Back in 1986 we bought our first station wagon to serve our growing family. It was a Chevrolet Celebrity and ran well for more than 10 years. I didn’t question the $200 “destination charge” on the invoice, but when we got the Chevy home, I noticed on the i.d. plate that it had been “assembled in Framingham, Mass.” Remember when they actually built cars right here? That was a lot of years and a lot if really bad decisions by the Big Three automakers ago. One of those bad decisions was to dump the highly successful, Celebrity line and focus on SUV’s. That’s what did in the Framingham Chevy plant and its 3,700 jobs in 1987, and what’s doing in the auto industry today.
Bob Herbert in the NYT quotes arch-conservative senator Richard Shelby of Alabama saying that “The financial situation facing the Big Three is not a national problem, but their own problem.” Folks on the left, including on this site, have similarly called for the failure option. So is this the coming together of Right and Left in the public good? I sure hope not.
Jonathan Cohn has a thoughtful piece in The New Republic on how bankruptcy is problematic for the automakers. His key point is:
In order to seek so-called Chapter 11 status, a distressed company must find some way to operate while the bankruptcy court keeps creditors at bay. But GM can’t build cars without parts, and it can’t get parts without credit. Chapter 11 companies typically get that sort of credit from something called Debtor-in-Possession (DIP) loans. But the same Wall Street meltdown that has dragged down the economy and GM sales has also dried up the DIP money GM would need to operate. That’s why many analysts and scholars believe GM would likely end up in Chapter 7 bankruptcy, which would entail total liquidation.
Do we really want to wipe out the American auto industry? It’s fine to talk about “creative destruction,” but Schumpeter’s famous phrase applies to a continuum of events and activities in corporations, ranging from downsizing and internal reorganization to outright liquidation. Creative destruction in a single corporate sector in an otherwise healthy economy is one thing, creative destruction in an economy undergoing a major general downtown is quite another.
The dilemma is that we need to do something quickly. My preference would be for a short-term injection of Federal cash to keep things going while a tough plan is worked out that will give the feds a major stake in the industry from which they can push for big changes in the ways that cars are built and what kinds of cars are built. For example, do we really want to strangle the Volt, the first plug-in car, in its cradle? In general, I believe that governments should produce public goods. I’m not generally in favor of governments going into the production of consumer goods whether it be cars or airplanes or hockey rinks or golf courses. But in these parlous times, “common sense” may be neither common or sensical. I vote for a strong federal effort to confront this crisis. Not to do so is (to use an old automotive metaphor) playing chicken with a big chink of the economy.
On its face I for one oppose a massive corporate welfare bill, as I opposed the Wall Street bailout. This is shifting valuable tax dollars to corporations essentially rewarding them for managerial incompetence and environmental negligence. The Big Three are failing because they deserve to fail. They opposed government pension plans in the 1950s and decided instead to adopt strict anti-union policies and create private pension plans that are one of the major causes of their profit losses. Instead of innovating away from big cars and creating small cars and safer cars like the Japanese and Koreans were able to do they forced Congress to adopt loopholes that allowed them to skirt safety and environmental standards to create SUVs. They have failed to create hybrids, they supported anti-global warming junk science, they have failed to adopt and innovate and frankly the market should and will dictate smaller cars, environmentally friendly cars, and better cars. The Big Three are dinosaurs that have failed to innovate and it has become inevitable that they will become extinct since they have failed to innovate.
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p>That said, the loss of three million jobs, the loss of $200 billion of tax revenue, all of that could send massive shocks to an already shocked and hurting market and really spiral this recession into a depression if an entire industry goes under. The current bailout is a terrible idea, we are essentially rewarding auto CEOs for their bad and failed policies and proposals. Instead there are painful ways to fix the industry and any bailout should force this industries to do what they failed to do on their own. We should force them to innovate, force the labor unions to make concessions, agree to wage insurance for displaced workers and a universalized pension plans, and most importantly force very green proposals on them.
