Friday, November 14, 2008

Should We Bail Out the Auto Makers?

While the market tests new lows and the economy continues to weaken, a decision that could further impact every American taxpayer stands right now before Congress: Should Detroit's auto makers be tossed the same sort of lifeline that some financial institutions received from the U.S. Treasury - tens of billions in aid to ensure safe passage through this crisis? Market bloggers weigh in. As always, click through to read the entire item if it piques your interest:

Yahoo! Finance link.


At 11/14/2008 4:22 PM, Blogger Free2Choose said...

Dr. Perry,

Your colleague, Jason Kosnoski, from the Poli Sci dept. was on ABC 12 today. He was talking up the productivity of the union and explaining the "myth" that union labor has been the downfall of the Big 3. An interesting explanation, albeit a complete fairy tale.

Not for nothing, but the kid looks like he just started shaving last week. Does his mother know he works there?

At 11/14/2008 4:31 PM, Anonymous Anonymous said...

I think we should "bail out" every business in America in this fashion:

1)Repeal the business tax completely.

2)Repeal the tax on dividends completely.

3)Repeal the tax on capital gains completely.

4)Repeal the CAFE standards for the automobile industry completely.

5)Repeal the Americans with Disability Act, the Family Medical Leave Act and the Equal Employment Opportunity Act. These laws have turned every employee into a potential lawsuit and added enormously to the cost of employing people.

6)Repeal the Sherman Act and fire all the federal employees charged with enforcing this utterly arbitray collection of non-objective laws.

7) Repeal the Wagner Act; make membership in unions -- as well as participation in any strike -- completely voluntary.

8) Repeal all of the state mandates that have forced health insurance companies to offer all policies with coverage for alcohol abuse treatment, drug abuse treatment, mental health treatment, contraceptives, in vitro fertilization, etc. Let people pay only for the coverage they want.

At 11/14/2008 4:36 PM, Anonymous Anonymous said...

I meant to close my comment with:

"That would be a good start and would provide businesses with a huge incentive to expand."

At 11/14/2008 4:36 PM, Blogger Unknown said...

Well Yes, we must try to bail out our automakers. The collaspe of financial institution is directly, indirectly responsible for bringing the 3 giants to this stage. The stock price went down, reducing their company's value to 1/4 of the original. Govt should not take decision by considering their failure to catch up with foreign brands like Toyota and Honda past 30 yrs! Compare these brands with the amount of money involved in american financial market which is in deep crises at present, infact if you consider last 10 years, the big 3 are actually recovering by delivering some of the best products to consumers.

At 11/14/2008 4:38 PM, Anonymous Anonymous said...


His mother also knows that he has a political science. I'm sure she is proud of her son.

You should consider a career in TV news. You managed to slam someone’s character and make a statement without any basis-in-fact in a very concise manner. Those are important attributes in the medium of entertainment that masquerades as news nowadays.

At 11/14/2008 4:45 PM, Blogger PeakTrader said...

U.S. automakers may have to declare bankruptcy, since their labor costs are too high. However, U.S. automakers have been a big benefit to U.S. consumers in recent years, since they sold their autos too cheaply, often with zero percent financing, which helps explain why they're in financial trouble. Unlike many high-tech industries, auto production faces barriers to entry.

At 11/14/2008 5:57 PM, Anonymous Anonymous said...

On the one hand, it is certainly undeniable that access to capital is severely limited. Consider the traditional methods of raising cash ie. through stock issuance, a bank loan, or sale of assets. It would appear that the present financial crisis adversely impacts these methods. On the face of it, a loan that was paid back would appear reasonable in the absence of private sector sources of lending.

Treating TARP like a slush fund is a fundamentally flawed approach. This fund was specifically designated to address the critical problems in the finance sector which are critical to the U.S. economy and the global economy. The priority for this fund is resolving the global financial crisis not giving treats to homeowners, the Big 3 or any of the other political pet causes.

GM, Ford & Chrysler have been having problems for years which have little to do with the global financial crisis. There are many companies that seek Chapter 11 that emerge with a more viable business model like Delta.

At 11/14/2008 6:08 PM, Anonymous Anonymous said...


You can't compare airlines' business model with automakers. One requires three years or more of trust after the sale; the other one just gets you where you are going and the business realtionship is over. A more appropriate comparison would be finding out that Delta Airlines recruits help from McDonalds and does not require their airline mechanics to have any training.

At 11/14/2008 6:40 PM, Blogger sethstorm said...

Yes, and do so until the likes of Honda and such do not add exorbitance should you want them to attempt to build something that GM builds quite well. If that means straight nationalization, fine. It also preserves the choice for affordable muscle and the option to have more than a 4cyl compact for $20-25K new. I'm not asking for an exotic, but for a preservation of cars that people have wanted and still buy.

The only laws I would like to see repealed are largely environmental ones. Another point would be to gut the RTW laws(and removing any artificial advantages given by said intervention). Replace it with an expanded definition of import that includes "transplants" as non-domestic. After that, I'd just disregard Michael Smith's attempts at pleasing business without any direct regard for individuals.

There is a way of building a car that Detroit will do - performance per dollar first, fuel efficiency a close second. I've yet to see anything from the transplants that has come close.

At 11/14/2008 7:25 PM, Anonymous Anonymous said...

Bail'um out, it ain't gonna matter in the long term as it's going to be the US that is being bailed out.
Were just getting warmed up here.

At 11/14/2008 8:27 PM, Anonymous Anonymous said...

Who was it yelled fire!
Hank was the man
And the panic began

when will it end?
when we wake up and see
how rich we all be

the glass is half full
not half empty

just wait a few weeks
and our fat rosy cheeks
will be smiling again

At 11/14/2008 9:27 PM, Anonymous Anonymous said...

Where has the U.S. bailout money gone?

Get on up there and get you a suck on at public tit.

At 11/14/2008 10:12 PM, Blogger bobble said...

This comment has been removed by the author.

At 11/14/2008 10:50 PM, Anonymous Anonymous said...


Your link doesn't work.


Can agree that the airline industry is nothing like a capital intensive business like manufacturing automobiles. Chapter 11 is certainly not an easy option as Delphi which still languishes in bankrupcty can attest.

Also agree with the point that you have made in prior posts regarding the cost of government assumption of pensions obligations from the Big 3. Additionally, the number of workers impacted is substantial in the Big 3 and related industries. CAFE standards will be very difficult for the auto industry to meet which really doesn't help in the present difficulties.

I still have grave reservations about whether the government should prop up private companies particularly when the Democrats are intent upon dipping into the emergency fund specifically targetted to resolving the worst financial crisis in 70 years. The priority at present is nothing less than the global financial system.

One cannot help but notice that GM just opened a new $300 million factory in Russia. For a company that has been bleeding cash for the last several years, it is a surprising announcement.

There are other public policy options ie. deferral of CAFE mandates, accelerated capital cost depreciation, reduction in corporate tax rates. None of these options puts public funds at risk.

Unfortunately, the Big 3's problems have been ongoing for a number of years. Chapter 11 may be inevitable regardless government intervention. At the present rate, how long will it take the Big 3 to burn through 40 or 50 billion?

Aren't we just putting off the inevitable?

At 11/15/2008 8:45 AM, Blogger Free2Choose said...

This comment has been removed by the author.

At 11/15/2008 9:06 AM, Blogger Free2Choose said...

This comment has been removed by the author.

At 11/15/2008 11:08 AM, Anonymous Anonymous said...

@sethstorm wrote:

After that, I'd just disregard Michael Smith's attempts at pleasing business without any direct regard for individuals.

@sethstorm, the issue is not pleasing one versus the other. The issue is justice -- of equality of rights under the law.

No one (except an advocate of totalitarianism) would argue that the government should have the power to determine who you may or may not work for. You have the right to free association -- to decide for yourself which employment offer to accept and which to reject.

Why? Because it is YOUR labor that will be traded in exchange for a paycheck, it belongs to you, and thus you have the sole right to decide whether to trade it for any particular employer’s money or not. Assuming you are not a hit man proposing to kill for hire, nothing justifies another party having the power to veto your decision and force you to trade your labor with someone other than the person YOU select.

What’s more, unless you sign a contract to the contrary, you retain the right to change your mind about the trade anytime you wish, for any reason you wish. You have the absolute right to withdraw from one employer and move to another if you find a better deal or for any other reason you wish.

But every bit of this reasoning applies to the employer just as much as it does to the employee. It is, after all, HIS money that will be traded for labor, so he alone has the sole right to decide whether to trade it for any particular person’s labor or not. Giving a third party, such as the government, the power to veto the employer’s choice, and force him to employ someone other than the person HE selects, is no more justified than if it is done to the employee.

Yet that is precisely the effect of the laws that I mentioned -- the ADA, the FMLA and the EEOA. These laws strip the employer of the right to spend HIS money on whatever labor he chooses. Creating a job is not easy -- only a small percentage of people are capable of doing it. It is also an enormously valuable thing to do, inasmuch as the great majority of us depend for our very livelihood on jobs created by other people. It cannot possibly be just to reward the job-creator by robbing him of a basic right -- the right of free association, the right to trade his money with whomever he pleases -- that we’d grant to any bum on the street.

What’s more, these laws also strip the employer of basic protections afforded to common criminals in the criminal defense system.

Normally when the state charges a man with a crime, the burden of proof falls on the state as the defendant is presumed innocent. But when an employer is charged with violating one of these “anti-discrimination“ laws, he is presumed guilty and must prove he did NOT discriminate.

When a criminal is brought to trial, he faces a jury of his peers and is protected by strict rules of evidence enforced by an independent judge. But the employer accused of “discrimination” faces only a bureaucrat with arbitrary power unrestrained by ANY rules of evidence.

The criminal has to be convicted by the unanimous decision of 12 independent jurors. The employer may be convicted by a single bureaucrat that answers to no one.

These laws are a gross injustice from start to finish.

I apologize to Carpe Diem for the long post, but I believe that needed stating.

At 11/15/2008 11:34 AM, Anonymous Anonymous said...


I can't really say if the loan would be a waste of money. GM will have a very difficult time switching to selling cars and making a profit after being a high profit truck and SUV maker. I guess it can be argued whose fault it is; however, it’s difficult to support over a ½ million retirees and surviving spouses. Most of the wage differential between GM and the others in the graphs is legacy costs. Those costs don’t die until they do.

The problem I see is that this has become a union vs. non-union pissing match. Instead of a rational discussion of all the alternatives, petty jealousies seem to be the rule. I would expect a more academic discussion in this forum; you provide a good start.

As a person who used to have over $100,000 in GM stock and currently has over 35 years’ seniority at GM, here’s what I would like to know from the financial experts:

1) How much money would actually be needed to solve the short term problem?
2) What is the total cost to the taxpayer (society) of doing nothing as compared to a loan?
3) What is the estimate of long-term viability of the auto company(ies)?
4) Will the savings from the UAW/GM 2007 contract be enough to compete with the transplants?

Of course, the problem is more complicated than my simple questions suggests. However, this analytical type of approach seems to be missing in most of the current discussion. Regardless, my suggestion to those who I work with remains the same as when I walked the picket line in the 1998 strike at GM: “You better find something else that you can do to support your family other than working for GM.”

At 11/15/2008 11:45 AM, Anonymous Anonymous said...


I forgot to address your remark about the GM plant in China. That’s an area where my opinion differs from my coworkers; sometimes quite loudly. I think that GM is a global company that has over 60% of its sales (and all of its profits) in countries other than the U.S. Any company that does not invest overseas will not be a viable company in the future. Accordingly, the future security of the U.S. workforce and retirees depends on GM making wherever and however they can make money. The China investment sounds smart to me. This remark is usually where I am called a management spy :-)

At 11/15/2008 11:48 AM, Anonymous Anonymous said...

Sorry about that mistake of country. Russia--China--same principle. GM should invest globally.

At 11/15/2008 1:01 PM, Anonymous Anonymous said...

Walt g,

I have to agree that discussions tend to devolve rapidly rather than rationally exploring the options. The discussion at the political level does not look any better. The problems facing the Big 3 are complex and legacy costs are a huge factor which the transplants do not have. Coupled with the high level of uncertainty in the global financial markets and banking sectors, these are very difficult times for the auto industry.

The questions that you pose offer an objective starting point and importantly a movement away from labels and sound bytes. Asking the questions is where one starts.
Most of us simply do not have the level of knowledge of the auto industry or the players to engage in such a discussion or to answer such questions.

