Let's not allow Congress and members of the bailout parade panic us into allowing them to do things, as was done in the 1930s, that would convert a mild economic downturn into a true calamity. Right now the Big Three auto companies, and their unions, are asking Congress for a $25 billion bailout to avoid bankruptcy. Let's think about that a bit.
What happens when a company goes bankrupt? One thing that does not happen is their productive assets go poof and disappear into thin air. In other words, if GM goes bankrupt, the assembly lines, robots, buildings and other tools don't evaporate. What bankruptcy means is the title to those assets change. People who think they can manage those assets better purchase them.
Chapter 11 of the U.S. Bankruptcy Code, where the control of its business operations are subject to the oversight and jurisdiction of the court, gives companies a chance to reorganize. The court can permit complete or partial relief from the company's debts and its labor union contracts.
A large part of the problem is the Big Three's cozy relationship with the United Auto Workers union (UAW). GM has a $73 hourly wage cost including benefits and overtime. Toyota has five major assembly plants in the U.S. Its hourly wage cost plus benefits is $48. It doesn't take rocket science to figure out which company will be at a competitive disadvantage. Then there's the "jobs bank" feature of the UAW contract where workers who are laid off workers get 95 percent of their base pay and all their benefits. Right now there's a two-year limit but in the past workers could stay in the "jobs bank" forever unless they turned down two job offers within 50 miles of their factory. At one time job bank membership exceeded 7,000 "workers." GM, Ford and Chrysler face other problems that range from poor corporate management and marketing, not to mention costly government regulations.
Two vital marketplace signals are the profits that come with success and the losses that come with failure.
When these two signals are not allowed to freely function, markets operate less efficiently. To be successful a business must take in enough revenue not only to cover wages, rents and interest but profits as well. In order to accomplish that feat executives must not only satisfy customers but they must do it in a manner that efficiently utilizes all of their resources. If they fail to cover costs, it means that resources are not being used efficiently and/or consumers don't value the good being produced relative to some other alternative. When a firm routinely fails to turn a profit, there are bankruptcy pressures. The firm's resources, workers, building and capital become available to someone else who might put them to better use. When government steps in with a bailout, it enables executives to continue mismanaging resources.
How much congressional involvement do we want with the Big Three auto companies? I'd say none. Congressmen and federal bureaucrats, including those at the Federal Reserve Board, don't know anymore about the automobile business than they know about the banking and financial businesses that they've turned into a mess. Just look at the idiotic focus of congressmen when the three auto company chief executives appeared before them. They questioned whether the executives should have driven to Congress rather than flown in on corporate jets. They focused on executive pay, which is a tiny fraction of costs compared to $73 hourly compensation to 250,000 autoworkers. The belief that Congress poses the major threat to our liberty and well-being is why the founders gave them limited enumerated powers. To our detriment, today's Americans have given them unlimited powers.
Walter E. Williams is a professor of economics at George Mason University. To find out more about Walter E. Williams and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate Web page at www.creators.com.
COPYRIGHT 2008 CREATORS SYNDICATE, INC.
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6 Comments | Post Comment
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Mr. Williams:
Excellent summary, cutting through the hysteria. You are correct that we already have a proper "bailout" mechansim in bankruptcy.
One important caveat -- a car buyer needs protection and service after the sale, or else they won't buy.
To make sure a carmaker doesn't completely stop selling , any such bankruptcy would need additional arrangements to guarantee future warranties and parts availability. Without that, bankruptcy WOULD be death.
Comment: #1
Posted by: Robert Arvanitis
Wed Dec 10, 2008 4:33 AM
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For several months I have been advocating a massive DEBT restructuring that would include the entire world. I simplified how to do this in three steps. First just make a list to include the debtor, debt-holder and a bank to administer it. The second step would be to just create enough FIAT money to pay all the debt and third authorizing the Central Banks of the entire world to make an accounting adjustment crediting the debtor and paying the debt-holder.
Review it here: http://allencharlesreport.blogspot.com/2008/11/worldwide-debt-is-problem_28.html
If done worldwide the currency values among the various currencies would adjust too different
values for inflation, I suspect America has the largest total debt of any country in the world so the dollar might weaken in value the most. If the US Dollar does devalue then we would be much more able to compete with the rest of the world.
Our economy has had most opportunities to actual produce (manufacture) something removed from it because we just cannot compete with the low wages paid elsewhere. Ths debt REBOOT would do two things, first it would take the pressure off our economy (the rest of the world as well) to allow the economy to restart because of all the NEW Capital coming back into the system. Because our debt (the USA) will cause a much larger adjustment in the US dollar's value, the Reboot would allow time for American production of items we use every day to return and our dependence on other countries could be reduced. It would happen because we could not afford the more costly imported products and not because of tariffs which the trade agreements will not allow us to do.
