Wednesday, November 19, 2008

Three Reasons Why We Should (and Should Not) Bailout GM (and maybe Ford)

Although it doesn't look likely at the moment, The Big Three from Detroit have gone to Congress asking for money to bail them out.

I'm working under the assumption that Chrylster is unsavagable. Also, as a disclaimer, your author owns seven shares of GM stock. That's right, $20 bucks! Drinks on me!

Why the U.S. Government Should Bailout GM (and maybe Ford)
1.) According to David Cole of the Center for Automotive Research if:
Detroit’s production falls by 50%. He estimates that in the first year that
would cost 2.5m jobs: 240,000 from the carmakers themselves; 795,000 from
suppliers and 1.4m from other firms indirectly affected. The cost in transfer
payments and lost taxes would exceed $100 billion over three years. Some of Mr
Cole’s assumptions are likely to be too pessimistic, but his blood-curdling
forecast and others like it have helped to convince legislators that the $50
billion of help that the carmakers are asking for would be cheap at the price.

If the Center for Automotive Research's cost/benefit analysis is even sort of on target, giving the money to GM and Ford is a no brainier.

2.) The long term prospects of each company are actually pretty good. Both have a strong presence in Europe (especially Ford) and other emerging markets (especially GM). They have both started producing competitive compact and fuel efficient cars (everyone seems to rave about the Focus) moving away from the SUVs that American drivers demanded for such a long time. And in 2007 GM and Ford struck a deal with the UAW union which allowed them to cut costs by about $1,000 a car.

Should they have been making more fuel efficient cars? Probably, but that's easy to say today. The SUV market in the 90s and early 2000s was not a result of Ford and GM forcing American buyers to buy big gas guzzling cars. SUVs were attractive to American consumers because gas was so cheap... thanks in part to the U.S. government levying such small taxes on gasoline.

3.) Lehman Brothers - When the Treasury let Lehman Brothers die everyone seemed to support the decision. But it quickly became evident that letting Lehman 'die' might have been a huge mistake. The financial world simply was not ready for a bank as big as Lehman Brothers to go "buh-bye". Is the American economy ready to lose a few million jobs? And what about the pressure the bankruptcy of GM and Ford would have on the Pension Benefit Guaranty Corp--the Federal agency that insures benefits to retirees in the auto industry and other industries?

Why the U.S. Government Should NOT Bailout GM (and maybe Ford)
1.) When Becker speaks, I listen:

Nevertheless, I believe bankruptcy is better than a bailout for American consumers and taxpayers. The main problem with American auto companies is that during the good times of the 1970s, 1980s and 1990s, they made overly generous settlements with the United Auto workers (UAW) on wages, pensions, and health benefits...

It is not that cars cannot be produced profitably with American workers: the American plants of Toyota and other Japanese companies, and of German auto manufacturers, have been profitable for many years. The foreign companies have achieved this mainly by setting up their factories in Southern and border states where they could avoid the UAW, and thereby introduce efficient methods of production. Their workers have been paid well but not excessively, and these companies have kept their pension and health obligations under control while still maintaining good morale among their employees.

Bankruptcy would help GM and Ford become more competitive by abrogating significant parts of their labor contracts with the UAW.

2.) A.I.G. - What a mess this has become. This is in part the fault of the Treasury which basically has given A.I.G. billions upon billions of dollars without out any oversight. Conservatives cannot complain about welfare anymore after the A.I.G. fiasco. These guys are paying themselves bonuses for running the company into the ground... why? Because they don't want to lose the talent that nearly caused the company to disappear. Congress and taxpayers are right to be cautious about handing any private company billions of bucks after watching A.I.G. reward themselves for being total fucking morons (pardon my French).

3.) While I don't agree with much of Mitt Romney's reasoning he does make an important point in his Op-Ed today:
Without that bailout, Detroit will need to drastically restructure itself. With it, the automakers will stay the course — the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check.
A bailout does not guarantee further restructuring within Ford and GM. Both companies need further diversification in their products--the pickup truck and SUV business was lucrative until gasoline became expensive. And since both companies relied far too much on those big gas guzzlers and didn't really have smaller, fuel efficient cars to offer consumers, they're in the position that they're in today. Giving them a few billion won't guarantee a change in philosophy in Detroit, something we should all be worried about.

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