Wednesday, November 19, 2008

what's with the detroit auto bailout?

Time for a bailout? GM is near bankruptcy. Ford not far behind, maybe Chrysler as well. The auto industry bailout is a very bad idea, an unbelievably bad idea. The bailout will not solve the problems of the auto industry and just end up causing the taxpayers to waste money to help a very few people in a very expensive way. It avoids dealing with problems rather than confronting them. Let's see why.

Is this going to be hard to understand? Nope. The auto industry's problems are relatively simple and straightforward. (Hey, NO ONE completely understands the financial market meltdown mess.)

The problem? The $29/hr pay gap (Source: CARPE DIEM)

Why is GM (and Ford and Chrysler) seeking taxpayer subsidies when Toyota, Honda, Nissan, Kia, BMW, Daimler, Hyundai and other foreign nameplate producers, who are facing the same contracting demand and credit crunch quietly weathering the storm, are not? Because the latter have costs structures that haven’t been made obsolete and uneconomic by ludicrous union demands (see chart above, data here). ~ Dan Ikenson, "A Cancer on the Big Three."

The Detroit 3 have high legacy costs, costs of giving retirees generous pension benefits and expensive health care with low deductibles and co-pays. Current employees also have these benefits. Thus Detroit has higher costs for current benefits and are required to currently put money in funds to pay the future benefits. These are obligations that the bailout will not and can not change.

This $29 pay gap is the key to understanding Detroit's problem. Everything else, any other reason put forth, is just noise, just a side issue diverting attention from the real problem.

Will bailout help fund better technology? Nope. The problem isn't the lack of technology. The Detroit 3 have invested heavily in new technology. Other auto companies can operate in the US profitably. Other auto companies aren't weighed down by high pension, health insurance, and other labor costs. That is, the $29 pay gap.

You will hear the myth that the US auto industry needs the bailout to invest in better technology in order to compete. Please don't swallow that b.s.

Will bankruptcy throw hundreds of thousands out of work? Nope. Chapter 11 bankruptcy does not mean liquidation. Did US Airways, Delta, United, and other airlines disappear when they went into bankruptcy? Neither will the auto companies. They will reorganize, forcing the restructuring of labor agreements that are the cause of the problem.

[There is overcapacity in the auto industry: too many plants producing too many cars to remain profitable even in good times. There will be some job loses due to plant closings whether or not any of the Detroit 3 go into bankruptcy. This is a side issue that has nothing to do with the bailout.]

However, let's get back to the real problem of labor costs. That is, the $29 pay gap. Reducing labor costs is the only real solution. That will only happen if GM and its two US rivals seek bankruptcy protection. Unions and politicians will never agree to reduce these costs if they have a choice.

The myth of automakers and parts suppliers having massive job losses will be voiced. Please don't swallow that b.s.

Any other myths? Yes. Several. The Detroit 3 are better companies than their public perception. It is not a matter of producing gas guzzling SUV's and trucks or making cars that are lousy. (For more: 6 myths about the Detroit 3)

The myth that there are major reasons other than the $29 pay gap will be voiced. Please don't swallow that b.s.

Who gets bailed out? The auto execs may keep their jobs if they stay out of bankruptcy. The bailout will help maintain the value of their stock options.

More importantly, you must understand bailout's main goal is to bail out Big Labor; to keep the high-priced union benefits that are the cause of the problem. Big Labor wants the $29 pay gap to remain.

Is there a leak in the bottom, a gap between the boards?

Got a better idea than the bailout? Yes. Like in the photo above, we need to fix the leak or the bailout will not work. Realize the Detroit bailout, or loans, will not solve the problem of the $29 pay gap. The loans will not allow them to do anything to become more profitable as long as the $29 pay gap remains. The loans will just subsidize the pay gap until the money runs out. The Detroit 3 will still not be able to compete and probably won't be able to pay back the loan.

A solution? Let them go into bankruptcy and go as quickly as possible. That is the only practical way the $29 pay gap can be removed or reduced.

If you want to bailout the pension funds or subsidize other labor benefits then go ahead. It will be a lot cheaper to do so directly rather than have it trickle down through the auto companies.

Or let the federal government guarantee pensions. Oh wait a does that already!

Got a link with a good explanation? Try this one:

The Becker-Posner Blog:
Bail Out the Big Three Auto Producers? Not a Good Idea-Becker

Be blessed.

P.S. The auto bailout is altogether different than the financial bailout. The financial bailout was and is intended to keep capital markets functioning, not to protect the workers and fat cats on Wall Street. For example the bailout of AIG didn’t help, nor was it intended to help out AIG. With a financial sector seized up, you get a depression. With it only sort of seized up, you get a lost decade – like Japan in the 1990s – stagnant growth and high unemployment. It is absolutely essential to get the financial markets working.


Jason said...

For those GM employees concerned about their retirements don't fret the Pension Benefit Guaranty Corporation (PBGC) protects the retirement incomes of nearly 44 million American workers including those at GM.

The only problem is that the taxpayer is the Pension Benefit Guaranty Corporation. Keep GM and its employees working or pay for their retirements.

RB said...

Yep. Good point. Having the Federal government bailout the pension fund would be cheaper than *trying* to bailout the companies. My point, which has been made by many others, is that bankruptcy would allow the restructuring necessary. IMHO, no one will seriously deal with the legacy cost issues otherwise.