How about some tough love for Detroit?

by Jay McDonough

Following up on yesterday's post about the Big Three automakers and what, if any, lifeline should be tossed their way by Washington.... 

First, some background from a former assistant secretary of Energy during the Clinton years. Joseph Romm recounts an informal partnership between the Clinton Administration and the Big Three automakers to speed the development of hybrid gasoline-electric cars.  After spending nearly one billion taxpayer dollars, the automakers walked away from the development project as soon as the Bush Administration were sworn in.  The work done in Detroit on hybrids, Romm explains, motivated the Japanese car companies to begin their own hybrid development. 

And as the effects of greenhouse gas emissions became known and the price of gasoline was creeping upwards, the Big Three chose to wage intensive legal battles and lobby to prevent fuel efficiency standards from being raised rather than begin the manufacturing of more fuel efficient cars (Congress just provided $25B to help the Big Three for this development).

Sounds like a bunch of knuckleheads, right?  No way should they be rewarded for their incompence and obstinance with a big Washington bailout. Well, there's some big time implications to letting them go belly up.  From a reader at the Daily Dish:

What's the economic impact if the Detroit 3 ceased operations now? A new study by the Center for Automotive Research estimates that 2.9 million U.S. jobs would be lost in the first year. It would reduce U.S. personal income by over $150 billion in the first year; $398 billion over the course of 3 years. The loss of state, local and federal taxes coupled with the increase in transfer payments (unemployment benefits, etc.) would cost government $60 billion in 2009, $54 billion in 2010, and $42 billion in 2011, for a total of about $156 billion over 3 years.

Dave Cole, chairman of the Center for Automotive Research, says "On a strictly cash basis, it's less expensive to keep industry moving than have it shut down,"

The arguments for letting the Big Three drift towards bankruptcy are, as you might expect, mixed.  There have been success stories of huge corporations emerging from bankruptcy relatively intact.  And while in bankruptcy, the automakers have the opportunity to trim costs that are making them non-competitive with foreign automakers, such as pensions and health care, and trim operational costs, eliminate non-performing models and shut down underperforming dealerships.

However, the Washington Post notes a study that indicated 80% of car buyers wouldn't buy a car or truck from a manufacturer that's in bankruptcy, fearing loss of warranty, financing issues and parts availability. 

One big takeaway from this mess is the burden health care not only places on individuals, but on American corporations hoping to be competitive in a global economy.  Anderson at Newshoggers commented:

Perhaps the crushing death of Big Auto by health care costs will wake people up to the enormous burden being placed on American business by the overly expensive, near useless, capricious and often dangerous health insurance "industry."

From a 2007 article in Money magazine:

Health care is the biggest chunk (of cost). GM, for instance spends $1,635 per vehicle on health care for active and retired workers in the U.S. Toyota pays nothing for retired workers - it has very few - and only $215 for active ones.

Thankfully, health care is way up there on the Obama agenda and these burdensome costs will decline. 

As I wrote yesterday, some relief will be provided by Congress.  But the money ought to come with some new rules for the automakers; a commitment to developing hybrid and alternative fuel powered automobiles, significantly higher fuel standards, a new management team, commitments to maintan as much of their workforce as possible, andsome heavy lifting on the automakers part to get universal health care here in the U.S.

Comments

[Mark]

I'm not sure how wise it is to rely on numbers provided by the Center for Automotive Research, which is to my knowledge closely affiliated with the auto industry. At worst, it has a strong incentive to inflate the numbers to bolster the case for a bailout; at best, it has a strong institutional bias that is likely to result in an over-estimation of the Big Three's role in the wider economy.
I'm also skeptical of the claim that 80 percent of car buyers would avoid buying from a company in bankruptcy - not because I think the survey is fabricated, but simply because the phrasing of the question almost begs for a "no" answer. It's also an inherent problem with polling based on hypotheticals, as well - how people actually would act and how they say they would act are often two very different things.