To restate what I am REALLY ADVOCATING I am advocating the Federal Reserve be told to create NEW FIAT MONEY in an amount equal to ALL debt now held in America and using it to zero out ALL the debt. If this occurred, the US dollar would be revalued downward closer to the real value of our labor etc. compared with the rest of the world. If this was done all the SO-CALLED BAILOUTS going on would be unnecessary because no debt would exist.
Allen Charles
http://allencharlesreport.blogspot.com/
Comment: #2
Posted by: Allen Charles
Wed Dec 10, 2008 9:46 AM
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I am really getting tried of comparing the American Auto Industry with the Imports. If you want to drive an import, maybe you should fly their flag over that vehicle too cause that is who you are supporting. And if the Big Three files for Chapter 11, I bet all their employees and retires will file too, what a ripple effect will that be, the courts will be busy.
Comment: #3
Posted by: David Wallis
Wed Dec 10, 2008 8:05 PM
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Re: Robert Arvanitis
I agree with your comments. Senators: CORKER, MCCONNELL, SHELBY, etc. - all have a vested interest in their anti-union, pro-foreign automaker mantra. Their states gave large tax breaks to Toyota, Honda, etc. to build plants in their states. As an independent voter I cannot believe how much damage these obstructionist senators are doing to the UAW and American manufacturing. Yes, there must be changes on wage and benefit agreements and executive salaries. However, President Bush is to be commended for not siding with Republicans who put their own interests above those of our nation.
Comment: #4
Posted by: neotrebor
Sat Dec 13, 2008 9:08 AM
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I shun products that proclaim "union made". Union workers are antagonistic toward the companies that employ them. Why would I want to pay for a product where workers are more interested in their benefits than the health and future of their employer?
As for flying a foreign flag over my VW, let me remind the union workers that under the American flag, I have the right to buy a foreign car or anything else offered in this country. Apearantly, there was a senate seat for sale in Illinois.
Comment: #5
Posted by: madmax
Sat Dec 13, 2008 11:05 PM
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Dear Mr. Williams. I have enjoyed your column for years and usually agree with you. However.... Your column of 12-15-08 contains a common misconception. You state that the average hourly wage plus benefits for the (not so) big three equals $73 per hour while the Toyota Co. equals $48. This is misleading. Nearly every analysis that I have seen gives approximately this same figure. The problem is that the average for the Big Three includes the cost of the pensions and benefits for the retirees. Obviously Toyota and company do not have the number of retirees that the big three do because they were still planning the Pearl Harbor attack while G.M. was already 35 years old. The hourly wage of the assembly workers is about the same at $29 - $30 per hour. If you haven't worked on an assembly line, please do not assume that this is too much. I could not agree more that the big three need to restructure. They have made some stupid mistakes and seldom seem to learn from them. In their defense, I must point out that we have built fuel efficient cars for years but have had great difficulty in selling them to the American public. Our fuel is just too inexpensive to change the public's buying habits over the long term. Then, when gas prices spike, the public and the media vilify the car companies for building the vehicles that would sell. Usually when prices come back down, people go back to buying larger vehicles. General Motors alone produces more cars that get 30 miles per gallon than Honda and Toyota together. Perhaps government intervention would be a good thing to dictate what people will have available. Isn't that what they did in Russia? I also think that top executives should make far less money. By now, you know that I wasn't an exec.
Certainly change must come. Probably it needs to be forced on the companies and the public. It makes no sense to kill our manufacturing capacity to show displeasure with the Big Three. Detroit was the "Arsenal of Democracy" during W.W.II. A little loyalty would be nice. It has been pointed out that following 9/11/01, the big three contributed $12 million relief dollars - BMW, Porsche and the Japanese companies gaves not one cent. A man wrote in to the Oakland Press pointing out that a Cadillac sells in the U.S. for over $40,000 but is over $100,000 in Japan because of the import duties imposed by Japan. Our generous government sets our import duties so low that often a car from Japan is less expensive here than in it's home country. I don't have a problem with bailing out the financial sector if better minds than mine think it would be a disaster to let them fail. Failing to support the ability to produce goods in this country and throwing millions of people out of work would be a far greater disaster. Thank you for listening.
Comment: #6
Posted by: James Nurse
Mon Dec 15, 2008 11:58 AM
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