…because I’m an economist and a mom–that’s why!

Are We Too Hard on the Auto Industry?

November 26th, 2008 . by economistmom

Last weekend’s Saturday Night Live opened with what I thought was a pretty funny spoof of the House Financial Services hearing with the CEOs of Detroit’s “Big Three.”  (Here is the only video link I’ve found, posted on Crooks and Liars.)  I have to admit I felt a little guilty for laughing at it though, because it struck me as a little unfairly harsh–even understanding that it’s comedy and a video caricature, after all.

Then one of my personal connections to the Detroit auto industry sent me this column by the Detroit Free Press’ Mitch Albom (most famous for his brilliant books, Tuesdays with Morrie and The Five People You Meet in Heaven).  Mitch provides some insight into the “Detroit perspective” on the automakers’ request for federal aid, with a bit of wit and anger.  An excerpt:

And the rest of you lawmakers. The ones who insist the auto companies show you a plan before you help them. You’ve already handed over $150 billion of our tax money to AIG. How come you never demanded a plan from it? How come when AIG blew through its first $85 billion, you quickly gave it more? The car companies may be losing money, but they can explain it: They’re paying workers too much and selling cars for too little.

AIG lost hundred of billions in credit default swaps — which no one can explain and which make nothing, produce nothing, employ no one and are essentially bets on failure.

And you don’t demand a paragraph from it?

Well, it seems to me that at least some members of Congress do understand the Detroit perspective on this, including Barney Frank, if you go to this video of the (real) hearing (courtesy YouTube).

And many of us inside-the-Beltway types also sympathize with Mitch’s closing point:

Besides, let’s be honest. When it comes to blowing budgets, being grossly inefficient and wallowing in debt, who’s better than Congress?

So who are you to lecture anyone on how to run a business?

Ask fair questions. Demand accountability. But knock it off with the holier than thou crap, OK? You got us into this mess with greed, a bad Fed policy and too little regulation. Don’t kick our tires to make yourselves look better.

2 Responses to “Are We Too Hard on the Auto Industry?”

  1. comment number 1 by: Troy

    I see two problems with the comparison. First, while the AIG bailout appears to be a disastrous black hole, that doesn’t really justify giving money to the auto industry by reasoning “you threw away money over there, why not us?”

    Second, as AIG again shows, you don’t want to keep throwing good money after bad. The government didn’t ask for a plan for AIG, and AIG keeps coming back for more. Continuing that cycle for an ever increasing array of companies doesn’t seem to be the best strategy. At some point, you’d think the government would learn a lesson (although this might be the first time in 200+ years of that happening). It may be bad for the auto industry that they weren’t first in line before the lesson was learned, but that doesn’t mean we shouldn’t learn the lesson eventually.

    And, an additional point about all the jobs purportedly being lost, especially the supplier jobs. If there is a market for X number of cars, does it matter if it is Ford, or GM that supplies them, or Toyota? They all have a combination of US and foreign components and labor costs. Whether those parts suppliers provide the parts to Toyota or Ford, they’ll be in business if there really is a market for that many cars. So, the “add-on” losses to the industry would be minimal. If there isn’t a market for X number of cars, then we really are just throwing money away “saving” the US automakers temporarily. In either case, there is no impetus for bailing them out.

    The only thing the bailout would do would be to very temporarily ease troubles in Detroit, at the expense of marginal increases in many other areas of the country as other production facilities picked up the slack. The other thing would be be to delay the much needed adjustment in the Detroit economy from being such a monoculture. Both would just inevitably delay the recovery to salve some national pride.

  2. comment number 2 by: Bill C

    Some restructuring is probably in order - possibly through chapter 11, though I think it is a legitimate question about whether people will buy cars from companies in “bankruptcy” (I wonder how much all the bad news is hurting sales right now…) - but a liquidation of GM and/or Chrysler would be a serious blow to aggregate demand in the midst of a recession.

    Folks in Washington should realize (but probably don’t) that roots of Detroit’s problems are (at least partly) in policies:
    - Lack of an energy policy has allowed gas prices to fall to far, and swing too much. The SUV boom isn’t the result of myopia in Detroit, they were just responding to consumer demand (and the Japanese and Europeans were making bigger vehicles for the US market too)
    - Lack of any plan to control health care costs; much of the Big 3’s financial burden comes from past health care commitments. In essence, they have stepped into the breach left by a national policy failure, putting them at a disadvantage relative to Canada, etc (one reason Ontario now produces more vehicles than Michigan)
    - Beggar-thy-neighbor labor and tax policies among the states. Lots of people are slamming the UAW, without appreciating that the threat of unionization raises wages, at least a little, for non-union workers. Also, Canadian and German auto workers are unionized. But within the US states can compete by offering ‘right to work’ and tax breaks.

    Warren Brown, the automotive writer for the Post, does a good job debunking some of the stereotypes about the US auto industry. I hope people in Washington are reading his stuff.