December 17, 2008
Economics Department
Solving the Auto Industry Crisis
I've been wanting to write a bunch of posts about the crisis in the auto industry and why I think a bailout is a bad idea, but I haven't had time, so here are a few quick observations.
Automakers are not like power companies.
One of the arguments for bailing out the financial sector was that banks are like the electric power companies: Everything else depends on them. Letting the banks fail would be like letting the electric power companies fail, plunging our nation into darkness, our cities into chaos, and our economy into a death-spin.
Unlike most power companies, the automakers are not monopolies. Altogether they supply about half of the domestic market, with the rest coming from American subsidiaries of foreign automakers and imports. If they go out of business, those other companies will step into the market.
Also unlike the power companes (or the financial sector) the millions of vehicles we have on the road will keep working even if their manufacturers go out of business.
Bankruptcy does not mean Out of Business.
The "Big 3" automakers might be out of money, but they still have all their produtive assets---assembly plants, distribution networks, car designs, valuable brand names, spare parts for cars already on the road, a pool of suppliers, access to a skilled labor pool, and so on---and those assets could be put back in use by whoever gets them from the bankruptcy proceedings.
In fact, since U.S. bankruptcy law recognizes that functioning companies are more valuable to creditors than the mere sum of their assets, a bankrupt automaker would almost certainly emerge from bankruptcy intact, with reduced debts, new owners, and probably new management.
Demand will continue to require a supply.
Even if all the "Big 3" automakers went completely out of business, much of the demand for their products will remain. For example, with millions of cars already on the road, there will be a demand for spare parts for years to come. Someone will snap up that business and keep it going.
Also, people will still want cars, and the remaining automakers will need a way to ramp-up production fast enough to meet demand. To do this, they will almost certainly have to use the resources freed by the bankrupt automakers---factories, trained workers, existing parts suppliers.
In fact, since not even the "Big 3" are total failures, they will probably buy up entire car lines. For years we'll be seeing new models of Toyotas and Hondas that look just like some of the cars made by by the late Ford, Chrysler, and GM.
We don't have to help the auto industry to help auto workers.
If we want to do something about the "human cost"---workers losing their jobs, retirees losing their pensions---then the best approach is probably to make keyhole interventions. If we're worried some people will suffer, then we should help those people.
Pump funding into the Pension Benefit Guaranty Corporation. Provide additional unemployment payments to auto workers who lost their job, help them find a better place to work. We don't need to bail out the entire industry to help the people who work in that industry.
We can experiment.
If we're still worried about the dire consequences of failure of the auto industry, then let's not make the decision all at once. Before we give the auto industry billions of dollars to prop it up for a few more months, let's try an experiment: Let's let one of the "Big 3" automakers go bankrupt.
If I'm wrong, and it turns out to be real bad, we can still bail out the other companies. But if I'm right, the bankruptcy of one of the automakers will either have little effect, or else it will give the remaining companies a boost in profits. Maybe the failure of the worst-performing automaker would solve the industry's problems.
Don't let this happen.
This has been making the rounds, and it sums up my feelings about the bailout pretty well:
Source: The BEAST
2 Comments
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1. Stating that additional help should be extended to the unemployed is easier said than done. When all other auto makers are pruning their workforce, getting jobs for retrenched auto workers mapping with their skills is going to be an uphill task.
2. Bankruptcy of one firm will have a spiraling efect on others and whole auto industry will be caught in a vicious cycle maing it difficult to come out of it in near future.
1. What's the alternative? The way the Big Three are building cars now doesn't work. Those workers are going to have to be retrained and repurposed one way or the other. We can give the Big Three money which we hope they'll use to do that, or we can do it ourselves and make sure the money is target to the workers and not some other nonsense.
2. I don't understand. Why would other automakers be drawn into bankruptcy when their competition goes under?