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Should We Bail Out the Auto Makers?

by Mick Weinstein

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Posted on Friday, November 14, 2008, 12:00AM
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:

The 'No Way' Camp

University of Michigan professor Mark Perry compares average salaries for Big Three auto workers with industry peers and the market at large and asks pointedly: "Should U.S. taxpayers really be providing billions of dollars to bailout companies that compensate their workers 52.5% more than the market...54% more than management and professional workers, 132% more than the average manufacturing wage, and 157% more than the average compensation of all American workers?"

Always insightful Megan McArdle, blogging at The Atlantic, believes the money would be much better spent on other goods and services: "Bailing out the auto industry offers no net gain to society. It is a straight transfer of resources from one sector to another: we tax money, or borrow it from a finite pool of capital available to the nation, and spend it on auto workers. The people who pay the taxes, or the people who would have borrowed that investment capital, now have less to spend. Whatever they would have bought goes unbought; whoever would have made it goes unemployed... We have the illusion of a gain only because that other group of people is invisible... we're just pouring money into the same deep hole that will periodically reward our efforts by coughing up the Pontiac G6."

Ryan Avent at The Guardian thinks it's a terrible idea, and sees a big difference from the efforts to save AIG and the banks: "a bail-out involving tens of billions of taxpayer dollars ought to hold out the promise of helping the people it's supposed to help. Saving Ford, General Motors and Chrysler provides no such hope. In all probability, a bail-out will hurt the very region it's meant to help... Political energy in the Rust Belt is geared toward maintaining the status quo at the expense of other priorities."

Jim Wiandt of IndexUniverse questions the President-elect's advocacy of a Detroit bailout: "Obama's lead with aid for automakers is not an auspicious start... To me it's right up there with Bush's opening with steel tariffs when he started 8 years ago. Let's take our least efficient, most poorly run and least competitive industries and prop them up. Great idea!"

UC Berkeley econ professor Brad DeLong: "I understand that the argument 'you saved X from bankruptcy, why won't you save GM from bankruptcy?' is very hard to deal with in a soundbite. And I believe the federal government has an obligation to autoworkers and retirees. But this obligation is not well-exercised by keeping GM out of bankruptcy."

Justin Fox, blogging at Time.com, agrees that GM's arguments against Chapter 11 don't hold water: "GM is headed for bankruptcy without government intervention. So any government intervention ought to be structured like a bankruptcy: Current shareholders wiped out (they're almost there already), debt converted to equity, top management out. We could just, for the sake of not scaring car buyers, call it something else. 'Government-arranged workout'? 'Bailoutruptcy'? 'GMerdämmerung'? 'Economic stimulus'?"

Ockham Research finds an amusing parallel: "You cannot help but laugh when you hear that GM is the world's leading purchaser of Viagra. The Detroit News reported in 2006 that GM spent $17 million dollars on the 'little blue pill'. Admittedly, this is a relatively small portion of the more than $5.6 billion per year that GM spends on health care for their employees... but the Viagra problem is a symptom of an overall cost management illness."

The 'Yes, Unfortunately' Camp

Always ready to question popular opinion in the econo-blogosphere, Felix Salmon presents four good reasons to go ahead with a GM rescue package, critically examines those very reasons, then concludes: "count me in on a strategically-oriented bail-in package which benefits the Midwest, rather than GM's bondholders and shareholders."

James Surowiecki at The New Yorker concurs: "[I]f G.M. goes under, so too will many of its suppliers, who do business not just with G.M. but with other car companies as well. That, in turn, will make it hard for those companies to keep the assembly lines going. So the ripple effects of a failure of G.M. or Ford are bigger than we might imagine."

NYU Business Professor Robert Salomon differentiates between GM and Ford on the one hand, and Chrysler on the other: "Although I am not opposed to the idea of providing aid to the auto manufacturers, there is a difference between an investment and an expense. Injecting capital into General Motors and Ford represents more of an investment. An injection of capital into Chrysler would represent nothing more than an expense."

John Lounsberry thinks the money should flow to the automakers, but in the process, those firms should be at least partially nationalized: "I look back to the Chrysler rescue of the early 1980s and find that to be a good model for the current situation. We did essentially most of the nationalization process there, but kept the management in private hands because of the $1 a year man, Lee Iacocca."

