Wednesday, November 12, 2008

Detroit Metal or Washington Muddle?


To bail or not to bail, that is the question.

No, not an effort to address surfer-speak, but a question about the auto industry’s pleas for government aid (or subsidies to the more plain-spoken). Will President Bush push money at ailing auto makers in his waning days? Will President Elect Obama act early in his administration to put a shot in Detroit’s arm? Speculation seems to favor the latter. So what are America’s car and truck manufacturers saying about their woes and asking for in terms of help?



Essentially, they are saying that within the next year some of them may be in bankruptcy or worse. With sagging sales, locked out of tight credit markets due to said sales, millions of jobs on the line, and a seeming inability to rapidly adjust to volatile fuel prices and their impact on consumer purchasing behavior, America’s Big Three are running out of money. And according to an industry trade association, there are approximately 3 million jobs at risk. It doesn’t take a very clever flak to begin assigning these 3 million jobs to specific states and Congressional districts as they mount the pressure for an auto industry bailout likely to carry a $25 – $50 billion price tag (MSRP, dealer fees may apply). And it’s not just at home that they are seeking help. Ford and GM have both asked Chancellor Merkel in Germany for assistance in order to avoid job losses there. This rather pointed game of “give us money or we’ll fire thousands of people” is apparently international. And Chrysler, only recently spurned by Mercedes Benz, is shamelessly flirting with all comers, including the likes of Hyundai. Their stories are backed up by balance sheets showing that even when hard decisions are made and matched by hard work, a narrowing of losses is the best they can currently hope for. And Kerk Kerkorian feels their pain. The billionaire investor and casino mogul has lost almost $700 million on the just over 6% stake in Ford that he took back in June.



Their goal: money and legislative/regulatory changes that will encourage new car purchases and improve their competitive position versus foreign automakers. Specifically, Big Three executives, along with United Auto Worker union leadership, have asked for at least $25 billion in “loans to bridge the current financial crisis” along with an additional $25 billion for “health care coverage and other retirement costs” for retired workers. In addition, measures such as allowing taxpayers to deduct interest on car payments from the taxable income and providing a financial incentive to consumers to scrap older vehicles have been floated. Democratic leaders Nancy Pelosi and Harry Reid have said that they are committed to some kind of bail out for the car manufacturers. The Bush administration has also made favorable noises but claims Congress’ authorization for the current $700 billion bailout package does not allow them to divert aid to the auto makers. Meanwhile, Democratic Michigan Governor Jennifer Granholm is claiming that 10% of all US jobs are dependent on the auto industry and thus, at risk. President Elect Obama seems to be in favor of some kind of aid and assistance, but would probably prefer that President Bush carry the water on this one. And, Treasury Secretary Paulson insists that any measures aimed at aiding the auto industry must improve car companies’ “viability”, while many House and Senate Republicans, reeling from the $700 financial bailout package, are likely to make moves by Democrats and a lame duck administration difficult.



Pundits accuse GM at least of “playing chicken with the government” in its bid to portray bankruptcy as “not an option” vs a government bailout. Yet despite the transparent nature of their doom and gloom messaging, there are few serious voices being raised against some sort of aid. The kicker is obviously the jobs argument. That is clearly working with Governor Granholm whose claim of 10% of all US jobs dependent on the auto industry is farfetched, but delivered with gusto. As a former purveyor of economic impact studies aimed at influencing public policy, my guess is that the 3 million jobs cited by the Center for Automotive Research study is inflated to the absolute extent that industry lawyers will stomach. But even if the real number is 2 million, or 1.5 million, can the country afford to lose those jobs? What about the knock-on effect of those lost jobs? This is Detroit’s most potent argument and it has traction inside the beltway.
Our learned commentators, freed from recent political commitments, are back with us to analyze this issue. The Bleeding Heart, recently returned from Chicago (and no doubt pursuing a patronage job in the Obama administration) was quick to back Congressional Democrats. “Eight years of failed Republican policies have driven us to these dire economic straits and the American people have responded, giving President Elect Obama and the Democratic Party a mandate to use the powers of government to resuscitate our economy, regulate industry, and repair our nation. That means a bailout for automakers whose jobs are critical throughout the Midwest”, he said, sounding remarkably Press Secretary-like.


The Bloated Plutocrat, called away from secretive GOP rebuilding sessions, was less certain. “And then what? Given the commitments that the Big Three have, through UAW, to retired workers, the line between company and care provider is blurred. Will an injection of billions of taxpayer dollars into ‘companies’ that can’t seem to shed the fat needed to compete effectively really solve their problems? They are encumbered with legacy issues that make them more social institution than employer. Maybe the time has come when cars just can’t be made profitably in this country?” The Bloated Plutocrat is not amused.


Car-makers are making potent arguments by focusing on potential job losses that would further set back the economy and add to the challenges facing a new Executive and Congress. If they can remain effective, it seems very like that more of your money will be headed via the Treasury to Detroit’s coffers.

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