Seven Reasons Government Must Invest In American Auto Makers

The Economic Policy Institute, in an article by by Robert Scott, is calling for government action to help the US Auto industry, saying that such action should be called an investment, not a bailout.

EPI says, “Government intervention in the form of a bridge loan will allow the industry to survive until the economy stabilizes, new fuel efficient models are introduced, and recently negotiated changes to United Auto Worker (UAW) contracts kick in. That means saving millions jobs—not only in auto factories, but also at component suppliers, dealers, and elsewhere—when employment is desperately needed.”

EPI gives seven reasons the government should invest in the American auto industry:

  1. Although domestic automakers made strategic blunders in the past, they have recently made tremendous strides in restructuring. But many of those changes won’t kick in until 2010, when new models such as GM’s plug-in hybrid, the Chevy Volt, and a new model getting 45 mpg are introduced. New union contracts will also take effect in 2010, which will greatly reduce automakers’ many legacy costs.
  2. The current industry collapse is a direct result of the financial crisis rather than past industry decisions. Nervous consumers are delaying large purchases, sending vehicle sales in the United States to their lowest level in decades. More than 16 million light vehicles were sold in 2006 and 2007. Sales fell to 10.6 million units in October, a 35% decline from 2007 and the lowest absolute level since February 1983. The collapse in light vehicle sales has hit both import and domestic companies. GM sales fell 47% in October, but Suzuki (-48%) and Isuzu (-49%) were equally hard hit. While Chrysler sales fell 38%, Kia’s fell 40%. Ford’s sales were off 33%, but Nissan’s fell 36%. Overall, domestic sales fell 41%, and Asian producers dropped 29%.
  3. Unionized U.S. automakers are highly productive. The top two most productive auto assembly plants in the United States in 2005 were UAW plants (in terms of hours per vehicle assembled). In fact, six of the top 10 plants were UAW shops (Harbour 2006, as cited by Shaiken 2007). Product reliability for U.S. manufacturers is now approaching that of Japanese producers in some cases (Cohn 2008). This high productivity has allowed domestic manufacturers to compete with foreign companies that benefit from government subsidies, including manipulated currencies in Korea and Japan that reduce costs by 10% to 20%, and national health insurance systems in most competitive countries that remove the burden of covering costs for existing workers and retirees. Such high-productivity industries are exactly what is needed to ensure future economic growth.
  4. Union auto workers have already taken substantial hits on pay and benefits. For example, contracts negotiated in 2007 slashed wages for new workers by 50%. In addition, new workers will not be guaranteed any retiree health care benefits, and will not participate in the traditional defined-benefit pension plan. On top of that, the UAW agreed that the responsibility for health care benefits for existing retirees would be transferred from the auto companies to an independent trust, called a Voluntary Employee Benefits Association. Analysts now believe that the labor cost gap between the Detroit-based auto companies and the foreign transplants will be largely or completely eliminated by the end of the current contracts.
  5. A collapse of the Detroit-based auto manufacturers would result in the loss of 2.5 to 3 million jobs, according to a 2008 study by the Center for Automotive Research (CAR). There would also be a ripple effect throughout the local economies of auto communities across the United States. Furthermore, liquidation of the auto companies would put at risk the pension and health benefits of 1 million retirees and dependents, and could saddle the federal pension guarantee program with enormous liabilities. Under current law, the federal government would also be required to pay for part of the retiree health care costs for pre-65 retirees from the auto companies.
  6. The automotive industry represents almost 4% of U.S. gross domestic product and 10% of U.S. industrial production by value. The failure of the Detroit-based auto companies would severely aggravate the current economic downturn, compounding the difficulties facing working families and businesses. Revenues to the federal, state, and local governments would drop, forcing cuts in vital social services at a time when they are most needed.
  7. An airline-style (Chapter 11) bankruptcy re-organization is not an option for U.S.-based automakers. They have already extensively restructured product lines and labor contracts. They would be unable to get debtor-in-possession refinancing to continue operations, and consumers would be unwilling to buy cars from bankrupt companies. Hence, a Chapter 7 bankruptcy liquidation is the only alternative for domestic automakers. The bankruptcy of one or more of the “Big-3” automakers would endanger thousands of large and small parts and services suppliers. Massive job loss and community disruption would result. Increased government payments and tax losses alone would exceed $150 billion in the first three years following bankruptcy of all three domestic auto companies, according to the CAR report. The $25 billion rescue plan is a bargain by comparison.
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3 Responses to Seven Reasons Government Must Invest In American Auto Makers

  1. Joe says:

    I truly have sympathy for the all the gm family, but, where does “bailoutmania” stop. I want the same type of bail out the big companies are receiving. My near bankrupt situation was cause by the financial sector too. America is forever changed as a result of the government bailing out corrupt and inefficient businesses. I surely do not want to see fellow americans suffer because of a few greedy executives.

    If we continue with these bailouts we are sending the wrong message to business owners, stockholders, and executives. We will be telling them, much like a daddy who bails his brat kid out of jail for screwing up, we will be there to make sure you don’t suffer the consequences of your actions.

  2. Mike Bock says:

    Joe, I think a lot of people agree with you, philosophically. The question is, what should government’s role be in helping our economy correct itself? Most people are looking for solutions that are practical and workable, not solutions that are ideologically pure. Over $700 billion has been approved to help correct the financial sector of our economy. This $700 billion “wall street” bailout was sought and approved by a “conservative” Republican administration, regardless that such a bailout contradicts Republican philosophy. Bush and Paulson, etc., were convinced that the consequences of allowing the free market to work out the situation in the financial sector, without massive government intervention, would be too devastating to allow to occur.

    So, it seems to me, the question of whether government should bail out Detroit auto makers should be similarly evaluated. As a nation, we really don’t have the luxury of holding ideological positions, if holding such positions means that our economy goes down the drain. Economic devastation has the capacity to threaten our civil peace, social order, and, eventually, our democracy itself.

    The above article says, “A collapse of the Detroit-based auto manufacturers would result in the loss of 2.5 to 3 million jobs, according to a 2008 study by the Center for Automotive Research (CAR).”

    Such a job loss would have devastating consequences and would end up costing the tax payers hundreds of billions of dollars. So, whether government supplies mountains of cash now, or not, in this situation, the taxpayer is doomed to pay one way or the other — for years to come. It seems pretty clear to me, the pain of not helping Detroit will be much greater than the pain of helping Detroit. Ideology doesn’t matter. What matters is whether there can be a sensible plan that can be articulated that will actually work.

  3. Joe says:

    Mike, you use the adjective “conservative” to describe the Bush administration erroneously. No true conservative worth their weight in salt would agree conservative principals guided President Bush. His “drunken sailor” spending of tax dollars, his “no national interest war in Iraq”, his bloating of the education system with “no child left behind”, I could go on, but please do not insult me and other conservative leaning Americans with statements the Bush presidency was conservative.

    With that said, I am being philosophical and ideological in my statement we should not bail out the auto industry. What are we to believe, the sky was falling in September when all the kings men in Washington said we had to enact this emergency legislation for 700 billion or immediate meltdown was going to occur. The sky did not fall, we did have a dramatic downturn in the market but some was made up this week and much of the bail out money has not been distributed yet. I also ask who is monitoring this unprecedented disbursement of taxpayer’s money. Yeah, I may sound skeptical, but I am. I will need more convincing before I can try to surf the “bailout” tsunami.

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