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All Da King's Men

Should We Bail Out The Big Three Automakers ?

By Da King Published: November 18, 2008

Let's start by using some numbers to illustrate what GM, Ford, and Chrysler mean to the American economy, American workers, and American retirees. This comes from a pro-bailout column written by Pat Buchanan:

When workers, execs, engineers, dealers, salesmen and suppliers are all factored in, the Big Three employ 3 million people who contribute $21 billion a year to Social Security and Medicare, and $25 billion in federal income taxes. Add in all the businesses that depend on the auto industry, and we are talking about one-tenth of the U.S. labor force.

As columnist Tom Piatak of Chronicles and writes, 850,000 retirees, and their families, depend for pensions and health care on the Big Three. If they go under, the burden falls on us.

If the American auto industry were to die, we'd go directly from the recession we're in now to the Great Depression II. Nobody wants that, and nobody wants to see millions more people out of work. In addition, do we really want to concede the auto manufacturing industry to the Japanese, Koreans, and Europeans ? That would have a big negative effect on America's future. Sure, we'd still have automakers here and autoworker jobs here, but the profits would be going overseas. For our long term economic health, we need those profits here in our country, not in a foreign country. We must save the American auto industry.

The question then becomes - how do we do it ? The two alternatives being bandied about are 1) Provide $25 billion more in taxpayer-funded government bailout money to the Big Three, or 2) allow the Big Three to restructure under Chapter 11 bankruptcy protections.

To address how to save the auto industry, we have to acknowledge why the American auto industry is going broke. The missteps and nearsightedness of the Big Three's management have been plain for all to see, but those errors are correctable. The real problem with the Big Three is structural. The American automakers are losing money on every car they sell. Here are some of the reasons, according to Fortune at CNNMoney:

Structural inequities between the U.S. and Japan - notably in labor costs and currency - account for a big chunk of Detroit's problems...According to the latest calculations, the gap between Japanese and American carmakers' profits average out to about $2900 per vehicle, and the home team does not have the advantage. A big reason is the cost of labor. As analyzed by Harbour-Felax, labor costs the Detroit Three substantially more per vehicle than it does the Japanese.

Health care is the biggest chunk. GM (Charts), for instance spends $1,635 per vehicle on health care for active and retired workers in the U.S. Toyota (Charts) pays nothing for retired workers - it has very few - and only $215 for active ones. Other labor costs add to the bill. Contract issues like work rules, line relief and holiday pay amount to $630 per vehicle - costs that the Japanese don't have. And paying UAW members for not working when plants are shut costs another $350 per vehicle.

Here's one example of how knotty Detroit's labor problem can be:

If an assembly plant with 3,000 workers has no dealer orders, it has two options. One is to close the plant for a week and not build any cars. Then the company still has to give the idled workers 95 percent of their take-home pay plus all benefits for not working. So a one-week shutdown costs $7.7 million or $1,545 for each vehicle it didn't make.

If we hand the automakers $50 billion ($25 billion in September + $25 billion to come) without any structural changes taking place in the American auto industry, we will simply be forestalling the inevitable collapse. They'll be coming back next year for $50 billion more in taxpayer bailouts to stay afloat. That doesn't help anyone. It's a non-solution. A realistic mechanism to restore American competitiveness must take place before any bailout occurs. If that mechanism happens, we should bailout the automakers. If the Big Three's management and labor can't work something out, then the more painful bankruptcy path should be pursued.

Note that some of the Big Three's problems are not really their fault. They are larger problems that America must deal with as a whole. The exploding cost of health care isn't Detroit's fault, but it is putting them at risk of failure. A simple solution would be for autoworkers and retirees to pay half the cost of their own health insurance premiums, like most of the rest of workers do these days. The UAW will balk at that, but it's time for a little reality check. The alternative is bankruptcy. If the automakers return to profitability, employee bonuses can make up the difference. That's the way the Japanese auto plants in America do it. They are still profitable, and their workers are doing well. It sure beats unemployment.

Let's have the Big Three execs come up with a workable business plan, and hash out an agreement with labor. We can use some of our Congressional know-nothings (they know nothing about the automobile industry and should not be the ones setting the terms) as go-betweens. That's the only way I see out of the mess.



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