The U.S. Government Should Allow the Big Three Automakers to Go Bankrupt

1(a). I cited legacy costs as the reason why a bailout would not rescue the Big 3. Having new designs might otherwise help the companies improve their profitability, but the obligations under exorbitant past labor contract would keep the companies uncompetitive. Con failed to address legacy costs, and implied that there was nothing needed but new designs. As referenced in the Times article I previously cited, the reason that the Big 3 are lagging in their designs is that their legacy costs have limited what they can invest. After a bailout brought designs up to date, legacy costs would then limit the next generation of designs, unless, of course, money is pumped in for decades. 1 (b) The argument that an Audi is an inherently superior to a Hummer is irrelevant, but false as well. The Hummer is a specialty vehicle with negligible sales. It is designed for severe off-road use. The Q7 is a lovely luxury vehicle, but it is not even designed for off road use. (Will Europeans actually prefer to go to war in an Audi Q7? That sounds like Monty Python material.) In the US there are still state highways built of dirt and gravel where with a regular car you have to stop to push rocks out of the way. Specialty vehicles are designed for special uses and say nothing about the automobile market in general. 1. (c) The argument about taking a lesson from the banking bailout begs the question of exactly what the lesson is. The current resolution is offered as reflecting the pertinent lessons. The banking bailout could only be justified as a symbolic action to end panic that was potentially destructive. It was a psychological remedy more than a financial remedy. There is no comparable panic relevant to the auto industry. 1.(d) Con argues that there are examples of successful government bailouts of European automakers, thus preserving the supply of Renaults to the world. I challenge that on two grounds: None of the bailouts involved the issues of legacy costs that make the Big 3 inherently non-competitive, and "success" should not be measured by the survival of the name plate. All government sponsored programs are successful in the sense that they can keep something going as long as taxpayer money is pumped in. For example, the Big 3 could be "successfully" rescued by dumping in a couple hundred million to pay off the legacy costs. that is success in the narrow sense, but failure in terms of serving the best interests of the taxpayer. The taxpayer is best served by letting failed enterprises be replaced by successful ones. I think con is also appealing to nameplate nostalgia, that surely traditions should be kept alive. That is worth something, perhaps, but not what a bailout would cost. Another way to preserve the nameplate would to require that whoever buys assets under the bankruptcy sale must continue to produce cars under the brand name. Buyers would generally want to do that anyway to cash in on brand loyalty. 2. Con did not respond to any of the reasons given as to why a bailout would merely postpone inevitable failure. 3. Con asserts that a bailout would only serve as precedent for bailing out some other industries. Con states "The only industries that any government would provide financial assistance to are the one's that are vital to the economic infrastructure of the country. They may include, agriculture, heavy industry and, as we have seen, banking." That leaves plush toys to the whims of the marketplace. Times of economic contraction are painful, but they serve to eliminate non-competitive companies, and sometimes non-competitive industries. For example, there was an issue of preserving the US clothing manufacturing industry that went on for decades. The industry is labor-intensive and is best done where labor costs are low. The industry has largely moved overseas, but the job losses were transient as other industries developed to take its place. It would have been far worse if government intervened to "save" the industry. Automobile manufacturing is in no sense a strategic industry, and in any case, the economics dictate that autos will be manufactured in the US for the foreseeable future, just not with the same corporate governance. 4. I argued that fundamental economics will keep auto manufacturing in the United States, as witnessed by the large presence of Japanese and European manufacturers producing domestically. Con provided no rebuttal to this argument beyond noting that labor costs are cheaper yet in China and Korea. It is true that labor costs are cheaper in China and Korea, but labor costs are only one component of total costs. Other factors include responsiveness to local markets, training costs, infrastructure costs, access to capital, design costs, and availability of automation technology. That is why the US remains competitive overall when the legacy costs are taken out of the equation. If labor costs were the only costs, those Audis would be made in China as well. 5. Con asserted that market forces should not prevail, but failed to give reasons why they should not. I used the example of agriculture declining from 92% to 4% of jobs over the past century. At 92%, it was clearly the most important industry by far. I challenge Con to explain what would have happen if agriculture had been protected by government, rather than allowing market forces to prevail. A 92% industry clearly meets Con's requirement of one that is important enough to be preserved. So should it have been preserved? 6. - 7. Con did not dispute that government could and should facilitate industry transition, and that would minimize the short-term dislocations to an acceptable level as the economy adjusts. I take those points as accepted.