Opher BanarieAuto Bailout Debate
November 17th 2008 19:54
Charles Krauthammer's current column discusses the pros and cons of an auto industry bailout. In my earlier post on this subject, I wondered if bankruptcy wouldn't be better for everyone involved.
Since then, Krauthammer's points and comments by others have really confused the issue for me. When flying on an airline that is in bankruptcy, the passenger really only cares about the fare paid and the convenience of the schedule. There is no long-term concern. That's not true with auto manufacturers, since the owner needs some assurance that replacement parts will be available, that warranty service will be honored, that recalls and safety issues will be reported and repaired in a timely manner. Would anyone buy cars from a manufacturer in bankruptcy? And if not, how does the company "recover" enough to resume normal operations?
On the other hand, the debate about a bailout is wrapped in the conditions to be required for taxpayer money to flow to the auto industry. Some conditions may be reasonable, such as limits on management bonuses. Others might only make the situation impossible to improve, such as requiring that the labor force be maintained at a certain level, or that cars of one type or another be manufactured (or no longer manufactured).
How many sub-compacts like the Smart car, or hybrids, can be sold in the US? If Congress insists that Detroit crank them out, will the industry recover or simply inventory finished (unsold) cars?
Krauthmammer states that
I would answer all of the above as I had before: Bankruptcy is better than a bailout. Would there be pain involved? Yes, but there would be pain both ways. The company management and shareholders must feel the pain before the taxpayers do. The only thing we can be certain of is that companies will be run more inefficiently by government edict than by any management team from private industry. Bankruptcy is the only way for GM and Ford to recover from the disasterous labor contracts of the past, and to move forward with responsible (and responsive) management.
Any other action by Washington will only result in every other industry lining up their lobbyists and asking for a helping hand. That will result in weakening even more companies with the obligation to satisfy the central-planners rather than their customers and shareholders.
Since then, Krauthammer's points and comments by others have really confused the issue for me. When flying on an airline that is in bankruptcy, the passenger really only cares about the fare paid and the convenience of the schedule. There is no long-term concern. That's not true with auto manufacturers, since the owner needs some assurance that replacement parts will be available, that warranty service will be honored, that recalls and safety issues will be reported and repaired in a timely manner. Would anyone buy cars from a manufacturer in bankruptcy? And if not, how does the company "recover" enough to resume normal operations?
On the other hand, the debate about a bailout is wrapped in the conditions to be required for taxpayer money to flow to the auto industry. Some conditions may be reasonable, such as limits on management bonuses. Others might only make the situation impossible to improve, such as requiring that the labor force be maintained at a certain level, or that cars of one type or another be manufactured (or no longer manufactured).
How many sub-compacts like the Smart car, or hybrids, can be sold in the US? If Congress insists that Detroit crank them out, will the industry recover or simply inventory finished (unsold) cars?
Krauthmammer states that
The criteria will inevitably be arbitrary and political. The money will flow preferentially to industries with lines to Capitol Hill and the White House. To the companies heavily concentrated in the districts of committee chairmen. To clout.
But this is how Washington has always worked. Will it be "worse" this time? And how to define (or decide!) on what is worse? Does it make any sense at all to give $25 BILLION to two companies that have market capitalization values around $7 BILLION? In other words, if it was your money, would you spend $25 for a book you could buy for $7?I would answer all of the above as I had before: Bankruptcy is better than a bailout. Would there be pain involved? Yes, but there would be pain both ways. The company management and shareholders must feel the pain before the taxpayers do. The only thing we can be certain of is that companies will be run more inefficiently by government edict than by any management team from private industry. Bankruptcy is the only way for GM and Ford to recover from the disasterous labor contracts of the past, and to move forward with responsible (and responsive) management.
Any other action by Washington will only result in every other industry lining up their lobbyists and asking for a helping hand. That will result in weakening even more companies with the obligation to satisfy the central-planners rather than their customers and shareholders.
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