Bailing Out Big Auto is a Bad Idea
Written by Richard M. Ebeling Monday, 10 November 2008 00:00
Chances are the Detroit Big Three Automakers will receive a huge bailout from the politicians in Washington, D.C. Taxpayers will be expected to pick up the tab for $50 billion or more. Not only will this be bad for hard working Americans who will bear the cost of another bailout boondoggle, it will be a big mistake for the health and future prosperity of the United States economy.
Of course, that is not how it is seen from the halls of Congress or by the in-coming new president. The Democratic Party leaders in the House and Senate, Nancy Pelosi and Harry Reid, have insisted in a letter to Treasury Secretary Henry Paulson that, “A healthy automobile manufacturing sector is essential to the restoration of financial market stability, the overall health of our economy, and the livelihood of the automobile sector’s work force.”
In his first press conference as president-elect last week, Barak Obama also insisted that, “The auto industry is the backbone of American manufacturing and a critical part of our attempt to reduce our dependence on foreign oil.” Obama added that he wanted to see support for the American auto companies in a new $100 billion stimulus package that he hopes will get through Congress before the Christmas recess.
In all the highly charged exuberance for bailing out Big Auto there is one question that has not been raised in the discussions: Might it not be better for America to allow the automobile companies to sink if they cannot learn to swim better in the ocean of global competition?
First of all, we have been here before. When the oil crisis of the early 1970s hit the Detroit auto industry real hard, the Big Three asked for temporary trade protection behind informal import quotas to help them in the face of foreign competition, especially from the Japanese. Having bet wrong at the time that American car drivers would never give up their big gas guzzlers, they promised to retool and make smaller and more fuel efficient automobiles.
The Japanese, however, could not be unseated from their growing position in the U.S. automobile market. Instead, Detroit’s share of the American market has slowly but surely continued to decline.
Then, in the late 1970s, the Carter Administration shelled out a multi-billion dollar bailout to salvage a rapidly sinking Chrysler Corporation. The upshot was a big price tag for the American taxpayer, the number three among the American automakers has continued to lag behind in the competitive car race, and has changed ownership hands several times in an unsuccessful attempt to save itself.
Even when the era of cheap gas returned in the 1980s, Detroit kept on in its traditional ways. It failed to match many of its foreign rivals in terms of reliability, quality and driver satisfaction. In 2007, The Big Three fell well below 50 percent of the domestic automobile market.
Now they are running to Congress, cup in hand, to bail them out once more. The Congress passed a $25 billion subsidy just last month to defray some of the expenses to develop more fuel efficient cars. But they are back, again, asking for upwards of an additional $50 billion to cover their massive losses that are draining their cash reserves.
It is clear that in the form of cash bailouts and higher prices behind trade barriers, the American taxpayer and consumer have been paying a lot over the decades to subsidize Big Auto’s big mistakes. Maybe it’s time to stop throwing good money after bad.
Yes, the Detroit automakers employ a lot of people and there are a lot of companies and workers indirectly dependent upon them who supply parts and service for the Big Three. But it should be clear by now that the current ownership and management of these companies are not able to keep them profitable in the face of what consumers want and what their foreign competitors are more successfully able to deliver.
When the current economic crisis passes – and it will as all other crises have in the past – Americans will still want cars, trucks, and maybe SUVs to drive. But that does not mean that the suppliers have to be American automobile manufacturers. The whole purpose of open, competitive markets is to find out who can “deliver the goods” better and cheaper, and to take advantage of the resulting cost savings and improved qualities of what is being offered.
If it turns out – in the extreme – that one or more of the Big Three go out of business, so what? The plants and supply networks will be bought up and transferred to more productive and cost-efficient hands. The new owners will then employ people and support companies to help them make the cars that consumers want at the prices they are willing to pay.
Yes, that means that some time in the future Americans might buy all their motor vehicles from foreign-owned companies. But, again, so what? There are many countries in the world that buy all their commercial airplanes from foreign manufacturers, and in many cases from America airplane producers. Should the citizens of those countries be fearful or feel insecure because they are “dependent” on America for their supply of airplanes? Would they or we be better off if they insisted upon primarily or only buying planes produced in their own countries?
One of the great benefits of a global marketplace with world-wide competition is that if gives people in other countries the opportunity to take advantage of all the better and cheaper goods that they can buy from America.
It also means the same thing in reverse. Americans should be able to improve their standard of living by buying what the rest of the world has to offer. This may mean buying all of our cars from companies owned and headquartered on other continents. But even ownership and management is global. If, say, a Japanese auto manufacturers generates attractive profits by selling cars to Americans, many Americans may end up earning some of those profits by buying shares in that Japanese company.
The idea of “our” industry and “our” jobs becomes increasingly meaningless with every passing day. Besides, it is not “our” industry or “our” jobs to begin with. As long as there remains any meaningful form of private property and free enterprise in America, then any industry is the private property of distinct individuals who have invested their money, their time, and their talent to making a product that they hope to sell to individual consumers, whether in America or elsewhere.
There are no collective jobs. There are only the individual jobs held by distinct people who have entered into mutually advantageous contracts to earn salaries for performing specific services. Inevitably any and all talk about “our” jobs and “our” industry means that others with political power or influence want to tell those private individuals whom they may hire, and from whom they may buy and to whom they may sell.
All talk about “our” jobs or industry means some people want to use government to tell others what they can do and how they may do it. Going down that road always means less freedom as consumers and producers, as employers and workers, and as citizens and taxpayers.
If the Big Three auto makers cannot make it on their own, then the buying public is basically saying that they think their product is not as good as their rivals. Falling profits and losses are meant to be a signal in the market to inform producers that they are doing something wrong. They may be making the wrong product, or in ways that are too costly in terms of what they can sell it for, or they are not keeping up with the innovations and improvements being introduced by competitors.
Falling profits and losses are meant to be a wake-up call: Start getting it right, or you should not and will not be in business. Bailouts in general and this planned multi-billion dollar bailout for the Big Automakers will only prevent those market signals from working as they are supposed to in a free society.
It will only succeed in maintaining a politically powerful group of manufacturers from having to answer to the most important “voters”– the consumers in the marketplace. And it will cost all of us dearly as citizens, taxpayers and buyers of automobiles in the years ahead.
Regards,
