Friday, December 12, 2008

Big Three Bailout?

The US House of Representatives recently passed a bailout for the "big three" automakers. However, passage of the plan is in doubt in the US Senate.

This is obviously a major issue in Michigan. All the Republican members of the Michigan congressional delegation voted for the bailout except for Tim Walberg, who did not vote. This was one-fourth of the total number of Republican supporters of the plan in the House.

The bailout plan is presented as necessary to save the big three, save millions of jobs, and the American economy. But is this true?

Certainly the government can keep the big three in existence indefinitely, provided that it can continue to borrow or steal enough money indefinitely. But propping up businesses that can't compete indefinitely is the road to stagnation and poverty. It's better to let such businesses fail.

Instead, the advocates of the bailout present it as a one-time thing. But is it? To answer this, we need to know what happened to the big three in the first place.

Doubtless there have been some bad management decisions along the way. But the major reality facing the big three is that labor costs them much more than it costs their Japanese competitors that make cars in America. The available statistics show that the big three spends $73 per hour for labor, including all the benefits, which Japanese companies spend $48 per hour. Further, the big three have huge "legacy" costs of pensions and health care of their retirees. A bailout wouldn't do anything to change this. Hence there isn't much reason to think that a bailout would be one-time-only.

So should we just let them fail? No. There are steps that the government can take to help the big three. More particularly, it can undo the harm it is causing them.

For one thing, it should immediately repeal Corporate Average Fuel Economy (CAFE) standards, or at least repeal the increase in recently passed. These standards not only kill thousands of motorists, but they also hurt the big three relative to the Japanese automakers. This is because for some time the big three's advantage has been in larger vehicles, especially trucks, SUVs, and vans. But these are exactly the vehicles that are penalized by CAFE standards, which help the smaller cars that are the forte of Japanese automakers.

The government has also empowered the labor unions that are bleeding the big three dry. They extorted unrealistic wages and retirement benefit guarantees. They could get away with it during the good times, but now the bills are coming due. Congress should repeal the law that prohibits competition amongst unions.

The bill being discussed in Congress would make the situation even worse. It would create a 'car czar' to dictate to the big three. More government mandates aren't going to create better cars. The bill would also push more 'green cars'. These are fantasies that only work in the minds of congressmen.

Bailouts only lead to more bailouts. Subsidizing failure only leads to more of it. The big three should be helped, but the plan Congress is discussing won't help in the long run. If undoing the harm the government causes isn't enough, then the big three need to reorganize.

Previous: Stop The Bailout!

1 comment:

Matt said...

How unsurprising that this blog would incorrectly report a Big Three autoworker's average salary. What is the average salary of middle-managers and above? What is the average salary of a bank manager, over 100,000 (

Does anyone do any fact-checking for this blog?

ABC's Overpaid Autoworkers


picture of ABC broadcast
(Watch clip on YouTube.)

In an attempt to explain the plight of the Big Three U.S. automobile manufacturers, ABC's World News used a wildly misleading statistic regarding autoworkers' pay.

On the December 3 edition of the ABC newscast, reporter Chris Bury took aim at the supposed inflexibility of the United Auto Workers:

But the union did not offer to give back the big stuff, pay and benefits that remain a fundamental problem. Ford, Chrysler and GM pay union workers more than $73 an hour in wages and benefits. Japanese plants here shell out just over $44. For GM, that translates into $1,500 more per car more than Toyota has to pay.

This factoid, which is a favorite of the industry--and, increasingly, of the media as well (see Media Matters, 11/22/08)--has been exposed as misleading for some time. In the New Republic (11/21/08), Jonathan Cohn called it "wildly misleading," and cited an analyst for the Center for Automotive Research who determined that "average wages for workers at Chrysler, Ford and General Motors were just $28 per hour as of 2007." The much higher figure, according to Cohn, results from a mathematical sleight of hand--taking "the cost of all employer-provided benefits--namely, health insurance and pensions--and then dividing by the number of workers." In other words, costs related to retired workers, who well outnumber current employees, are used to create an inflated figure that is misleadingly labeled as current labor costs.

Writing in Portfolio (11/18/08), Felix Salmon called it a "ridiculous number," adding: "Now that GM's healthcare obligations are being moved to a UAW-run trust, even that fictitious number is going to fall sharply. But anybody who uses it as a rhetorical device suggesting that U.S. car companies are run inefficiently is being disingenuous." The United Auto Workers also has a page on their website debunking the industry figures (

And as the Wall Street Journal reported (11/20/08), "During the past three years, the union agreed to eliminate tens of thousands of production jobs, reduce healthcare coverage for union retirees and slash wages for new hires--moves that essentially level the playing field between the Big Three auto makers and their foreign-owned rivals." The paper went on to explain that these concessions are significant: "Analysts believe the changes will bring the average cost of union labor to less than $50 an hour by 2010 or 2011, in line with Toyota Motor Corp.'s labor costs. The Harbour Report, a closely watched scorecard of auto-plant productivity, earlier this year found that in 2007 the average per-vehicle labor costs for the Big Three in 2007 was no more than $260 above Toyota's"--far from the $1,500 premium ABC claimed GM pays.

ABC did include a quote from UAW president Ron Gettelfinger, saying that he "bristled at blaming auto workers"--but ABC's newscast was as much behind the finger-pointing as the industry is. As economist Dean Baker noted (Beat the Press, 11/18/08), this misinformation has serious consequences: "It certainly can affect public support for a bailout if they are led to believe that autoworkers are paid much more than is actually the case." ABC should correct the record.