Wednesday, November 19, 2008

There's Nothing Wrong with a "Big Two"

Boy, this is eye-opening and puts a new perspective on the proposed bailout.

GM and other automakers with UAW contracts have to pay many of their employees to do nothing! It's called a Job Bank. Laid-off workers at Ford, GM, and Chrysler are paid 90% of their previous wages to sit in a room at the factory doing nothing!

Daniel J. Ikenson of the Cato Institute writes:

Management and labor consigned the Big Three to a future of troubles when they agreed to preposterous work rules... Those rules compelled General Motors in particular to keep pumping out vehicles in the face of shrinking demand earlier in the decade, ushering in the period of "0% financing" for five, six and seven years. Because labor costs were locked in, it made more sense to keep producing and selling at below the full cost of production...

Management also gave labor the "Cadillac platter" of health and retirement benefits, all of which substantially increased the cost of producing vehicles at unionized plants in America. Management and labor always assumed that the U.S. government would come to the rescue when the chickens came home to roost over this inefficient, uncompetitive cost structure...

On the demand side, Big Three management demonstrated an egregious failure of imagination, if not downright dereliction of duty, in assuming that large pickup trucks and SUVs would never fall out of favor. When SUVs and trucks are excluded, Big Three offerings barely make the list of the country's top 10 selling cars of the decade. None has been a top five seller. Shouldn't producers try to make things that people want to consume before scapegoating their failures and seeking bailouts?

But here's the equally important thing to realize: If GM fails - or even GM and Ford both fail - we are not facing the loss of the U.S. auto industry. There are plenty of profitable operations, particularly those operating outside of Michigan. In 2008, the Big Three accounts for roughly 55% of light vehicle production and 50% of sales. To speak of the U.S. automobile industry these days, one must include Honda, Toyota, Nissan, Kia, Hyundai, BMW - and other foreign nameplate producers who manufacture vehicles in the U.S.

Those producers are the other half of the U.S. auto industry. They employ American workers, pay U.S. taxes, support other U.S. businesses, contribute to local charities, have genuine stakes in their local communities and face the same contracting demand for automobiles as does the Big Three. The difference is that these companies have a better track record of making products Americans want to consume and are not seeking federal assistance.

If taxpayers are forced to subsidize automobile producers, they should at least be able to subsidize the successful ones...

If one or two of the Big Three went into bankruptcy and liquidated, people would lose their jobs. But the sky would not fall. In fact, that outcome would ultimately improve prospects for the firms and workers that remain in the industry. That is precisely what happened with the U.S. steel industry, which responded to waning fortunes and dozens of bankruptcies earlier in the decade by finally allowing unproductive, inefficient mills to shut down.

Following the steel industry's lead to an auto industry reckoning makes more sense - to the taxpayers, to the country, and ultimately to the auto industry - than another bailout.

There's Nothing Wrong with a "Big Two"

Hat tip to "".

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