A Case For the Auto Industry Bailout

I’m no economist. I don’t play one on tv either. But I’ve watched the government try ways to shore up this economy and so far, none of it has affected me personally.

I did get that stimulus check, which we used to pay off bills (like we were going to go SHOPPING????) however the recent Wall Street bailout hasn’t made it to my pocketbook. By the looks of how things are going, won’t be inching near my checking account either.

Yesterday came word President-Elect Obama discussed an auto industry bailout in his meeting with President Bush. Today House Speaker Nancy Pelosi called on leaders to work with the Bush Administration to “craft legislation to provide emergency and limited financial assistance to the automobile industry under the Emergency Economic Stabilization Act.”

My ears perked up and my heart started to race. This is one economic issue I do know a bit about. Not because I understand how it all works, but because I was born and raised in the ‘burbs of Detroit.

Again, I’m not econ wonk by any stretch. But I know what I see.

My hometown needs jobs. People I know and love need plants to stay open, parts to keep on the shelves, and suppliers to stay in business. When a plant goes down an entire town goes down. Detroit isn’t one of your ‘least favorite cities to visit’ for no reason.

Yes, there have been serious flaws with the Big Three for many, many years from management to unions to everything in between. However the Big Three has kept my mid-west going for generations and they need help.

Again.

Many of you don’t think they deserve help. Certainly not your tax dollars. Let them fall into bankruptcy with their crappy cars and their poor management like any business should when it stinks, right?

Megan McArdle at the Atlantic seems to think so. She writes,

“People don’t want to buy their cars. People have not wanted to buy their cars for years. The only category in which they excel is the one in which foreign automakers barely compete because of gas taxes: light trucks. Without light trucks, they die. Even if people did want to buy their cars, they couldn’t survive their legacy costs, which are vastly higher than what their competitors pay *in the United States*. The Big Three union model is simply not sustainable. That “massive” renegotiation didn’t fix their problems; it merely staved off the date of the projected bankruptcy. That’s why the stock has been heading south pretty steadily for nearly a decade, as has GM’s credit rating, which hit junk long before the credit crisis. Perhaps you have seen something that all the investors, analysts, and creditors missed. But the company seems to me to have been in trouble for a long long time, and its turnaround strategy based on waiting for the price of oil to drop so it wouldn’t lose so much money on light trucks.”

As an OWNER of a Chrysler (yes, some of us DO buy American, Megan)I would contend that JD Powers shows American cars totally competitive with their foreign counterparts. The past several years have seen more than an effort to transform the American auto industry quality and the proof is in the ratings.

However Megan is joined by many others, like Betsy who writes,

“We should not be rewarding the Big Three’s shoddy management. If we continue down this road, where will we stop? Are we going to be bailing out every large company that makes bad decisions and then goes under? Is Circuit City next? Will the only companies that we don’t bail out be the small mom and pop businesses that are small enough to fail?”

And even if you are angry about the hole Detroit has dug itself into, consider what Laurie David writes,

“These companies invited their impending destiny, and some have argued they ought to face the consequences of the market without federal intervention. But the fact is that America can’t afford to lose the millions of jobs Detroit provides and the opportunity to lead on a manufacturing product that will see explosive foreign sales in the near future, especially in China and India.”

So where does that leave us? Agreement that GM, Chrysler, and Ford have done a crappy job and everyone is to blame. Fine. How do we fix it?

Sending these companies packing is not an option in my book. The American Industrial complex is one steeped in innovation and inspiration AND THE LIVELIHOOD OF MY FAMILY AND FRIENDS.

This is not like Circuit City closing down, or some Mom and Pop shop going under so please spare me those ‘then who’s next’ comparisons. Think of it more like the airlines, or like the recent bank and mortgage companies. It’s an entire INDUSTRY that is the heartbeat of the mid-west and beyond.

For those thinking I’m just playing partisan politics here, I should be very clear- yes I grew up union, yes I am a Democrat, but I don’t give two flying flips who is squeaking who’s wheels or paying back for votes. I want jobs, and I want them now. If the GOP had a plan to help my family and friends, I’d be behind it and considering it just as much as any Pelosi backed bailout measure.

