Tuesday, December 9, 2008

Why are we even discussing bailing out the car industry?

By the time I post this the car industry bail out is probably already done. I don't understand why we are even discussing it. We're supposed to be living under a capitalist system aren't we? If the United States can't manufacture cars that people want to buy, why would we collectively keep paying companies to do it. I don't see any kind of "strategic homeland security" advantages to have a domestic car industry. And it isn't like there won't be any cars to buy, it's just that the country that makes them will not be American unless they can clean up their mess.

True there are a lot of people employed by the car industry but it isn't that many. According to the US Bureau of Labor Statistics around 850 thousand people are currently employed by the car and part manufacturing industry. There are also a little bit less than 2 million people involved in the retail and whole sale distribution of cars.

Granted if over 2.5 million people over night lost their work that would probably be truly catastrophic. However it is not that bad if you look closer. First of all, people would probably keep buying and repairing about the same amount of cars (People still use a lot of cars, just not American cars) which means that most of the 2 million people mentioned above will probably still be able to keep trading and repairing cars. Secondly the 850 thousand number includes US employees of non US car companies. Most of these companies are still doing fine and will not be affected. Thirdly, it isn't like all the US car companies will go defunct over night even in the worst case scenario so the immediate impact would be spread out over at least a few years. To put this in perspective we already lost over 500 thousand jobs in just the month of November here in the US also according to the same web site above.

I would argue that one of the biggest problems that the US car industry has to deal with is that a worker here costs almost 3 times as much as a Japanese car worked (And Japan is generally considered more expensive to live in than the US). Why not let the car companies go into chapter 11 bankruptcy and renegotiate their labor contracts and debt. Isn't that exactly what chapter 11 is created for. I have read somewhere that this would be very risky because car companies might not be able to get the bridge financing required to go through the restructuring process (If you can't do that you would be immediately forced into liquidation). However, if that is the case then by all means let the government guarantee that. This kind of financing is senior debt so it is what is repaid first if the restructuring fails and the company is liquidated so the government will almost certainly get it's money back.

If the government just hands over more money to the car industry now, none of the fundamental problems that the industry has would have been fixed and we would be right back to where we are now in another couple of years again. However if we do let the companies go into chapter 11 and they succeed in restructuring they might actually emerge as entities that are able to compete in the global market. And if they don't, why should we spend money trying to keep this dying industry alive any longer than necessary?


Rae Gross said...

very well put! It is sad that Americans can't seem to wrap their minds around this concept.

Doug Daniels said...

well its a matter of fairness really.

why does the so-called "finance industry", which has done nothing but indebt the american public, get bailed out and a real productive manufacturing industry does not?

besides, sweden is hosting it's own auto bailout: