THIS WEEK, Congress debated whether or not to bail out the American auto industry, specifically the Big Three companies of General Motors, Ford Motors and Chrysler. Of these three, only GM is in danger of immediate bankruptcy without federal intervention. Once again, the American people may be asked to pay for corporate mistakes. Since the original federal bailout of Wall Street has done little to improve the economy and is only barely serving to keep things from getting worse, it would be reckless for the federal government to take on more corporate debt at the expense of the taxpayers.
One source of trouble for the Big Three is that in recent years, most of their auto sales have come from SUVs and trucks. However, these gas-guzzlers were not destined to be on top forever. It would seem good business sense to anticipate the direction the market was headed and shift production to meet demand. GM, Ford and Chrysler lagged behind in developing hybrid vehicles because they had little capital to invest after paying the union workers artificially high wages. Toyota and other foreign companies not beholden to unions were able to develop hybrid vehicles, just in time for the spike in gas prices this summer. Demand for trucks and SUVs has plummeted, and U.S. automakers’ sales along with it.
At best, bailing out the Big Three would be a stop-gap to keep them afloat a few more years. Supporters of the bailout say this is all they need, since in 2010, a deal struck with the United Auto Workers union shifts retirees’ health-care costs from the corporations to union-controlled trust funds, along with other cost-cutting measures. A large part of why the Big Three are no longer competitive is pressure from the unions for high wages, expansive health care and restrictions on layoffs. If a company wants to lay off union workers, it has to buy them out. In the past four years, GM has laid off 43,000 union workers in an effort to reduce costs.
If GM were forced to file Chapter 11 bankruptcy, in which the company sheds contracts that it cannot afford while still continuing to operate, it would give the company a chance to get out of contracts with unions and pay workers a lower, more competitive wage. While consumers may be hesitant to purchase vehicles from a bankrupt manufacturer, GM would have the opportunity to become more efficient and competitive to salvage the company. It is reasonable to expect that a company take on the responsibility for its own poor management and inability to say no to unions.
Proponents of the auto industry bailout are saying that between factories, dealerships and suppliers, 1.6 million American jobs are tied to the Big Three. However, all of these jobs would be lost only if all three companies declared Chapter 7 bankruptcy, in which the company shuts down and sells off assets to cover debt. It is extremely unlikely that this will happen, and if it did, it would not happen all at once. Ford and Chrysler are in much better shape than GM and will likely make it through 2009 without bankruptcy. By 2010, a combination of planned plant closings and expected increases in auto sales will make the production of these companies match demand. The only company that desperately needs a bailout is GM, and while it is the largest of the three, federal assistance is still unwarranted.
All auto makers have been hit by the economic downturn, including giant Toyota Motors. The difference is that U.S. automakers have had three bad years prior to this one, and Toyota and other foreign automakers have not. Despite decreasing truck and SUV sales, U.S. automakers failed to adapt to the market. If the U.S. still wants to maintain that it is a capitalist economy, it needs to allow the market to cleanse itself of unprofitable companies.
If the U.S. would like to shift over to a more socialist economy, by all means, bail out American automakers. Despite recent events, I do not think Americans are ready to give up on capitalism just yet. Bailing out the Big Three would be a drastic step that may lead to federal ownership of these companies. This would eventually make the industry inefficient and uncompetitive, as with all government-owned industry. Additionally, this would be discriminatory against foreign automakers that have remained competitive and also employ American workers. Toyota, Honda and others pay millions of dollars of taxes each year to the United States in order to maintain their American plants. Bailing out the U.S. automakers would ignore the contributions these foreign automakers make to the American economy.
Bailing out the Big Three would set a terrible precedent of federal intervention when companies are floundering. The Wall Street bailout has done little besides stop the downward spiral of the markets, and an auto industry bailout could not be expected to do much more. Declaring bankruptcy will allow the Big Three to pay lower wages and shed executives, freeing up capital to reinvest in the company. For the United States to maintain its status as a capitalist country, it needs to allow companies, even major ones such as GM, to go under when they fail to be competitive in the marketplace.
Annette Robertson is a Cavalier Daily associate editor. She can be reached at a.robertson@cavalierdaily.com.
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