Who Weeps for Detroit? No One.

By Dennis Sanders | Related entries in General Politics, Kitchen Sink

Let’s face it: people don’t like the American auto industry.

Scratch that: people hate the American auto industry.

There are a lot of reasons to hate it: unionized workers who make crazy money that is out of sync with reality, execs who seem to have a tin ear to what Americans really want, cars that aren’t made well, and a lack of fuel-efficient alternatives.

Americans have every reason to be upset at an industry that hasn’t performed well. Heck, I am upset at this industry, and my parents are GM-retirees who are proud union workers.

A few months ago, I even said that the Big Three should die. If they can’t make it on the free market, then they should die.

And then Lehman Brothers happened.

Remember them? Back in mid-September, the Feds decided not to bailout the investment bank. Many thought this was a good thing: after all, we are a capitalist society and if private businesses make bad decisions, then they should fail.

Well, we know what happened: the financial markets went wild and the Feds had to step in after all to keep the financial system from failing with the $700 billion bailout.

Now, I understand when people say that it sets a bad precedent that we should be bailing out companies like Ford and General Motors who basically got themselves into this mess.

As a Republican, I have a hard time lending GM a hand.

As an environmentalist, I consider it poetic justice that the domestic auto industry is on the ropes after producing vehicles that were gas-guzzlers and polluted the environment.

But as the son of two autoworkers, all I can think about is what could happen if we allow the Big Three to go hang. Jeffery Sachs notes that the closure of the automakers could be catastophic:

the sudden closure of an automaker would be catastrophic, possibly pushing our economy from recession to depression. Because of the impact on parts suppliers, the shutdown of one company would imperil domestic production across the board, and the jobs at risk include not only the 1 million in vehicle assembly and parts but millions more that would be caught in the resulting cascade of failures. The industrial Midwest — especially Michigan, Ohio, Indiana, Illinois and Tennessee — would be devastated, and the shock waves would reverberate across the world.

For a long time, I’ve tried to ignore that this was personal for me. But the fact is this IS personal for me. I grew up in Michigan during the 70s and 80s. I grew up during economic downturns and have seen the result. Yes, Michigan and other states should have diversified. Yes, the United Auto Workers were greedy. Yes, the Big Three made sure that CAFE standards were never raised. But I also know of my parents and several cousins and uncles who put in long hours to make cars and put bread on the table. My parents helped put their son through college and for that, I am thankful. There are many people like my Mom and Dad, who have put in long hours who are in danger of losing their livlihoods and who wonder how long will their jobs be around.

It’s easy to make remarks about how we shouldn’t help the Big Three and a lot of them make perfect sense. But I also think that many of those making these assumptions forget that there are real people who will be affected by whatever happens. We forget that states like Michigan and Indiana and Ohio will be pushed to the limit in trying to help these displaced workers. Social services would become strained. Local economies might crumble.

I’m not saying that we should give the automakers blank checks to keep making a mess of themselves. Fire the executives. Renegiotiate the union contracts. Tell them they have to accept higher CAFE standards if they want money.

But I think in the end, we can’t simply allow a portion of the nation to go to hell because we think it feels good. The price for that bit of schadenfreude is far too great.


This entry was posted on Monday, November 17th, 2008 and is filed under General Politics, Kitchen Sink. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

15 Responses to “Who Weeps for Detroit? No One.”

  1. Jeremy from Oregon Says:

    It’s just amazing how our government now acts as a guarantor of risky business behavior. CEOs and corporate executives engaging in unsound business practices, poor management and just pure incompetence get to use their golden parachutes and leave with millions.

    How long ago was it that the automobile industry knew they were far behind the Japan and Asian automobile industry in R&D and business models? We knew this in the 70s and now these industries want the American people to “bail them out” for their sheer incompetence? The audacity is appalling.

  2. TerenceC Says:

    And don’t forget that Rick Waggoner (CEO of GM) doesn’t believe in Global Warming, and doesn’t believe that human beings have or could effect the climate. Now thats appalling. On a side note – Ford has atleast decided to make small, fuel efficient cars similar to what they sell all over Europe – they are re-tooling their factories here in the US as we speak. Ford may survive this….GM and Chrysler should be gutted and sold off for their manufacturing divisions (Locomotives, Engines and automobiles, Capitol, National Defense) in my opinion. This is the US Steel story all over again regarding GM.

  3. Jake Says:

    That was a very thoughtful article, and it enumerates many feelings that most people have. It’s such a complicated matter that perhaps there is no one correct answer, but my gut feeling is to bail out the workers, not the industry.