Investment banker John Slater looks for lessons from IBM's descent on Washington in the early 90's: "Yes, let's preserve American jobs, but as we do so, let's invent a new transportation industry that will eclipse what's left of the old car companies and in the process that will position America for energy independence and assure a better environment for our grandchildren."

Finally, Prudent Speculations thinks a bailout should be combined with adoption of Boone Pickens' plan to build out massive wind energy fields and move auto fuel to natural gas: "Congress should put such stipulations in the agreement so that it forces the Big 3 to significantly ramp up their efforts to produce natural gas friendly vehicles as an intermediate solution to our country's dependence on foreign oil."

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661 Comments

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  • donna - Thursday, November 20, 2008, 3:55PM ET  Report Abuse

    • Overall: 1/5

    How insidious of the govt to allow blame to fall on everyone except the govt itself. The US auto business plan asked by congress must defy outdated govt restrictions on the industry. A return to standard components between models is the best route to a feasible and profitable US auto business.

  • bob - Wednesday, November 19, 2008, 11:00PM ET  Report Abuse

    • Overall: 3/5

    I reluctantly take the position that the inevitable bankruptcy of some or all of the big 3 should be allowed to take due course. What position will we take with ExxonMobil? What position will we take with Lockheed? What position will we take with Boeing? with Sears? with John Deere? with General Electric? with IBM? with AT&T? with Motorola? with ADM? with Cargill? with Walmart? with Dayton-Hudson? with 3M? with J&J? with Kraft Foods? I am a contract researcher for the DoD. What position will we take should future policy favor R&D in another field in which I have no relevance? Will I be bailed out? Not only do I think not, but I would not ask for it. I''m on my own for Plan B. What must be must be.

  • Yahoo! Finance User - Wednesday, November 19, 2008, 10:20PM ET  Report Abuse

    • Overall: 3/5

    Fry these Union SOBs. They dont deserve any bailout. They get 50% more pay for doing less work and demand so much. Every union-based organization will fail.

  • Yahoo! Finance User - Wednesday, November 19, 2008, 9:32PM ET  Report Abuse

    • Overall: 3/5

    So what are the unions doing to help in the bailout? Can you tell me there is nothing they can do to protect their jobs? Sounds to me like they better brush up their resume and send it over to Toyota. (and leave out their previous work experience) OK, I got my digg in. I feel better now. As an industrial technician I see different industries on a daily basis. I've acquired the ability to accuratly analize businesses I see and can tell which ones thrive, survive, and die. Well guess what. From what I've seen it doesn't look good for the big 3. I hope I'm wrong in my speculation but unfortunatly my track record diminishes my hope. As far as a bailout? Well lets say it will need a boat load of conditions applied to it to make it a success. Either way my tax dollars get spent. I will say, however, the quality and popularity of the recently developed new lines at GM and Ford are impressive and exceed most of the competetion in initial quality and performance. I hope it's not too late. If the big 3 can survive for another 6 months, the economy is going to turn around and people will start buying new cars again. The UAW IS GOING TO PUT A FOOT FORWARD to help not only themselves but also these American corporations and lead the country back into a great recovery!!! The world is made up of three kinds of people. People who make things happen. People who watch what happens. And people who say "WHAT HAPPENED". Which ones would you say are at the BIG 3?

  • Yahoo! Finance User - Wednesday, November 19, 2008, 9:12PM ET  Report Abuse

    • Overall: 3/5

    Looks like there is at least 10 people against the bailout for every one person for it (maybe more). Seems like the only ones for it are UAW members who think uneducated, unskilled workers should make 2-3 times what the free market (non-union) wages would be. Also, to the guy who thinks the government can force mortgages to 2%, I would like to know how. More importantly, how can that be good when easy mortgage moeney is what got us into this mess. Who would lend money at 2% when risk, inflation etc. has rates at 6%. What a moron.

  • chobiboh - Wednesday, November 19, 2008, 8:59PM ET  Report Abuse

    • Overall: 5/5

    No bailout unless we get rid of UAW and high pay management team.

  • Michael - Wednesday, November 19, 2008, 5:02PM ET  Report Abuse

    • Overall: 3/5

    Why on earth should we bail-out these loozers. By GMs own admission, they're burning through $5B a month. If we give them the $25B they're asking for, and GM gets, what maybe $15B of it..how are things better in three months? We're right back where we started minus $25N in taxpayer money!

  • LanceP - Wednesday, November 19, 2008, 4:37PM ET  Report Abuse

    • Overall: 4/5

    The only people for this bailout seem to be the auto workers. Guess what? This bailout is not necessary due to the financial crisis, it is because the big 3 don't produce products people want to buy. If it were the crisis, then why aren't Honda, Toyota, Nissan, and BMW lined up with their hands out? Answer: people keep buying their cars. Smart companies with good CEO's and boards plan for economic downturns and prepare for them. THis is an excuse to subsidize poor leadership and foresight and amounts to corporate welfare. The difference between the banks and the auto industry is that the banks have a global effect and are necessary for all industries to survive. Let the consumer decide what auto companies survive and leave the taxpayers out of it!

  • M J - Wednesday, November 19, 2008, 3:18PM ET  Report Abuse

    • Overall: 4/5

    You don't go to the store and buy rotten fruit, why do the same with automakers.

  • Mister Moose - Wednesday, November 19, 2008, 1:16PM ET  Report Abuse

    • Overall: 5/5

    I see UAW members making 2x the wage as others, and spending every dollar they get their hands on. Don’t give those greedy, short-sighted folks my tax money.

  • Yahoo! Finance User - Wednesday, November 19, 2008, 12:53PM ET  Report Abuse

    • Overall: 3/5

    Let them fail. The overpaid lazy entitled union employees need to be held accountable.

  • Yahoo! Finance User - Wednesday, November 19, 2008, 9:16AM ET  Report Abuse

    • Overall: 2/5

    O'My it must be the workers yada,yada,yada.Get your heads out of that dark hole, the upper tier of the auto makers have sucked hundreds of millions/billions out of the auto industry with their inflated wages,perks and benefits,for God sake one had 7 private jets(I wonder how many workers that would have paid).Now lets see Ford makes a car in Mexico,they pay the worker a dollar an hour ship them back over here and lo and behold you pay the same price you would have if it had been made here.Ah but than again its always easy to blame the worker or perhaps its just plain ole pure jelousy that someone else is making more than you,shucks in my book no worker should make over $5.00 per hour with no benefits there now everyone should be happy.!!!!

  • Despina - Wednesday, November 19, 2008, 4:55AM ET  Report Abuse

    • Overall: 5/5

    Either way, Darwin will prevail. Inadequate engineering, excessive wages and lack of quality are still the norm for the US auto industry. At the end of the day, failure is inevitable unless a change takes place where economy and innovation become the norm.

  • Kraal - Tuesday, November 18, 2008, 11:56PM ET  Report Abuse

    • Overall: 4/5

    Let them go into Chapter 11, and cut that anchor(Union) that is helping to pull them down with unreasonable benefits !!, and stop making so many gas hog's. Bankruptcy was designed to help you get back on your feet. They can but must agree to alot of changes and it will take time. won't happen over night and make an EFFORT at Quality control so your vehicles last longer with out mass breakdowns after few years....Thats why Toyota and Honda has beaten your butt.. Good Luck would like to buy one sometime in future....

  • Fantasylanders - Tuesday, November 18, 2008, 9:07PM ET  Report Abuse

    • Overall: 2/5

    No bailout. It's survival of the fittest in a competitive, free market. If you can't compete, you lose.

  • James E C - Tuesday, November 18, 2008, 6:27PM ET  Report Abuse

    • Overall: 3/5

    I do not believe the big three should be bailed out. Their labor costs have gotten askewed to burdensome and need to be renegotiated via a chapter 11 bankruptcy. Poor management allowed this to happen over many years and now the chickens have come home to roost. No bailout. If the unions can not renegotiate, and they seem to lack the smarts, then Chapture 11 the big three. Possibly 7.

  • PatrickW - Tuesday, November 18, 2008, 5:21PM ET  Report Abuse

    • Overall: 3/5

    It is unfair to bail out any company or industry. There are no accountibilities in bail out. Why waste tax payers money to bail out failing companies? Who can guarantee those money would be returned to US Treasury (out tax money)? Big Tree fail because they don't have products that comsumers want to buy. And they keep making those cars that burn too much gas. If they cannot make profit, let them fail. A lot of companies came out of Chapter 11 and became more competitive in their industry. Who is going to bail me out if I am in financial troubles?

