Bailing Out Detroit: Just Say No
Note to President-Elect Obama: Don't do it.
I understand the politics. I even get the symbolism—iconic industry and all that. But the economics is really bad.
Here are five reasons why:
It won't preserve jobs, at least not for long. The problems of the Formerly Big Three go far beyond today's slump. They have shed more than 600,000 jobs since the 1980s, and it is inevitable that more workers will be laid off, bailout or not. Firms such as Honda and Toyota can build cars more efficiently. Detroit has squandered once-great brands. Unions demanded—and got– exorbitant pay and benefits that are no longer sustainable. GM says it is burning through more than $1 billion-a-month in cash. At that rate, $15 billion in government money would last barely a year. Then what? Domestic automakers will require profound restructuring if they are going to live.
The government would be bailing out shareholders and management, not workers. And remember that any infusion of taxpayer money into Chrysler would end up in the pocket of its owner, a private equity firm called Cerebrus Capital Management. For all three companies, a bailout would rescue the very executives who created this mess. This is the same pitifully bad management culture that resisted safety in the 1960s, energy efficiency in the ‘70s, quality in the ‘80s and ‘90s, and energy efficiency again this decade. Instead of building cars people wanted to buy, these companies spent tens of millions of dollars lobbying against seat belts, air bags, and CAFE standards. Why would managers who could not maximize shareholder value suddenly get smarter now that they are playing with taxpayer money?
It won't accelerate alternative energy R&D. The bailout is being peddled as a way to encourage development of energy efficient cars. But money being fungible, most of this cash will go elsewhere—to CEOs, for health care, and for marketing. It is easy for a big corporation to shuffle costs to take advantage of government largess. Just look at what companies do to maximize the R&D tax credit. Besides, if I wanted to encourage technological entrepreneurship, the very last places I'd put my money would be Ford, GM, and Chrysler. As I have written before, if you really want to encourage alternative energy, raise the price of fossil fuel by boosting taxes on its use. If the price of gas is high enough, private research capital will flow like water.
If the problem is healthcare, find a health care solution. Allan Sloan argues the real reason these companies need a quick cash infusion is to fund retiree health trusts. The automakers turned this liability over to their unions, but agreed to kick in billions of dollars to finance the arrangement. Now they don't have the cash. If that is the real issue, government could provide a safety net for these retirees directly. For example, how about allowing these retirees to buy into Medicare before age 65? Or what about giving them access to the kind of Massachusetts-like purchasing pools you talked about in the campaign. Just a thought.
Where Will It Stop? Banks. Insurance companies. Investment houses. Automakers. Why not tech companies? Or retailers, who have cut more than 300,000 jobs in the past year alone–far more than the auto industry? Europe has experimented with Lemon Socialism. It does not work.