Also I would have the money contingent on forcing incompetent environmentally negligent management out and putting responsible people in. If the government is going to take an ownership stake in the automakers it has to demand environmental standards, labor reform, competent management, streamlined operations, and it must turn a profit on its investment. Frankly I don’t see the Big Three agreeing to those conditions, and if they don’t then they don’t deserve to succeed if they want to be rewarded for failure.
Personally, I wonder if failure is the one thing that will finally push our failed auto companies into actually building cars that people want and running themselves in a sustainable way.
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p>Why is it that we are so afraid of letting companies fail? And how is it that car companies are different than any other? (I don’t see anyone stepping in to “save” Circuit City.)
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p>Part of capitalism is taking risk. That’s what lets good companies succeed and bad companies fail. We’ve propped up the auto companies for years and every time they’ve failed. Chances are some other companies will come in and pick up the pieces, companies that will most likely be more innovative and successful than the current ones.
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p>No one wants to lose jobs, but if we’re uncomfortable with the proposition of losing many jobs, perhaps we need to rethink if we really like capitalism or not. Should we be limiting the size of companies so that when they fail their effects are not as great?
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p>I don’t know what the answer is. I do know that the current situation and what we’re proposing makes me sick to my stomach.
But, I think you are wrong when you paint bankruptcy as the death of the U.S. auto industry because the bankrupt companies wouldn’t be able to get parts.
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p>The question is, can these businesses make money by make cars that people will buy? If the answer is no, then a bailout will not save the industry. If yes, than bankruptcy will not destroy it, though I would not hazard to guess what institutional arrangements will end up owing the factories and paying the workers. (And I will shed no tears for the stockholders.)
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p>Would Shumpeter agree with your characterization of “creative destruction?” Can you point to any basis for that statement?
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p>A more-compelling argument for the bailout–the only one in my view–is that bankruptcy could bring down so many ancillary industries (parts suppliers etc.) as to create an unacceptably large impact on the economy.
The choice is not to let the Big 3 go bankrupt and then ‘start producing cars that consumers want’. Rather the choice is do we let them fail and disappear.
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p>Everybody who self-righteously declares that American auto companies have not listened to consumers doesn’t know what they are talking about. The Big 3, until the past 2 years, was making money hand over fist by — guess what— listening to consumers and their desires for over-sized SUVs and trucks.
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p>The quality issues regarding American cars have been a myth for about the past 20 years. In almost all consumer satisfaction and objective quality measures, the Big 3 are extremely competitive with Japan and Europe.
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p>Take a look at Chrysler. Daimler bought them and despite being incredibly successful with their European brands, the Chrysler brands under the management of business people with a successful track record in the auto industry could not figure it out. As screwed up as Detroit is, they do better than most in creating and selling cars to Americans.
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p>I have no problems if the bailout requires huge investments in green tech and that incompetent “Peter-Principle” executives are forced out. I could live with the renegotiation of the UAW contracts. (Nationalized healthcare would solve a huge part of the problem overnight) There are many caveats that could and should be attached to any rescue package.
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p>But doing nothing will certainly spell the end of the American auto industry in any meaningful sense and the permanent loss of 2 to 3 million jobs in and around the auto sector.
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p>That is completely unacceptable from both an economic an humanistic point of view.
“Letting them fail” has the potential to be catastrophic — and not just to GM. Per Jonathan Cohn in The New Republic, first the credit crunch could force GM into liquidation, not just Chapter 11:
With GM liquidated, say good-bye to the suppliers:
With the suppliers gone, guess what happens.
(H/t Krugman)
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p>I disagree completely. First of all, it’s quite true that the American auto industry was ignoring customers — the vast numbers of consumers outside the US who did not demand “over-sized SUVs and trucks”. Doing so little to expand outside of the American market at the same time Japanese companies were expanding everywhere — including, crucially, in the US — was a disastrous decision.
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p>Secondly, if it was true that the Big 3 were so attentive to the wants of American consumers, as you claim, then why did Toyota and Honda increase their market share in the US so quickly? Obviously they were doing something right; the American companies were not.