    Let the market and the auto industry level of competence (the latter being quite low these days) dictate the size of the New 3, then put taxpayer money toward the displaced workers, either by education opportunities or making it advantageous to foreign car companies to open more plants in the States and hire these workers.

    As they say, “you can put a bow on it, but it’s still crap,” and that’s the way I feel about American cars. I’m not sure they’re salvagable (we bailed out Chysler in the 80s and their cars still stunk afterwards [remember the K car?] and C was eventually forced to merge w/ Mercedes anyway) .

    It’s not good for the consumer to have the Big 3 bought up by Toyota, etc. because monopolies raise prices. But I’m not yet convinced that the Big 3 can be competetive in their present state regardless of how much money taxpayers throw at them.

    Jake

  4. Mike A. Says:

    Watch the DVD “Who Killed the Electric Car”. GM did, that’s who. They had the EV – a successful, rechargeable electric vehicle launched in California in the 1990′s. GM soon found out that the EV made little money for the dealers as it required little to no maintenance – no air filters, oil filters, fuel filters, oil, etc. They yanked the vehicles off the market, crushed them (yes they literally crushed fully functional cars) and sold the batter patent technology. The Prius is Toyota’s response to the threat the EV posed. Now look who’s laughing. I for one would LOVE TO SEE GM PAY FOR THEIR INCREDIBLY SHORT SIGHTED STRATEGY. I know it’s cruel to those who rely on them, but other industries have been taught cruel lessons before. Here is a good summary of the movie and some facts/rumors behind it: http://en.wikipedia.org/wiki/Who_Killed_the_Electric_Car

  5. ExiledIndependent Says:

    Break up the Big Three in a divestiture move similar to what happened with AT&T to create smaller, more nimble companies.

    Break up or restructure the unions. Pay and benefits have to go down at least 30% for most hourly workers, and this should be reflected in management and the executive suite as well.

    The government should invest 20 billion in developing a true alternative fuel and its related infrastructure; give this technology to detroit for almost nothing. Globally, give international concerns access to the infrastructure technology but protect the in-vehicle fuel and drive systems. Global incentive to purchase American vehicles.

    Give a $3000 tax credit to anyone who buys a new American vehicle. More if it leverages petroleum-free fuel technology.

    Move production facilities back to the United States.

    At the risk of a little Hawley-Smoot, consider tariffs on foreign vehicles (vehicles where the profit from the sale goes overseas).

    Bitter pills, and certainly no quick fix.

  6. kranky kritter Says:

    I don’t get the impression that most sensible folks want to see GM et al simply disappear from the landscape. Instead, what I perceive to be the most common viewpoint is this: whatever happens to the Big 3 needs to hasten whatever reckoning brings them or their progeny to a point of future sustainability.

    I agree with that. I don’t much care whether this is done as a congressionally engineered “bailout” or through a bankruptcy. (BTW, it’s not clear to me from what you are saying whether you regard GM lapsing into bankruptcy to be the same thing as “doing nothing’) Whatever gets done, I oppose it if it simply provides operating cash to prop up an enterprise whose costs are too high to allow it to compete effectively.

    Mike, I don’t think retribution is a very good rationale for policy. GM and other members of the big 3 may indeed have acted badly and foolishly. But this does not free our representatives in government from their responsibility to take whatever actions they think are in the best interests of Americans. If you are in parts, shipping, automotive repair, or involved with one of the thousands of car dealerships across the country, the current uncertainty is a substantial hardship, and collapse would be far worse over at least the near and intermediate term. The ripples would decimate the retail sector and most domestic blue collar jobs. Private construction would be decimated. And so on.

    Don’t we all need to at least seriously entertain the notion that such a big collapse could drag down economic circumstances far lower than we can withstand?

  7. mw Says:

    “I’m not saying that we should give the automakers blank checks to keep making a mess of themselves. Fire the executives. Renegiotiate the union contracts….” – DS

    This is exactly what will happen while GM continues to operate and restructures under the protection of Chapter 11 bankruptcy. That is the purpose of Chapter 11. This is exactly what will not happen if taxpayer money is used to prop up an uncompetitive cost structure and allow unresponsive management to continue to lose money for a few more months.

    It is not schadenfreude. It is not because everyone hates the big three. It is using the appropriate existing market mechanism to restructure failed companies. It is a way to not flush another $25-50 Billion that we don’t have down the toilet.

  8. Nick Benjamin Says:

    It won’t happen.

