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How Washington killed the auto industry

December 5, 2008

GM, Ford, and Chrysler were back in DC today, hat in hand.  And just like their last appearance, they received a chilly reception. Alabama’s Richard Shelby (R) said “If you made this presentation to get a bank loan, I suspect that any sensible banker would summarily dismiss your request.”  And he may have been right.  I’m still against the government bailout of the Big 3, because:

1) Not all parts of the industry are hurting, indicating that mismanagement is the central problem. Government shouldn’t reward poor management.

2) Government doesn’t have the right to confiscate my money and divy it up among their friends. Taxes are intended to pay for defense and critical infrastructure. Not GM’s Electric bill or pension plan.

3) “Government handouts” are dangerous. Not only do handouts, bailouts, and welfare reduce moral hazard, but every time you the government does it, another industry will discover a “dire emergency” that is “too big to fail”.

4) we didn’t bail out steel. Or textiles. Or Furniture. And yet we survived.

5) it won’t work in the long run.

But, it’s worth taking another look at WHY Detroit is in this mess. The Detroit Free Press had an interesting article on this.  So did Automotive News. (h/t Rush Limbaugh)It turns out that, just like in the mortgage industry, government policy helped create the problem.

Energy policy: The CAFE standards mandated higher fuel economy for some vehicles, but not all. At the same time, relatively low fuel prices in the early ’90s sent Americans out to the car lots looking for Hummers, Expeditions, and Dodge Vipirs. Of course, the foreign car makers got in on the action, too. But GM, Ford, and Chrysler got into the SUV in a BIG way, because that’s what America wanted. Then gas prices shot up, and you can’t give away a Hummer.

Unions. Folks may not remember, but automakers didn’t willingly marry the UAW. And even now, they’d move plants to other parts of the US, but the  UAW agreement  makes this difficult. Though they’re doing a decent job of offshoring jobs. FDR was instrumental in passing a whole raft of union-friendly laws. Now we’re at a point where unions are blocking innovation becuase often means using fewer people to do the same amount of work.

Double standard: Foreign automakers don’t have to pay the health benefits of their employees.  Japan is a difficult market for US companies to enter, but many states are paying MILLIONS for Japanese automakers to come over here. So we pay Toyota to make cars, and GM gets to pay it’s employees to sit at home. Thanks to an imbalance in government policy.

The financial crisis. Folks buy fewer cars when they can’t get loans. Even the PERCEPTION that loans are scarce leads to fewer people shopping for cars.

Uncertainty: The very act of coming to Congress, hat in hand, hurts the Big 3, especially GM. As Rick Wagoner tells Congress how close to bankruptcy GM is, how do you think carbuyers and stockholders are reacting? Ford, which is in better shape, may actually get some benefit out of this, because every day they get to say “we can probably get thru the year without a bailout.” If Congress just said “no bailout” right up front, then we could find a solution (even bankruptcy) without all of this drama.

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