Defenestrating Thoughts from the Bivouac

Bailing out the Big 3 automakers is a very bad idea. The reality of the situation is that in aggregate not a single job will be saved by propping by these companies. If you throw money at the problem, you’ll just waste money.

And that’s money that could be used for much better purposes.

Inefficient, poorly run and uncompetitive companies need to fail

Let’s start with the notion that “businesses going under is bad”. That’s wrong. Businesses going under is part of the natural economic cycle that leads to growth and progress. The business that goes under is replaced by a new and better business that buys up the old company’s assets, hires its employees and produces a better product.

Bad companies are replaced by good companies; it’s pretty simple.

For example, way back in the day people used to get ice blocks delivered to their homes. Then the refrigerator was invented and the ice delivery companies went out of business. Sure this was bad for the ice delivery man, but he was now able to get a job as a refrigerator deliveryman, salesman, or assembler.

We see the same thing everywhere. We went from 8-tracks to cassette tapes to CDs and now mp3s. The guy sells Walkmans doesn’t have that job anymore, but now he probably sells iPods.

In summary it’s natural and desirable for bad companies to go under. They will be replaced by something better.

The Big Three are Inefficient, Poorly Run and Uncompetitive Companies

Now, no matter what the government tries to do, the Big 3 will fail. There are a lot of reasons why.

First of all, their products stink. Quality is poor; most American cars need to be replaced in 4 to 5 years. On the other hand, Hondas and Toyotas easily last 15 years. A great example is how my 15 year old Honda Accord sold for more than most comparable 5 year old Big 3 models.

Second, their business model is broken. Normal cars are sold at cost, while all the profits come from pickups and SUVs. By building a business model around low gas prices and discretionary spending, the companies set themselves up for failure.

Third, the Big 3 labor contracts are untenable. Their employees are paid significantly more than the market:

52.5% more than the market…54% more than management and professional workers, 132% more than the average manufacturing wage, and 157% more than the average compensation of all American workers.

These companies pay on average two and half times more than the average American worker!

And they pay employees not to work. As part of a “Jobs Bank”, the Big 3 pay workers to not come to work.

I’m totally working for the wrong company. :-P

Between labor costs and pension obligations, the Big 3 have a $1000 to $1500 cost disadvantage per vehicle. On an inferior vehicle.

Finally, the primary thing the Big 3 are good at is lobbying. For decades, they bribed lobbied Washington to keep gas taxes and mileage standards low. This helped them sell gas guzzlers. So basically, they took the profits and used them to prevent laws that would have forced them to invest in technology which would have helped them stay in business!

Good companies take profits and invest in new technology. Bad companies use it to bribe politicians. It’s misallocation of resources at its finest.

And now that they are about to go under, they come asking for taxpayer money to build technology that they always sneered at.

There are more efficient, better run car makers in the United States

My Honda Accord was made in Tennessee. So was my last car. And my mom’s, dad’s, and sister’s cars were too. And our old Toyota’s were made here too. So were lots of the parts:

Honda, Toyota and the rest employ about 113,000 American auto workers who make nearly four million cars a year in states like Alabama and Tennessee (source).

This clearly shows us that you can have a profitable car company in the United States. The the Big 3 are failing because of their own faults.

Bankruptcy Is The Best Option

Bankruptcy is not the end of world. The airline industry didn’t stop flying when it went bankrupt; likewise car companies won’t stop making cars.

Chapter 11 will let them eliminate debt, bring compensation in line, and reorganize to be more competitive. Chapter 11 was designed specifically for this situation:

• Under Chapter 11, these companies have a chance to adjust obligations and rebuild. Employees will be able to keep their jobs, but at market rates.
• Shareholders will be wiped out. But shareholders have already lost 95% of their investment. And stocks are not guaranteed, every investor knows that he could lose it all. It is an accepted risk. Prudent investors stayed away from these companies, so they aren’t harmed.
• Creditors to the Big 3 will likely be wiped out too, but this risk was built into the bond price already. And again, prudent lenders stayed away from these companies, so they aren’t harmed.

