 per gallon did Americans suddenly begin to demand that large numbers of small, fuel-efficient vehicles be available for them to purchase. Guess what? It's not possible for the automakers to instantly re-tool their production facilities and begin turning out the much larger numbers, of the now popular small cars, required to meet all of the market's demand. It's unfortunate that the State-inspired housing bubble burst at the same time that Detroit, and other automakers, faced large re-tooling costs, but that is not a sign that the management of the Detroit car companies are incompetent. One has only to look at the inventories of Honda, Toyota, Nissan, etc. to see that those companies also have large numbers of unsold SUVs and pickups on their books.

The main reason that Detroit companies are facing dissolution and the foreign companies are not, does not lie entirely with management incompetence, but with the cost structures of the companies. And here is where Detroit has problems that cannot be resolved short of allowing the Big Three to go bankrupt if necessary. The simple fact is that Detroit's labor casts are far out of line with what the auto market will support. The inflated wages demanded, and won, by the UAW over the last fifty years of contract negotiations are no longer supportable in a global automobile marketplace. Detroit's labor costs are two to three times that of their foreign competitors and American workers are no longer productive enough, nor are profit margins high enough, to allow that state of affairs to continue.

Of course, it's much more palatable for our so-called “leaders” in Washington, D.C. to upbraid the management of the Detroit automakers, and they are not blameless in this mess, than it is for them to tell the American people the truth about UAW wage rates. Given UAW President Ron Gettelfinger's statements in the last several days that “it would be unfair” to ask “the workers” to make any more sacrifices to keep the American auto industry intact, it is unlikely that any of our lawmakers will make wage and benefit concessions any part of the new regulatory regime that the Detroit manufacturers will face when the bailout is finally approved, as it will be when Barak Obama assumes power at the latest. Rather, the State will require that the Detroit companies manufacture small fuel-efficient vehicles, which are already going back out of style with the reduction of fuel prices in the last few weeks. There will be more regulations regarding such things as executive pay and benefits, research and development efforts, and whatever else any given lawmaker's favorite hobby-horse is. None of that will help Detroit's balance sheets at all.

Until the Big Three are allowed to go bankrupt, as it appears certain they will so long as the State is kept from “rescuing” them, they will continue to be uncompetitive, primarily, because of their labor costs. If nothing else is accepted as an argument against a Federal bailout of the Detroit automakers it is this: until the industry's cost structure is brought into line with the realities of global competition any money which the taxpayers of the United States give to the Detroit companies will simply be wasted. This is because the “loans” would only put off the inevitable day of reckoning and will end up being a classic case of throwing good money after bad. Of course, once the Obama regime makes the bailout a fact, further losses will be used as a reason for sending yet further money to the companies, since it will be seen as senseless to have wasted the $25 billion currently being discussed. Lawmakers will find it easier to continue shoveling money into the pockets of overpaid U.S. autoworkers than they will to either stand up to the UAW and insist that it lower its wage demands, or to admit that the initial bailout made no economic sense in the first place. It will be easier to continue to heap opprobrium on the management of the car companies and to increase the control the Federal government will exercise over yet another section of the American economy than it will be for of leaders to admit that they were wrong and the marketplace was right.


Gail Reynolds said:

There has always been a problem with the unions.  But I view it in another manner.  I do not think the problem is with the unions or the companies or for that matter federal spending.  I do believe the problem is with insurance in this country.  Mortgage insurance, health insurance, auto insurance.  No one is rewarded for doing anything right.    They are just gouging us with their acturarial charts.   A re structuring of all facets of insurance in this country, and frankly, what their top people are getting paid is right up there with all these other people running various businesses, would have an enormous affect on all of us whether we be individuals, business owners or for that matter the federal government.  I think for all of our sakes this is the most important issue facing this country nowadays.  Can you imagine how some re structuring of that industry would stimulate the economy?

# December 4, 2008 2:24 PM

Roxanne said:

I'd like to share a possible solution to the GM crisis that impressed me. What if Exxon were to invest in GM and create a corporate mash-up.    (   The new company would have the unique ability to balance the profit equation of car value to fuel efficiency, help regulate demand for (and price of) gasoline: a customer-centric utopia. Exxon has the financial resources to reinvest, with a more commanding management team. This blog entry has three parts; two that deal with this specific suggestion and another that stresses the power of corporate mash-ups in a recession. Great read.

# December 8, 2008 2:37 PM