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p>I can’t say I’m too impressed so far for the arguments in favor of bailing out the auto companies. Undoubtedly, even if any of the Big 3 did go bankrupt, that would simply allow other companies (American or not) to swoop in and expand their operations in the US. People would lose their jobs, to be certain, but people will lose their jobs in many other industries as well in this downtown.
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p>That’s why providing a substantial increase in unemployment benefits and refundable tax credits is critical. But propping up failed companies is not a good use of taxpayer money. (Note that AIG and banks are is quite different…unlike the Big 3 automakers, the business of the banks and AIG is intrinsically tied into virtually every part of the US and global economy. I’m not saying that the $700B is being wisely spent, but the reason behind the financial bailout makes far more sense than the Big 3 bailout).
Two good places to start:
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p>1. End government mismanagement of the dollar which caused a massive spike in oil price unrelated to supply or demand.
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p>2. End government intervention in the job market, specifically Fed increases in interest rates to put Americans out of work. Unemployed people buy fewer cars.
everyone is saying that Chapter 11 won’t work because they won’t be able to find DIP financing. OK — let’s have the government guarantee DIP lending to GM (or even supply it, as a last resort). There’s a much less costly way of “bailing out” GM. Yes, they get government assistance, but much more along the lines of what we did for Chrysler. And it doesn’t involve forking over huge sums of cash into a company that basically sucks.
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p>Conditions on the guarantees? Sure — great idea. Green ’em up, whatever. But this both gives a needed assist to the employees and suppliers of GM, while also honoring our basic commitment that companies that suck go into bankruptcy rather than getting a big pile of government cash.
like AIG? Is this “basic commitment” to letting bad businesses fail new this week?
You guys seemed to be pretty strong supporters of the financial/banking bailout (at least in theory, if not in the actual execution).
In fact, Ford is in a position to ride this out. They not only have the ability to sustain their burn rate through the recession, but they can also continue the revamping of their product line that is in process now.
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p>(emphasis mine)
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p>What’s going on with the product line? An example:
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p>So why have they joined Chrysler and GM by also holding their hand out? A Ford employee explained to me that they see it as a matter of leveling the playing field. If the other two get cheaper credit than Ford did back in 2006, they’d also like to get the lower interest rate.
I’m really troubled by the idea of throwing money at GM just so it can continue down its path to ruin. Maybe a better option is to bring on a bailout, but put GM into receivership. Let the Congress, as a condition of providing financing, appoint new temporary leadership for GM to lead its transition to a much greener company. It’s been done before (here’s a little Wikipedia background).
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p>With all due respect to GregR, IMHO the US automakers worked very hard and spent hundreds of millions (actually billions) of dollars to create demand for their large, gas-guzzling vehicles. They lobbied Congress to exempt SUVs and trucks from CAFE standards, lobbied against any further mandates on fuel-efficiency, and let’s not forget the tax break Congress passed as part of the Bush tax cuts giving small business owners and the self-employed up to $100,000 in tax deductions for purchasing luxury SUVs (A Marketing Bonanza).
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p>I think it’s too much to ask Mssrs. Waggoner and Lutz to change their entire way of thinking about cars. GM has been in trouble for years, and this management team has been unable to find a way out of trouble. Waggoner recently told Automotive News he was unwilling to resign in order to get bailout money, saying that he was the best person to lead GM through its crisis.
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p>Bob Lutz, who famously said earlier this year that “Global warming is a total crock of sh*t,” is currently tasked with product development for GM, including the Volt. These guys are, IMHO, utterly incapable of leading GM in any direction that would benefit the workers, retirees, suppliers, and the rest of us.
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p>If GM is to be rescued, we’re going to have to come up with some pretty creative approaches. Receivership, with Congressionally appointed leadership (I can think of lots of top-level leaders who are committed to sustainability with profitability), is one out-of-the box solution to GM’s troubles.