  • Ken - Tuesday, November 18, 2008, 2:01PM ET  Report Abuse

    • Overall: 4/5

    Just my thought on a NEW BAILOUT IDEA... Why can't the government help everyone else instead of the people who are in trouble? Imagine this... through government intervention, which is already in place with the $700B bailout, 1. GOV'T SPONSORED LENDING: Working through banks, force the 30 yr mortgage lending rate to 1 or 2% for everyone using taxpayer money. It may even work with 3%, but please keep reading. 2. Allow people to refi if they wish to do so. 3. ENSURE THE TERMS ARE RESONABLE AND THAT PEOPLE CAN REPAY. 20% down etc. 4. Ensure banks will not make too much on the easy money with their crazy fees, but will make enough to stay in business. 5. REGULATE THE CRAP OUT OF IT SO IDIOT BANKS DONT END UP WHERE THEY WERE AGAIN!!!!!!!!!!!! 6. Probably other things will need to be in place, but this is the main idea. BENEFITS: 1. 95% of people with good credit and good standing can refi legally without ruining the credit system. this gives money to the economy to get restarted. 2. This will bring buyers out of the woodwork to buy new houses. 3. This will keep a % of the foreclosures from happening because the borrowers could refi into more reasonable terms. 4. MORE CHANCE "THE PEOPLE" GET PAID BACK WITH THEIR TAX MONEY AT RISK. It will guarantee that money will likely get paid back to the people UNLIKE the current $700B bailout. 5. There are plenty more benefits, too many to list here. 2nd way to implement this idea: You could even do the GOV'T SPONSORED LOANS in steps by starting at 5% and see where it goes, if it is not enough drop to 4%, then to 3% and keep dropping until the refi biz can get the economy back on its feet. In this 2nd scenario, the kicker will be that borrowers will not know how low the gov't will go thus spurring refi's at every level until the economy picks up. It may never have to reach 2%.

  • Yahoo! Finance User - Tuesday, November 18, 2008, 1:36PM ET  Report Abuse

    • Overall: 4/5

    It is disgusting and unbelievable that so many Americans are willing (and even demanding) to let the auto companies fall! Unions exist to help the workers. What do you think it means when "Toyota is able to produce cars in the US at a profit?" Toyota pays workers less, offers fewer benefits, then ships profits from the sales overseas. Great plan guys! One in twelve jobs in the US is tied to this industry but maybe after we let it fail we can all get jobs shipping money to foreign countries...

  • Richard - Tuesday, November 18, 2008, 11:13AM ET  Report Abuse

    • Overall: 3/5

    Everybody is missing the point. The innocent victims in this crisis are individual taxpayers. The plight of people that have done nothing wrong continue to be ignored. This situation has been building for more than a decade due to a widening global economy that has lowered our standard of living. The middle class should be the vehicle for sorting this mess out. It will take a massive tax rebate for those that have been paying taxes over the years. It has to be large enough to give consumers the spending power to determine which institutions survive or fail. This will automatically distribute the money to state and local governments, industry, banks, etc., etc., etc. . It will create jobs, generate tax revenue, and go a long ways to repair the damage done to the middle class. It should be tied to lower corporate taxes, higher gasoline taxes, and higher taxes to the weathiest individuals. The free market can manage this situation better than polititians, captains of industry, and financial gurus.

  • cootiegiver - Tuesday, November 18, 2008, 8:09AM ET  Report Abuse

    • Overall: 5/5

    If we are going to bail them out, then we should demand a 50% cut in worker compensation, and a larger cut in management compensation. This is the thing that is completely missing from the Congressional debate.

  • Ancient loadsmasher - Tuesday, November 18, 2008, 3:51AM ET  Report Abuse

    • Overall: 1/5

    Most of our major steel companies have gone through bankruptcy, as have several major airlines, usually for the same reaons facing the automakers: declining market share and excessive labor costs. After bankruptcy, pensions were slashed, wages were brought in line with reality, and the companies went forward leaner and more adapted to the realities of the marketplace. Hey, we don't allow a person to take bankruptcy except in the most stringent conditions, and we also don't throw money at him to save him from bankruptcy. What makes the automakers so special?

