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.