Auto Bailout Won't Prevent Bankruptcy

Auto Bailout Won't Prevent Bankruptcy

By Jack Kelly - December 2, 2008

The Detroit Lions were thrashed, as usual, in their annual Thanksgiving Day football game, bringing their record for the season to 0-11. This prompted some sports fans to wonder why the Lions' owners tolerate such consistent failure. But then, the Lions are owned by the Ford family.

This column is about the automobile industry. But I want to begin it with three numbers, because they define the environment in which the fate of the Big Three must be discussed.

The first is $13.84 trillion. That's the estimated value of all the goods and services produced in the United States last year.

The second is $7.6 trillion. That, according to the Bloomberg News Service, is the current amount for which taxpayers could be on the hook for the bailouts to date of financial institutions. It's more than half the value of the gross domestic product.

The third is $4.6 trillion. That, according to Jim Bianco of Bianco Research, is the inflation-adjusted cost of World War II. The potential liabilities our policymakers have imposed upon the taxpayers in the last two months are nearly twice as much as what we spent in nearly four years fighting the Germans and the Japanese.

Compared to what we've already shelled out to wealthy Wall Street bankers whose greed and stupidity are chiefly responsible for the mess we're in, the $25-$50 billion the auto makers are seeking now seems a mere pittance. It might even be a bargain, argued former Michigan senator Spencer Abraham in the New York Times.

"Nearly three million jobs would be lost in the first year if all three companies closed and their suppliers absorbed the shock, according to the Center for Automotive Research," Mr. Abraham said. "That would mean tens of billions of dollars in pension liabilities would be transferred to the Pension Benefit Guarantee Corporation, the federal insurance fund that protects the pensions of nearly 44 million American workers but already has a $10.7 billion deficit."

So if we're going to bail out Wall Street, why shouldn't we bail out Detroit? There are two reasons, the lesser of which is that at some point the taxpayer cow is going to run out of milk.

The more important reason is because a bailout will only postpone bankruptcy, and raise its ultimate cost. We say we "can't allow" the auto companies to fail. But that's hubris. The truth is, we can't prevent it.

Soaring gasoline prices in the summer and the stock market crash in the fall have made their illness acute, but the "Big Three" have been losing money for years. The chief reason for this is their higher labor costs make their cars about $2,000 more expensive than comparable foreign models.

General Motors (19 percent) and Toyota (18 percent) have about the same share of the U.S. car market. But Toyota has enormous efficiency advantages. GM has eight product lines, Toyota three. GM has 7,000 dealers, Toyota, 1,500. Toyota pays its workers in the U.S. an average of $48 an hour. GM, Ford and Chrysler pay their employees an average of $73 an hour. For GM to have a chance to become competitive, it must cut its product line by at least 50 percent, its dealer network by at least 50 percent, and its labor costs by at least 30 percent.

But any bailout that's acceptable to the United Auto Workers -- and thus to the Democrats in Congress -- will be designed to avoid the pain such cutbacks would inflict.

The current environment for auto sales is toxic, and is likely to remain so for at least a year. This means that ever more and ever larger subsidies will be required to keep the doors of the Big Three open. Eventually taxpayers will run out of patience, or milk. To avoid discomfort now, we court catastrophe a short distance down the road.

If the Big Three sought Chapter 11 bankruptcy protection now, one strong company could emerge from the wreckage. Surely the United States would be better served by having one healthy car company instead of three terminally ill ones. But good sense, alas, rarely makes political sense.

Jack Kelly is a columnist for the Pittsburgh Post-Gazette and The Blade of Toledo, Ohio.

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