by Jonathan Danzig | Congress should not subsidize incompetence by bailing out the Big Three.
After failing to win any taxpayer money at their last outing, the CEOs of General Motors, Ford, and Chrysler have ditched the private jets and have returned to Washington via hybrid to again plead for aid for their industry. They, along with representatives of the United Automotive Workers, plan to make their case for a government bailout by issuing a simple ultimatum: Congress must approve at least $34 billion for their companies, or the U.S. automotive industry will fail, devastating the American economy for generations. Americans should view this claim with some skepticism, because the industry has been failing for years through no fault of the American taxpayer. Congress must demand personal responsibility from the Big Three by firmly saying no to a government bailout.
The laissez-faire argument for saying no is strong. For years, the Big Three had a business model dependent on cranking out and selling as many big gas-guzzlers as possible with minimal investment in alternative energy and smaller, more efficient vehicles. This short-sighted strategy initially resulted in high profit margins for SUVs but barely broke even on its other cars, an insufficiency that grew with time. And in the days of Big Three oligopoly, they negotiated contracts with the UAW that granted unsustainable healthcare and retirement benefits to employees.
The first hints of real trouble in paradise came in the 70s, with the Middle Eastern oil embargo and the quiet rise of Japanese and German manufacturing. The government bailed out Chrysler in 1979. Chrysler thanked them by arrogantly changing nothing. A bailout, rather than saving the industry and encouraging better business practices, creates dependency on the government and allows a company to superficially change its image without confronting the real change it would need to make in bankruptcy.
The country should remain wary of any grand Democratic scheme to save the world. The Democratic leadership is certainly not content with handing money out to save the Big Three and letting the free market run its course; many would prefer to see the government have more of a hand in determining the future business models of the Big Three. Speaker Nancy Pelosi believes just that, tentatively supporting the bailout so that the companies will make “cars that people actually want to buy,” with plenty of obligatory government oversight. Pelosi’s blatant disregard of the free market should sound some alarms; she speaks as though that is not what they have been trying to do since their conception. The American people should not trust her as the CEO-equivalent of already-failing corporations.
More importantly, no irony should be lost on the fact that Sen. Chris Dodd, architect of the Fannie-Freddie debacle, chairs the Senate Banking Committee, which is holding the hearings on the Big Three. It would seem that Dodd’s liberal compassion never seems to end for over-regulated, over-unionized businesses. Make no mistake: the primary concern of Dodd and the liberal wing of the Democratic Party is to protect their support among unions. They support a bailout for fear of bankruptcies that are partially the fault of their anti-business policies.
Chapter 11 forces corporations to go through certain procedures. This mandatory restructuring would include renegotiated union contracts, liquidation of unnecessary capital, and hopefully, more provident management. More than anything, pro-bailout Democrats fear the wrath of unions if their entitlements are cut, and they need to protect one of their most loyal interest groups. Bankruptcy is an unfortunate last resort, but it remains the painful catharsis necessary to purge the Big Three of their excesses. If the Republicans want to prove their mettle as a capitalist party rather than a free-spending, crony corporatist one, then they must oppose this bailout.
This is not to say that the GOP should be the party of reactionary obstruction. Many of the auto industry’s problems come from the horrendous anti-business policies of Michigan. Those seeking a better example need look no further than the South, where foreign car makers have been attracted to the less-taxed, less-unionized, and less-subsidized environment. In turn, wage increase, job growth, and innovation have occurred. Much of the South, unlike Michigan, has tax policies that favor native manufacturing products, rather than add excess taxes to them. As a result, foreign companies maintain their American headquarters there. While refusing to bailout the auto industry, the GOP should point to the success of the South as a better way forward.
In the end, the debate on a Big Three bailout comes down to a very basic principle of economics, the opportunity cost. For the sake of the country, the benefits of bailing out the auto industry would have to so clearly outweigh the proposed $34 billion cost that everyone would emerge better off. It would have the Big Three make the radical change they need to become profitable, rather than remain complacent in unrealistic business models and union entitlements. It would have to allow for greater success and fresh, new ideas, rather than subsidize failure. But at this time, it is unlikely that any of these things would happen. Any bailout seems more like throwing money down a hole than building up a sustainable company. The federal government should not be in the business of rewarding failure.
Mr. Danzig is a freshman who has not yet declared a major.