    GM has no cash on hand. Period. For every car they build they have to thousands in cash on hand. Literally. Their cost-cutting measures of the late 90s were quite simple. They fired the UAW folk who made components, closed many of their factories, and started buying from auto-parts companies that didn’t pay UAW wages. Without cash to pay the bills Delphi’s not gonna deliver parts. And without parts GM doesn’t make cars.

    Normally this wouldn’t be a problem in bankruptcy. Debtor-in-possession loans would cover the costs. But all the experts say that market ain’t functioning. Even if it was would you loan GM $25 Billion if the states of Michigan, Ohio, and Pennsylvania couldn’t convince the feds to do it?

    BTW, most of the problems people mention with American cars are overblown. Ford reliability beats Toyota. The Japanese have cool hybrids, but American conventional engines get better mileage than Japanese conventional engines. And there’s no waiting list.

    The problem the Big 3 had up until about June was their obsession with trucks. Trucks are higher-margin than cars, and lower CAFE standards apply. Ford killed the Taurus because of that obsession.

  9. Jim S Says:

    The only way for Chapter 11 bankruptcy to work is for those companies that specialize in loaning to businesses in the process of restructuring to extend credit. Right now they’re not in a position to do so because of the mess in financial markets. This takes Chapter 11 as we know it off the table for the Big 3 right now. An equivalent process must be devised quickly and that presents a problem. The only other option would be Chapter 11 with the government being the lender.

  10. kranky kritter Says:

    Doesn’t a place like Delphi have to take a risk based on what they think is going to happen? Can they really afford to just kiss off such a big customer?

    Jim, I think that as long as the credit markets stay gummed up, the probability that the government becomes the lender or guarantor who makes the market goes up and up. For example, if Delphi thinks they’ll never see payments for parts shipped, they have no choice but to go draconian. Then the plants shutter and down that rabbit hole we go.

    Maybe this has to extend into things like real estate and car loans too. At least until enough stability is seen to convince capital holders it’s worth taking the risk of extending credit. Not to mention convincing consumers they ought to buy a car or a house.

  11. mw Says:

    @Nick
    Funny you should mention Delphi. Delphi filed for bankruptcy in October of 2005. They are continuing to operate and manufacture quite well under the protection of Chapter 11, even turning a profit this quarter. That is the way it is supposed to work. Management and unions will often strongly oppose taking a bankruptcy action, even if it is clearly in the companies interest, for the simple reason that management loses control (and maybe their jobs) and unions lose contracts (and members) in a restructuring.

    Delphi will continue to sell to GM because GM is more than half of their revenue. GM debtors will want GM to continue operating under Chapter 11, because otherwise they will never get any of their money back. Hence GM will continue operating in Chapter 11. Just like Delphi.

    I do not know if the DIP loan issue is real or not. If it is, then I would support the government guaranteeing the DIP loans as a reasonable intervention. GM would not only survive, but likely thrive with the kind of radical restructuring, new management, and new cost structure that Chapter 11 can provide. But pour $25 Billion into this cost structure with this management? You might as well burn it.

  12. gex Says:

    This is all good and fine, but I don’t want a system that privatizes profits and constantly socialized the costs. If a company or industry achieves a size that means it “is too big to fail” that industry should be subjected to a bailout tax in flush times. If they can’t manage their way out of a paper bag, we’ll have to do it for them. But on their dime, not ours.

  13. Nick Benjamin Says:

    Delphi is going to lose 50% of its revenue no matter what happens. If they stop making parts, and fire half their employees, they might survive. If they keep making parts, without getting paid by GM…

    I’d be happy with loan guarantees myself. I’m sure they’d be reported as actual spending — the $25 Billion for them to re-tool is not actual spending, it’s loan guarantees.

  14. Jim S Says:

    Yes, MW, the DIP loan issue is a real one. The normal sources of these loans just aren’t going to be able to deal with it. So while a Chapter 11 style arrangement is possible the source of the loans will still have to be the government. Even if the source of the money isn’t the normal one it should otherwise be like Chapter 11, complete with Special Masters who can fire executives, boards and in the case of the Big 3 I would sincerely hope every fossil in their marketing departments.

  15. Jake Says:

    http://www.washingtonpost.com/wp-dyn/content/article/2008/11/19/AR2008111903669.html?hpid=topnews

    Whatever sympathy I have for Detroit is waning fast. These guys, as Obama would, don’t get it. If they want my money, then their resignations, all three, are part of the deal.

    American society is forgiving enough to work with arrogance or morons, but not arrogant morons.

    Jake

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