When someone asks a question that one cannot answer, learning begins. It begins with the perception that there is a gap in our understanding and the desire to find the answer.

Would appreciate any recommended reading on this subject. There are very few things written that are ground breaking.

Best wishes :)

At 11/15/2008 1:12 PM, Anonymous Anonymous said...

Walt g,

I agree with you that a company the size of GM has to think globally. The advantage of multiple markets is that regional fluctuations like the downturn in the U.S. market can be offset by profits from other markets.

Manufacturing facilities need to be located strategically close to the markets that they serve. Delivery costs from the U.S. would not be economical.

I also meet a great many protectionists (some of them are family) who don't really understand the extent to which our GDP that comes from trade. I must be another management spy :)

At 11/15/2008 2:30 PM, Anonymous Anonymous said...


I don't know about ground-breaking information. Just like hurricane Katrina, most of that is written after-the-fact.

David E. Cole (Center for Automotive research) has written a lot about the domestic auto industry lately. He estimates that a < $50 billion dollar investment by taxpayers in the near future could prevent $180+ billion in lost wages, taxes . . . in the next 3 years.

As a taxpayer, I would want to know the chances of the company(ies) long-term survival before I committed that much money. As a GM worker, I would say, "Let's see the money. We don't want another Katrina."

Regardless of whether the money is forthcoming or not, it will be a huge financial blow to the country for an auto company to fail. Many people probably do not think an auto company failure will affect them; they are seriously mistaken. When you have to pay my part of our school taxes to send your child to school, or I quit shopping at your store, you will realize that my money is your money, too.

At 11/15/2008 5:58 PM, Anonymous Anonymous said...


I think you hit the nail on the head: long term viability of the business model. Will this money help the Big 3 over particularly challenging economic times or will we simply be putting our money in the stove?

The fact that the Big 3 have been burning cash at a record pace for several years is not encouraging and suggests that the problems extend beyond the present economic challenges. GM has a huge workforce/retiree base and the effect of a bankrupcty would be substantial.

At present, there is a firestorm of economic problems and a major confidence crisis which the FED and Treasury have failed to contain. Spending by the House and Senate is completely out of control and the nation is fighting 2 wars.

President-elect Obama is expected to somehow waive his wand and make it all magically go away. That ain't going to happen either.

Good luck on this one.

At 11/16/2008 10:31 PM, Anonymous Anonymous said...

In the case of the auto-makers' bailout, it's a relief to have a national issue that is so straightforward: American cars tend to break down and fall apart therefore people have stopped buying them. If GM and Ford don't want to go out of business, they should start making decent cars. To bail them out would be to reward their terrible manufacturing standards.

At 11/17/2008 10:53 AM, Anonymous Anonymous said...

iF YOU BAIL OUT THE Union Freindly GM then please bail me out to my bills and loans are to much for me!

At 11/20/2008 12:23 AM, Anonymous Anonymous said...

No nO No no No nO No no No nO No no No nO No no No nO No no No nO No no No nO No no No nO No no No nO No no No nO No no No nO No no No nO No no No nO No no No nO No no No nO No no No nO No no No nO No no No nO No no No nO No no No nO No no No nO No no No nO No no No nO No no No nO No no No nO No no No nO No no No nO No no No nO No no No nO No no No nO No no No nO No no No nO No no No nO No no No nO No no No nO No no No nO No no No

At 11/20/2008 12:38 AM, Anonymous Anonymous said...

In The American Dream we are allowed, with our valued freedom the chance to succeed.It is an unspoken extension of that ideal that some must also fail. When we bailed out Chrysler, and to bail out the auto makers now; that cannot survive this current trial; we devalue the American dream for us all.

At 11/20/2008 6:19 PM, Blogger weman9232 said...

This comment has been removed by the author.

At 11/20/2008 6:31 PM, Blogger weman9232 said...

i say bail them out but where is the free money going into stock holders pockets or back into the tax payers its simple supply and demand if we create a demand then the supply will fallow suit i dont think we should be punishing a company for paying a liveing wage we should praise them but back to demand we should order a shit load of police cars and other govt cars at a little over cost and trucks and store them till there needed also offer rewards to banks that offer low interst auto lones if you buy domestic this would create more demand and everyones happy for the most part anyway we get a good deal on cars and they stay open win win but im no finacal wiz u tell me


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