  • Teeee - Monday, November 17, 2008, 11:53PM ET  Report Abuse

    • Overall: 4/5

    I am in support of a loan to the domestic auto makers of this country. If financial companies can get help than why not our own auto companies. Ford, GM and Chrysler and their suppliers have helped support middle class families for generations. Toyota and all the other foreign nameplates have not. They have only put some plants here in order to cut their costs and gain easier access to our "Largest in the World" automobile market. As far as comments here bashing the Big 3's quality, I disagree wholeheartedly. In my forty some years I have only owned Ford products and have never been let down. Also anyone who thinks making $15 to $30 dollars an hour is too much is not based in reality. The Big 3 may need to trim some benefits to compete. (Namely retiree health benefits.) Our own auto companies essentially started mass producing automobiles and are now shunned by our own public who have given their American made dollars now to foreign car companies who now have over 50% of our market. Fifty years ago, our economy was approximately 50% manufacturing and 50% services and did not depend as much on consumers. Now it is approximately 20% manufacturing and 80% services. I am not saying services are not important...they are but if we become a nation that does not manufacture tangible products, we are on an unsustainable path. Of course I would rather not see the government have to get involved but would rather see help go to companies that make products rather than companies who push paper! I'm sure if Americans had bought American made products when possible, we would not be in as dire straits as we are now in. It's just a shame I have to say "When Possible" since so many American industries have been pushed off our shores! Vote with your hard earned Dollars! Wake up America!

  • chuai - Monday, November 17, 2008, 11:42PM ET  Report Abuse

    • Overall: 4/5

    I drive the same Ford for the last ten years. It is definitely not as glamorous as a BMW, but it sure is reliable. Letting these companies go is sad. Bailing them out is not a good idea too. These companies need to design better cars. Has anyone thought of selling these companies to India? Those Indians got deep pockets. They could finance these companies back to shape. Well at least we would still have the brands around and millions of families would not starve. The brands are excellent. We just need to fix the cars.

  • Jeffrey B - Monday, November 17, 2008, 11:29PM ET  Report Abuse

    • Overall: 5/5

    I love my Honda Civic and Honda Accord. Each have over 120,000 miles and have never had mechanical problem. They also get 30 to 36 mpg. After Ford/GM fail and have restructured, perhaps we will be able to build cars that rival those of German and Japanese origin.

  • Bernie - Monday, November 17, 2008, 10:09PM ET  Report Abuse

    • Overall: 4/5

    I agree. A bailout is nothing but a short term gift to the UAW from low and middle class tax payers. Good bye UAW!

  • David F - Monday, November 17, 2008, 4:55PM ET  Report Abuse

    • Overall: 4/5

    are you kidding me bail out the the big three more liberal demodemons bailing out the unions. come on paying someone 20 something dollars an hour to stand with a air wrench in hand and tighten several bolts, please. the unions killed that industry let capitalism rule and give the big three a book on bankruptcy laws and let them figure it out.

  • John - Monday, November 17, 2008, 4:44PM ET  Report Abuse

    • Overall: 3/5

    I haven't read about anyone mentioning a middle ground solution. What about the possibility of deep cuts in union compensation, deep cuts in executive compensation in return for government assistance over the next 5 years? Everyone should be made to sacrifice. At the end of 5 years, if the companies have made successful and fundamental change, bonuses would be paid to executives and workers alike based on a formula agreed to in advance. If 1 or more auto makers have still not shaped up 5 years from now they would be allowed to fail. A failure at that time would not have the same deleterious effects as it would today since the economy should be in much better shape by then. Just a thought.

  • JUN - Monday, November 17, 2008, 4:16PM ET  Report Abuse

    • Overall: 5/5

    anyway this automaker will soon be bankrupt why save them. they just making under quality and unreliable cars.

  • Frank - Monday, November 17, 2008, 4:15PM ET  Report Abuse

    • Overall: 4/5

    Let's not bail out poor management and "overpaid, non-competative on the world market" Union workers. If bailout is considered, then let's get concession, and a major increase in good management, quality and productivity. High cost crap don't cut it!!

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