I can’t stress it enough- this is not about politics. This is about my cousin not seeing her husband for weeks on end because he’s had to take a job in another state. This is about my high school friends back in school working on another degree because their jobs no longer exist. This is about everyone that’s left and moved to Arizona or California or Florida.

I don’t want to see a hand-out for these companies either, so don’t mistake me for some ‘socialist.’ (insert eyeroll here)

I agree with David, “Congress should set strict guidelines to ensure that Detroit moves as quickly as possible to get clean cars into American driveways where they can help power a new smart grid like the one Al Gore described in Sunday’s New York Times. Congress should also open the process beyond the Big 3, offering financial support to smaller entrepreneurial carmakers for large-scale production of their innovative all-electric and plug-in hybrid prototypes which lack financing to move from the concept contests and into dealer showrooms and consumer hands.

It’s past time for Detroit to get serious about regaining America’s once-proud role as a leader in automotive engineering. Congress must hold the automakers accountable in any bailout to ensure that our clean car ‘future’ starts now.”

…and now can’t come soon enough for me and mine.

*I fully expect my cousin Rick to weigh in on the comments. He’s still in the metro-Detroit area, unlike myself who moved away over 10 years ago.

cross posted at blogher.com
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Comments

  1. I found you (and your blog) through Twitter, and I LOVE LOVE LOVE it. Adding it to my favorites as we speak. And although I love her books, can’t stand to be a party to that right wing conspiracy that is Jennsylvania, so am removing her. How does one join Blogher? I never wanted to do this until I started reading your blog.

  2. It’s a difficult issue. Many American’s are so disgusted by the results of mismanagement and poor planning. You do point out the thing that is important to remember which is regardless of how sickened we are by all the bailouts, we HAVE to retain jobs in the US.
    I think it is time for the auto industry to pay attention to the fact that many of us want vehicles that are safe, reliable and fuel efficient. If the taxpayers are funding private business they had better start thinking about more than short-term profits.
    Great post, by the way.

  3. While I am sensitive to the plight of Detroit and the midwest as a whole (I am from St. Louis, MO), I do not believe we should be bailing out the U.S. auto industry. A bailout amounts to indirect welfare. We are simply pumping money into a sinking ship that has had years to try to right itself. GM and Ford have been operating based upon fundamentally flawed business models. If you want to bail them out, go buy their stock.

  4. The familiy sedan is a wonderful thing. Truly an amazing feat of engineering. A vehicle that can carry a family of four and most everything they would need for weeks and weeks up to 400 miles at a time, and requiring only a 5-10 minutes stop and about $40 of materials (at current commodity prices) to go up to another 400 miles. When anything other than an internal combustion engine running on gas can do that in a vehicle that costs between $20,000 and $40,000 (before tax breaks), I’m all for the government making it a reality.

    What Detroit and Michigan need is not a stopgap measure designed to keep manufacturing jobs in the state. What Michigan needs is a new economy. It can still be an economy based largely on providing transportation to the people and goods of America, but it can’t be one based solely on building and selling cars. A bailout of the Big Three is a bailout of Detroit, and at that point the federal government should just bite the bullet, ignore the criticism, and fix the long term problem by coercing the city of Detroit into federal receivership and using federal tax dollars to rebuild the city, its infrastructure, and its economy into something more sustainable over the long term.

    Of course, such action would inevitably invite constitutional challenge and would inevitably be struck down. But at least one president has figured out a solution to that (and a hint: it’s not the current guy).

  5. Seems like Tom Friedman is (eventually) on the same page as you are:

    How to Fix a Flat

    Last September, I was in a hotel room watching CNBC early one morning. They were interviewing Bob Nardelli, the C.E.O. of Chrysler, and he was explaining why the auto industry, at that time, needed $25 billion in loan guarantees. It wasn’t a bailout, he said. It was a way to enable the car companies to retool for innovation. I could not help but shout back at the TV screen: “We have to subsidize Detroit so that it will innovate? What business were you people in other than innovation?” If we give you another $25 billion, will you also do accounting?

