Saturday, November 15, 2008

Just Say No to Detroit; Let's Cut Our Losses And Let Society's Scarce Investment Flow To Better Uses

Given the abysmal performance by Detroit's Big Three, it would be better to send each employee a check than to waste it on a bailout, says NYU finance professor David Yermack in today's WSJ:

Our government is being asked to put tens of billions of dollars in GM, Ford and Chrysler, but we would be much better off if Washington allowed these companies to go bankrupt and disappear.

Over the past decade, the capital destruction by GM has been breathtaking. A net $182 billion of society's capital has been pumped into GM over the past decade -- a waste of about $1.5 billion per month of national savings. The story at Ford has not been as adverse but is still disheartening, as Ford has invested $155 billion and consumed $8 billion net of depreciation since 1998.

As a society, we have very little to show for this $465 billion. At the end of 1998, GM's market capitalization was $46 billion and Ford's was $71 billion. Today both firms have negligible value, with share prices in the low single digits. Both are facing imminent bankruptcy and delisting from the major stock exchanges. When a company makes money-losing investments, the cost falls upon all of society. Investment capital represents our limited stock of national savings, and when companies spend it badly, our future well-being is compromised.

Investing in the major auto companies today would be throwing good money after bad. Many are suggesting that $25 billion of public money be immediately injected into the auto business in order to buy time for an even larger bailout to be organized. We would do better to set this money on fire rather than using it to keep these dying firms on life support, setting them up for even more money-losing investments in the future.

Americans are not going to stop driving cars, and if GM, Ford and Chrysler disappear, other companies will expand to soak up their market share, adding jobs in the process. Many suppliers will also stay in business to satisfy the residual demand for spare parts even if the Detroit manufacturers go under. If the government wants to spend $25 billion to protect auto workers, it would do better to transfer the money to them directly (perhaps by cutting each worker a check for $10,000) rather than by keeping their unproductive employer in business.

It's time to cut our losses and let society's scarce investment capital flow to an industry with more long-term potential to create jobs and economic value.


At 11/15/2008 7:53 PM, Anonymous Anonymous said...

In 1971 Nixon put a big tariff on Japanese cars because they were taking away business from the Big Three. This action was meant to give Detroit breathing room to combat these imports. Then there was the Chrysler bailout of $1B in 1979. Since these actions Detroit has still continued to lose market share. The idea that these bozoes will be able to turn about the US auto industry with any amount of money is self deceiving.

At 11/15/2008 8:10 PM, Anonymous Anonymous said...

US Citizens for the most part do say no and said so to the bailout bill that passed, but the bought and paid for politico prostitutes in DC are another story. They want those campaign contributions.

At 11/15/2008 9:02 PM, Anonymous Anonymous said...

Prime candidates for conversion to GSE's?

At 11/15/2008 9:23 PM, Anonymous Anonymous said...

I lived in Kenosha when American Motors went under. I remember Rudy Kozel, the UAW guy.

Kenosha survived and actually has a more diversified economy without American Motors.

Oddly enough, the choice here is between jobs and prosperity. Pick one.

At 11/16/2008 12:06 AM, Blogger save_the_rustbelt said...

I can't wait until UM Flint declares fiscal exigency and starts laying off professors.

The law of unintended consequencesis very quirky.

At 11/16/2008 6:58 AM, Blogger Free2Choose said...

"I can't wait until UM Flint declares fiscal exigency and starts laying off professors."

That would only happen if the auto industry expanded markedly. Then everyone would work for the UAW, wouldn't need to acquire new skill sets (unless playing cards when you should be working is considered a skill) and college admissions would plummet. Sounds like a "great society", eh comrade?

At 11/16/2008 5:00 PM, Blogger Sean Cooksey said...

Thank you for giving this issue the attention it deserves. If the Big 3 get bailed out, then I will just begin the countdown until the day when we have all been mandated to drive our own environmentally friendly version of the Trabant. Really, a quality vehicle.


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