Auto Bailout Update

The $15 billion Big 3 bailout is expected to pass today. They're just quibbling over details now, and the White House is expected to sign whatever Congress sends over. So, I wanted to give you some thoughts that have kind of been floating around the edges of the issue.

Heavy-Handed Politics posts a column by Jack Kelly about three numbers we should all keep in mind when it comes to the bailout:

[T]hree numbers ... define the environment in which the fate of the Big Three must be discussed.

The first is $13.84 trillion. That's the estimated value of all the goods and services produced in the United States last year.

The second is $7.6 trillion. That, according to the Bloomberg News Service, is the current amount for which taxpayers could be on the hook for the bailouts to date of financial institutions. It's more than half the value of the gross domestic product.

The third is $4.6 trillion. That, according to Jim Bianco of Bianco Research, is the inflation-adjusted cost of World War II. The potential liabilities our policymakers have imposed upon the taxpayers in the last two months are nearly twice as much as what we spent in nearly four years fighting the Germans and the Japanese.

So if we're going to bail out Wall Street, why shouldn't we bail out Detroit? There are two reasons, the lesser of which is that at some point the taxpayer cow is going to run out of milk.

The more important reason is because a bailout will only postpone bankruptcy, and raise its ultimate cost. We say we "can't allow" the auto companies to fail. But that's hubris. The truth is, we can't prevent it.

Soaring gasoline prices in the summer and the stock market crash in the fall have made their illness acute, but the "Big Three" have been losing money for years. The chief reason for this is their higher labor costs make their cars about $2,000 more expensive than comparable foreign models.

General Motors (19 percent) and Toyota (18 percent) have about the same share of the U.S. car market. But Toyota has enormous efficiency advantages. GM has eight product lines, Toyota three. GM has 7,000 dealers, Toyota, 1,500. Toyota pays its workers in the U.S. an average of $48 an hour. GM, Ford and Chrysler pay their employees an average of $73 an hour. For GM to have a chance to become competitive, it must cut its product line by at least 50 percent, its dealer network by at least 50 percent, and its labor costs by at least 30 percent.

But any bailout that's acceptable to the United Auto Workers -- and thus to the Democrats in Congress -- will be designed to avoid the pain such cutbacks would inflict.

The current environment for auto sales is toxic, and is likely to remain so for at least a year. This means that ever more and ever larger subsidies will be required to keep the doors of the Big Three open. Eventually taxpayers will run out of patience, or milk. To avoid discomfort now, we court catastrophe a short distance down the road.

If the Big Three sought Chapter 11 bankruptcy protection now, one strong company could emerge from the wreckage. Surely the United States would be better served by having one healthy car company instead of three terminally ill ones. But good sense, alas, rarely makes political sense.

Isn't that the truth?! Next up we have a Newsmax story that busts four big lies in this whole deal:

1. Detroit’s wages really aren’t out of synch with those of auto workers in other countries.

It has been well established that total compensation for U.S. auto workers, including pensions and benefits, comes in around $70 per hour. That compares to $45 per hour for Japanese workers.

But some auto industry supporters have distorted the argument. They use the American workers’ hourly wage without benefits – about $30 an hour – and compare that number to the $45 hourly total compensation for Japanese workers. Then they claim that U.S. auto makers are actually more labor efficient than their Japanese counterparts.

Obviously that’s not comparing apples to apples. If you are looking at apples versus apples, a new auto plant in India offers hourly pay of only $19.

2. The auto industry is unique and therefore must be bailed out.

It’s true that auto companies, including suppliers etc., account for about 3 percent of economic output and employ at least one million people. But those numbers aren’t dependent on the financial status of the Big Three.

If the companies go into bankruptcy and come out stronger, the industry will employ about the same amount of people. If not, foreign auto makers will produce more cars in the U.S. and pick up many of these workers.

Plenty other uniquely American industries are taking it on the chin, and no one is calling for a bailout of those sectors.

3. Bankruptcy for the Big Three will mean the end of the U.S. auto industry.

That is simply poppycock. A prepackaged bankruptcy could actually leave the major auto makers in better shape than they were prior to the financial crisis. Since the mid-1990s, the Big Three made most of their money on gas guzzling SUVs and trucks. That simply won’t cut it anymore. Bankruptcy will force the auto makers to quicken their shift to smaller cars.

Plenty of companies have emerged stronger from bankruptcy. Nearly all the major airlines have gone through that process and came out stronger than when they entered.

4. A limited aid package now will insure the industry’s long-term future.

The amount of money being bandied about, $15 billion to $25 billion, is chump change. GM and Chrysler are bleeding $2 billion in cash per month. So the high end of the bailout range keeps them in business for about a year. Then what? Without major changes in their business model, they’ll simply be coming back to Washington with their hands out again.

And remember, this current "bailout" bears no resemblance to the rescue of Chrysler in 1980. In 1980, Congress passed, and President Carter signed, a law giving a U.S. government guarantee of a private $1.5 billion loan to Chrysler. Not one dollar of taxpayer funds was ever used in the deal. It's also important to remember that import tariffs sheltered Chrysler and the Big Three from Japanese competition in the 1980s. And unlike today, Chrysler also had a clear plan to make a comeback and the loan was relatively small.

This is good information to have. I've heard all of these arguments from Detroit defenders constantly. Watch this video exchange for a sample of the blind Detroit stupidity:

On a more pragmatic note, Hugh Hewitt suggests that if the GOP is really going to capitulate to another bailout (which they are), they should at least attach something that benefits them:

This looks like a wasted opportunity for the GOP. It might have been able to get from the Democratic majority a slash in the corporate tax rate for Michigan companies and companies in other car-dependent states like Ohio, but instead it gets....well, nothing.

As the GOP heads into opposition, it has to learn to use the rare moments of its leverage to obtain from Democrats a key concession or at least demonstrate to the public what it is fighting for.

This is a very good point - this would be making lemonade out of some major lemons, but they can't even do that. This signals yet again how incompetent they are.

Finally, I'd like to leave you with a video about Ford's most advanced factory. It's really quite amazing. Be sure you watch until the end:

Hm...once again the unions are standing in the way...

There's my two cents.