  6. Erin – you should read the Friedman article linked to by BarbD above. It’s good. A couple things I would add to his article. If money is to be given to the car manufacturers, the following need to be done concurrently: (1) it should be a proviso that car companies can no longer lobby. It would be ridiculous for car manufacturers to be allowed to use bailout money to lobby. (2) Congress should immediately put more stringent emissions laws in place.

    But I don’t agree that we should force the car companies to make hybrid or Volts. The problem w/ gov’t intervention is that you don’t want the gov’t to be making business decisions that would be better left to management, who has more information and expertise. What gov’t can do instead, is replace current management with people w/ mixed transportation/auto/environment background who don’t think that global warming is “bullshit”. They can make the correct call of what technologies to develope or if they even want to make cars anymore. (For example, I used to work w/ a group called Businesses for Social Responsibility, who promoted the idea that car companies should be converted to “transportation companies” so as not to be so wedded to the idea of providing a product.)

  7. Queen of Spain says:

    All great ideas from everyone. I’m reading the article now. I think they also need a collective brain trust of bloggers :D

  8. Like you, Erin, I grew up in the suburbs of Detroit. And picking on Detroit is kind of like when someone picks on your family — I can do it, but when others do, I immediately feel defensive. ; ) My father worked on the line at GM, his father worked on the line at Chrysler, and my mom’s dad was an engineer at Ford. So while I live in Chicago now, the subject of Detroit and the bailout literally hits home for me.

    We forget that while the big 3 are located in the Detroit area, their operations are GLOBAL, and just like the financial crisis, this is a global crisis within the auto INDUSTRY. If the big 3 fail, it’s one more global hit. Just like the government gave loans to banks to provide liquidity to the financial market, I think the big 3 should receive a government LOAN so they can get back on track.

    Thanks for this post Erin!

  9. Frank Sucks says:

    Its a bad situation with no good answers. Friedman has a point, but Steve Jobs isn’t the answer, and making Ipods and making cars have two different time frames. Bottom line is that the auto industry is means too much to this country to let it blow up by itself, so we need to do something. But that something needs to be different than whats been done before, and heads (and maybe even unions) will need to roll as part of it. Remember that Detroit is losing even though they have been writing the rules for the last 50 years.

    Here is a good read on why we can’t let them fail — http://www.autoextremist.com/current/

  10. Ok people let’s say this together: This Is Not a Bailout; it’s a government loan that the auto industry will pay back with interest.

  11. My issue is slightly unrelated – but related in that my town is about to get shut down because ConocoPhillips, the primary employer to my town, is pulling out almost 800 jobs by Jan. 31st, and possibly up to 3000 by the end of next year.
    I don’t know what’s going on, or why – but I’m certain that this, as well as what you’re writing about, all have to do with the country’s economy – if not the World’s. What I do know is that I am severely disappointed that rather than being able to raise my family in a small, tight-knit community, I’m going to have to move to a bigger city in order to offer them any sort of financial stability.
    So, I hope for the sake of the smaller (and larger) communities in the Detroit area, that the government does whatever it sees fit to do to help them.

  12. Eric Gagen says:

    Just because we (the U.S.) ought to have cars built by homegrown companies and ought to preserve our industrial capability doesn’t mean that the currenty structured U.S. auto companies should be the ones to do it. Bankruptcy does not mean “we close our doors forever and nobody ever works again” It means that the companies need to be completely re-thought and rebuilt in ways that cannot be done without the legal protection of bankruptcy to allow them to break bad contracts with unions, dealerships, parts suppliers and the current management. At present the existing talent and ability of at least a portion of the workers for the big 3 is not being used properly because they work for moribund ‘zombie’ companies. I would much rather see a dynamic competitive U.S. auto industry than the one we have now. If that winds up being 10 times smaller than the one we have now, then so be it. I would rather have a 10 times smaller winner that can grow into something bigger than a group of giant corpses that feed unendingly from government funds.

