Auto Bail Out

The press for a federal bailout of the auto industry increased over the weekend.

House Speaker Nancy Pelosi, D-Calif., and Senate Majority Leader Harry Reid, D-Nev., said in a letter to Treasury Secretary Henry Paulson that the Bush administration should consider expanding the $700 billion financial rescue to include car companies.

"A healthy automobile manufacturing sector is essential to the restoration of financial market stability," they wrote.

Over the weekend I was presented with the following argument on why it is a good idea to bail out the failing American Auto Industry...

Consider the following:

Let's say a 2 pack a day, overweight man comes into the ER with a heart attack - the doctors and nurses will do everything they can to bring that guy back to life. However, afterwards, the medical team tell him that he has to change his lifestyle to be healthier and to prevent having to come back into the ER, or worse, just drop dead. Because we're not going to do this again.

I thought that over, and considered it the best argument for saving the Big Three American dinosaur auto makers. Of course, the consequences of allowing the market forces to knock Ford, GM and Chrysler completely out of business would result in an immediate 3 million souls on Unemployment and would knock this little 'down turn' in to full blown Depression 2.0. Reagan agreed to "bail out" Chrysler in the 80's with a loan from the Federal Government. Lee Iacocca reasoned that the number of people tied to the auto industry was enormous. Perhaps it was the first 'too big to fail' argument. In fact, it wasn't even a loan - but Congress lent Chrysler the money and only guaranteed the loans.

But who, exactly, needs the bail out now?

The Detroit bailout is exactly what it looks like: a huge subsidy to several remarkably inefficient but politically well-protected firms. As a matter of economic theory, there is no reason the U.S. needs to make cars at all. As it happens, the U.S has an incredibly skilled labor force good at making complex things like cars, and it makes a hell of a lot of them very well and very efficiently. It’s just that the companies mostly responsible for great US autos are not headquartered in Detroit. Look at the success of Toyota and Honda in 'right to work states'.

There are plenty of factors for the Big Three's failure - Bloated hulking infrastructure, lack of innovation in gas millage and green tech. There's a lack of a good sedan: SUV and trucks were the basis of the black in the balance sheet - and when those sales dropped due to gasoline spikes, there was nothing to fall back on. Executive compensation can be thrown in there. And there's more. But why, specifically is GM asking for 10 Billion to buy Chrysler?

General Motors and Cerberus Capital Management have asked the U.S. government for roughly $10 billion in an unprecedented rescue package to support a merger between GM and Chrysler, two sources with direct knowledge of the talks said on Monday.

The government funding would include roughly $3 billion in exchange for preferred stock in the merged automaker.

The U.S. Treasury Department is considering a request for direct aid to facilitate the merger.

An injection of $3 billion in equity to support a GM acquisition of Chrysler would be roughly equivalent to the current, depressed value of the top U.S. automaker.

The taxpayer is being asked to help with a buy-out, not a bail-out?

But a larger issue that no one has mentioned - is that the bail out isn't for the corporations - it's for the labor that works there. Why else would the Democratic President-elect and the Democratic Congress be falling all over each other to protect the Big Three in Detroit? It's not (just) a case of corporate welfare, it's a grab for votes in the rust belt.

I ask, isn't this just a subsidy to the UAW?