The American auto industry is on the verge of collapse. Yet again, the brilliant minds of finance didn’t see it coming. If you turn to your expert economists on TV or any major newspaper, you’ll find them either debating whether or not the bottom has been reached or how long will the recession last. This is seriously disturbing given the fact that these number crunchers are suppose to be able to read balance sheets and cash flow statements and predict this stuff months, if not years, in advance. Of course there are exception, but they’re a mere handful, and at the moment, very hard to find.
Needless to say, the market is in a panic now after hearing about the chiefs of the big three Detroit automakers go to Nancy Pelosi and warn her of the impending bankruptcy if the $25 billion loan they seek isn’t coughed up as soon as possible. (Bear in mind that they’ve already received $25 billion earlier this year to help them build more fuel-efficient cars.) Bankruptcy would entail massive job losses not just for the automakers but also for the supporting businesses, and most importantly, eliminate the possibility of ever emerging out of bankruptcy as no one in their right mind would buy a car from a company in such dire financial condition.
That said, Barack Obama seems to be for some sort of bailout (judging by his speech today): “I have made it a high priority for my transition team to work on additional policy options to help the auto industry adjust, weather the financial crisis and succeed in producing fuel-efficient cars here in the United States of America,” he said. This seems disturbingly wrong on several levels.
First, the problem isn’t just that GM can’t produce better cars, it’s that people aren’t buying cars and trucks right now because of the economic downturn, and the Detroit Three are so big that they simply can’t adjust to what the market is telling them. Helping these behemoths make more fuel efficient cars would’ve made sense three years ago when Toyota started its climb to the top of the industry, but now is the time to let them become small, efficient and more competitive. Simply put: let them close factories, get rid of models that don’t sell, lay off people and figure out what size works.
Second, these companies suffer from terrible deals struck with their unions. By all estimates, the crippling costs of health care, pension plans and other benefits would continue to harm them in the long run even if the market was to turn around and their factories were to start churning out more fuel-efficient vehicles. They need to renegotiate these benefits with their unions and now seems like the perfect time to do so. The workers can either accept a reduction in their benefits or risk losing their livelihoods forever – chances are they’ll cave in.
To conclude, the Detroit Three are simply not competitive any more. They’ve been making mediocre cars and trucks for years, and now, because of the economic downturn, must scale back operations. Unfortunately, scaling back isn’t something that can occur at the flick of a switch when it comes to giant factories employing thousands of people (well, it probably can, just look at how quickly entire manufacturing companies moved across the border), and because of that, factories are still up and running, cars are still being produced, people are still employed (although 100,000 jobs have been cut in the industry since 2006), and money is being spent.
It would make sense to let nature take its course on these companies and for the government to provide assistance to all those who would become unemployed as a result. The kind of assistance that would help these people get an education and learn another trade. This should probably go hand-in-hand with other assistance that keeps them (not the automakers) from falling into complete financial collapse, although that may be unavoidable.
There simply is no other sensible strategy. What Obama is suggesting will simply lead to more begging by these companies six months from now. And then what? We move on to bailing out the airlines? Smarter economists have said recovering from this recession could take up to five years. The employees at these factories need to be told that their companies are about to die and they have to move on – find another job; all those who were employed in manufacturing did exactly that when their jobs moved away to the Third World. Sure, the pace of change is much faster this time, but people have to adjust. Times have changed. Obama promised change. Now’s the time for him to step up and deliver it, even if it’s not the kind he had in mind.
