Continuing the series, I could spend a lot of time trying to articulate why the Big Three automakers should stop receiving federal funds to resolve or reduce their financial troubles. But I wouldn't be able to say it any better than Declan McCullagh in his column yesterday.
There are two misconceptions that are well addressed in the column. First, saying "the U.S. auto industry" is not the same as saying "The Big Three" automakers. As McCullagh points out, there are plenty of people employed in the U.S. auto industry who work for foreign car companies operating plants in the U.S. (My Subaru was team crafted in Indiana a decade ago.) Second, and more importantly, the absence of a bailout means bankruptcy, not the shuttering of factories. In bankruptcy, the company is reorganized. As McCullagh explains:
Contrary to popular belief, that will not mean the end of a company such as GM, which has indicated it may run out of cash by the end of this year. Under Chapter 11, a bankruptcy judge will weigh the different interests of GM's creditors, labor unions, shareholders, and so on, and the resulting company will emerge leaner and stronger. Many current customers of United Airlines, Texaco, Global Crossing, and Pacific Gas and Electric probably don't even know that those companies once filed for Chapter 11.
Chapter 11 also would let a judge alter gold-plated union contracts and benefits that have hamstrung the Big Three and crippled their ability to compete against Japanese and European car makers. Toyota, Honda, and other non-Big Three manufacturers that employ over 100,000 Americans, mostly in right-to-work states, have shown that they can make money building cars in the United States. The best way to keep U.S. auto workers employed in the future -- tens of thousands already have lost their jobs -- is to make it profitable to keep them on the payroll.
Why should the taxpayer have to provide funds to spare GM's shareholders, creditors, workers, and retirees the reductions in what they've been promised that are required to return the company to profitability? GM didn't pay for insurance, so why can it file a claim? And if the taxpayer were to provide funds to subsidize auto production, why should those funds be allocated on the basis of "who made the worst business decisions in the past" rather than "who will provide the taxpayer with the best return on investment?"
Read the whole thing.
Heads or Tails the public pays
If workers are laid off, the public pays the unemployment benefits. The public coffers are denied the income tax revenue. Cities with abandoned properties lose property tax revenue. Abandoning infrastructure in one location means more stress on infrastructure in another.
It is simple to break the system into small components and complain about the losses (bailout) in one small part of the system (unemployed auto workers). It is more difficult to look at the system as a whole and optimize the spending of public funds to get the biggest bang for the buck. Doing nothing may be more expensive that investing some public funds.
Unions are foolish to bank on corporations to make good on their promises of health care. Steel workers have already been stiffed by companies now out of business. Once the unions pivot and massively get behind universal health care, we will start to see the type of bailout that makes sense like nationalizing health care costs. Having health benefits tied to employment creates enormous political pressure for bailouts of large corporations that are footing a large portion of the national health care bill.
Chapter 11 doesn't work for cars
There is a whole infrastructure to cars and no one will buy a car if they believe the warranty won't be honored and the parts and service won't be available.
If the government could guarantee warranties to the public, Chapter 11 might be workable, but without it, Chapter 11 will quickly become Chapter 7 as revenue falls to zero on a fixed-cost business.
What we need is Chapter 11 without the name bankruptcy so consumers keep buying the cars.
warranties
Car warranties are a heap of rubbish in practice. If something happens, it isn't covered. Warranty guarantees aren't a sound argument for thowing government money to an incompetent management.
Chapter 11 won't work for the Auto industry
People just don't understand the logistics of doing business. Unlike the airlines, GM and Ford are in product manufacturing and not services. When the airlines file for Chapter 11, they continue to operate because they already bought their planes and only sell tickets. They just have to manage a few suppliers, whereas GM has to manage thousands of suppliers.
If you are an auto parts supplier to GM and they file for Chapter 11, the first thing you do is cut off supply because you know you won't get paid for quite awhile. No auto parts, no cars and no cars means they will have to close the plants and axe the jobs and only sell what is left at the lots. Imagine just a single supplier of steering wheels who is not willing to supply will derail the entire assembly line. Also people may not buy the cars off the lots for worry of no future parts, warranties. It will be a huge devastation to USA.
The airlines, K-Mart or Circuit City have no problems with Chapter 11 because they are just a service.
At this point in time, the government can set any kind of conditions to GM and the unions in exchange for a lifeline. Chapter 11 for the auto industry will just be like Chapter 7...THE END.
Different type of companies
Declan McCullagh mentions in his column that United Airlines, Texaco, Global Crossing, and Pacific Gas and Electric have all come out of Chapter 11. The fact is, none of these companies are manufacturers. The GM downfall will be a bigger domino effect than Lehman. If Lehman didn't fail, we would not have the current financial meltdown. If GM fails, next in line will be USA's manufacturing meltdown; its not going to be just $25 billion. I'd say lend them the money on the condition that they cut costs by 40%, even more drastic than Citigroup.
Let The Big 3 Choke
The public does not pay the unemployment benefits. The company that employed the worker that collects the unemployment pays on every employee.
let the big 3 go down.. their
let the big 3 go down.. their cars suck anyways.. it's amazing that they have still been around this long with their crappy cheap cars.. they should watch and learn from the import companies..
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