  13. AngieNextDoor says:

    I think all of these ideas are great. Let me add one that I think helped Japan with their auto industry way back when… They imposed serious tariffs on imports which forced the domestic auto makers (Toyota, Honda) to respond to consumer demand for quality and innovation. It doesn’t make economic sense for a Japanese person to buy an American car. The rest is history : )

  14. Queen of Spain says:

    Great minds think alike Angie. My Dad JUST called to remind me about that.

  15. nafta moved a significant amount of factories and jobs to canada and mexico…my dad helped get them started and increase their efficiency. government policy that was lobbies by the big 3 has had a tremendous effect on the current state of the industry….who killed the electric car to make way for the hummer? i don’t remember the specifics, but wasn’t there a federal subsidy for small businesses to purchase a vehicle that got less than 15 mpg to the tune of line $10,000? I don’t know all the answers, but i have a serious distrust of the big 3 and don’t think just giving them a loan without dictating what they should do with it will help.

    Coincidentally, notice how gas prices have plummeted…..is this a conscious effort for the oil producers trying to make the american public forget about the true cost and dependency on oil? the push for the big 3 to make fuel efficient cars abruptly ended when gas became affordable again.

    j

  16. it’s remarkable how poor my spelling and grammar are after 3 cocktails…..sorry.

  17. I am an unemployed Michigander, and the level of ignorance here is appalling.

    Where were you when Detroit was profitable, but paying 38% tax on those profits: profits that could have been used to put GM, Ford and Chrysler stock at something above junk bond status, a level they have been approaching for decades?

    Where do I get the job of taxing 2/5 of people’s income, then loaning it back to them on profitable terms?

    How do I get in the “job bank” that has no jobs, that is an unwanted employee bank, that pays $65,000 to sit on my ass for years?

    Why do we have a corporate income tax where politicians like Mark Foley and Stephen Condit decide which business is “worthy” for tax breaks?

    Detroit pays that income tax on every car it sells overseas. A national sales tax would eliminate that, and help our trade deficit tremendously. All of Europe and Japan have this tax: it’s called the VAT (value added tax). I won’t vote for it, though, if it came to me: not unless it had a provision that prevented these stupid tax breaks and progressive tax levels.

    Tiny little minds in Detroit. For a tiny, rapidly shrinking state.

  18. Rick Wagers says:

    I am writing to you regarding my concern about the possible bailout of the automotive industry, and a possible solution. With all the money being thrown around by the Federal Government, I have deep concerns about accountability, etc. I am currently a factory worker for Mitsubishi Motors in Normal, IL. It seems to me that the only solution to getting the automotive industry back on its feet is through increased sales. Instead of just handing over billions of dollars, I have a possible solution. Offer a government rebate to the consumer for the purchase of an American made vehicle. Lay down some ground rules. You must be an American citizen, be 18 years of age, and qualify for financing. The vehicle must be brand new. Tier the rebates based on MPG of the vehicle. For instance, any vehicle which gets over 32 MPG, you would receive a $4,000 rebate. 28-31 MPG $3000. 24-27 MPG $2000. Anything less, $1000. Of course, you could alter any of these numbers. Let the consumer negotiate the vehicle with the dealership as usual. The consumer would finance the car as usual with his/her bank of choice. Once the deal is made, and papers signed, the government would send the check to the lending institution to go against the amount owed. For instance, say you purchase a $14,000 car, which gets 35 MPG. You would actually owe only $10,000, once the government sends the check. This way, the dealership can’t scam any money; the consumer can’t scam any money; you increase sales the old fashioned way; you create a demand for more fuel efficient vehicles through consumer demand. Even if you normally pay cash for a vehicle, you still have to finance it. Once the lending institution has received their check, you simply pay the remainder. Also, you would want to put a time limit for such a plan. Maybe 3, 4 or 5 years. Let me know what you think. Thanks for reading my idea.

  19. We have to help out GM or we will become a strictly importing company. How can anything work if we don’t even have jobs for our own people. Many of us are on 2 sides on this issue. It is like religion and politics (with politics playing into this article by the way) it gets the most controversy and stirs everything up….

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