Recently a GM spokesman said the bailout is necessary because “Chapter 11 is not an option”. The arrogance is amazing. The company demands taxpayer money instead of using prudent mechanisms to return to profitability.

The assets don’t disappear

If the Big 3 shutdown, their valuable assets don’t disappear. The factories will be bought by other companies and their employees will be hired by other companies.

We need to let the incompetent go under and have the smart and prudent re-build.

Some people will say, “but there isn’t demand, so all the workers won’t be re-hired.” Well, if there isn’t demand, all those displaced workers would have lost their jobs anyway.

We already have a safety net for the workers

One reason touted for the bailout is to “protect the workers”. Well, that’s why they have been paying unemployment insurance and social security. We have mechanisms in place to help these people already.

And if push came to shove, I’d much rather we give the unemployed money directly, rather than give the money to the bureaucracy to pay them to build cars that no one wants. Aside from being more logical, the former costs less too.

What about the ripple affect?

“[I]f G.M. goes under, so too will many of its suppliers, who do business not just with G.M. but with other car companies as well. That, in turn, will make it hard for those companies to keep the assembly lines going. So the ripple effects of a failure of G.M. or Ford are bigger than we might imagine.”

You mean those companies that produce products no one wants will go under? So we should pay them to produce stuff no one wants?

That doesn’t make sense. Those factories can start selling things that people want and if they have to cut jobs, we have safety nets in place.

Even if just GM collapsed, the failure could bring down the other two companies — and even the U.S. operations of foreign automakers — as parts suppliers run out of money and shut down. (Source)

Not really. These suppliers will need to scale down. This may raise prices a bit or even need to go into Chapter 11 to reorganize, but they won’t shut down.

Here’s some more idiocy: Sen. Sherrod Brown (D-OH) said,

“Letting the industry collapse would also be a national security risk, eliminating companies that were essential in two world wars. If we ever need that national security production for serious defense, for any kind of significant war, it’s gone.”

Ah… the when you can’t think of anything else excuse: national security. This is wrong on so many levels, but I’ll pick the easiest. Detroit’s factories and workers don’t disappear. If we need to build tanks, we can do it.

Also, I’m sure the Honda and Toyota plants in Tennessee and Alabama could be re-purposed to build tanks. I bet they would be better tanks too.

American Taxpayers paying to have jobs sent overseas?

Yup, while the Big 3 are trying to pick your pocket. They are moving jobs overseas: GM Opens $300 Million Russian Plant to Boost Sales.

General Motors Corp., the world’s biggest carmaker, opened a $300 million factory in Russia as it looks to compensate for slumping sales in western Europe and North America.

The plant in the Shushary district on the outskirts of St. Petersburg will produce 70,000 Chevrolet Captiva sport-utility vehicles and the Opel Astra, with plans to manufacture the Chevrolet Cruze compact car next year.

“Our strategy is to become the leading manufacturer in Russia,” Carl-Peter Forster, GM’s chief for Europe, told reporters during the plant opening today. “For us Russia is not an emerging market. Russia emerged long ago.”

Ford’s most advanced plant isn’t in Detroit. The UAW wouldn’t let them build it there. Instead they built it in Brazil.

“Help me Chapter 11, you’re my only hope!”

The bailout plan can be summarized as “Let’s take our least efficient, mostly poorly run and least competitive industries and prop them up.”

While a bailout could help avoid bankruptcy in the short term, it’s just a stop-gap. It won’t address the fundamental fault that these companies are inefficient, poorly run and uncompetitive companies.

Their fundamental problem is that they make cars people don’t want and their labor contracts are too inflexible to allow the company to be competitive.

So the only hope is for Chapter 11. It will let them restructure their debt, labor contracts, and other obligations. And it will give them a fair chance to start building products people want. And if they do, they can return to profitability. If they don’t, they deserve to go under.

Finally, it’s very important to consider the opportunity cost. For every job you “save” at GM, you destroys one somewhere else. That bailout money doesn’t come out of thin air; you need to tax (or inflate) it out of productive sectors in order to help an unproductive sector.