It doesn’t matter, ultimately, that the bridge loan failed in the Senate. Looks like the White House will come through for the car makers. But is it a good idea?

I know it’s hard to swallow that the finance industry, which caused the economy to crumble while paying its top execs handsomely in the process and creating nothing of value at all (more on that next week) gets a 700+ billion dollar bailout with hardly any strings attached, even as the auto industry, which actually makes a product and didn’t cause the economy to blow up) is denied a $14 billion loan. It offends an innate sense of fairness. Especially stinging was the government’s demand, ultimately leading to the plan’s failure, for compensation limits for autoworkers of the kind never required of the finance industry employees, whose incomes are incomparably higher and who, as it turns out, got bonuses from the bailout money. This is making some people fume with appropriate righteous rage. Although I have many questions and doubts about bailing out the auto industry, I share the sentiment regarding the double standard (captured most poignantly by Jon Stewart, as usual).

However, I think it’s important to parse this into (at least) three pieces and assess them separately.

First: the bailout itself should be evaluated independently of the compensation cap question.

Second: the compensation question should be considered, not in light of Detroit vs. Wall Street, but in terms of Executive vs. Regular Worker compensation.

Third, Detroit vs. Wall Street, a double standard, yes. But whether and to what extent that double standard is warranted, is extremely, extremely gray. There are arguments (for and against) bailing out each industry that simply don’t apply to the other. Let’s be honest, this is really not about “fairness.” We don’t “owe” it to the auto industry to help it survive, any more than we owed the finance industry. When did corporate welfare become a moral imperative? The finance industry bailout was, in its terms, simply obscene (more on that next week). But as your grandmother used to say, two wrongs don’t make a right. My point is not to excuse the Wall Street bailout or sweep it under the rug. On the contrary, I would’ve filibustered it if I were in the Senate; it was a travesty that we should be investigating, discrediting, and hopefully fixing, rather than relying on it as precedent for future measures.

Here are some doubts I have about the pro-bridge-loan arguments (framed in admittedly simple terms) considered without irrelevant references to the finance industry bailout (some references are, of course, relevant).

• Bankruptcy doesn’t necessarily drive a company out of business. If the car makers actually are turning the corner in terms of product improvements (as they are claiming in support of their creditworthiness), then shouldn’t they be able to survive a reorganization? Better yet, shouldn’t they be able to get a loan in the market (“relevant reference” alert: isn’t this why we gave money to the banks)?

• An “industry” doesn’t die just because some inefficient monoliths go down (if they do). Small, trim, innovative companies are much more likely to form, thrive, etc. in an environment where established companies don’t effectively become cartels by growing “too big to fail” – that’s a dangerous philosophy (as I’ve discussed here). Furthermore, precisely because a car is a real product with a real function and value, someone will move in to fill the void, if free to do so and if capital is available (again, what the hell happened to our $700 billion, I wonder). Truth is, the Big-3 are failing because they’ve been making cars that consumers don’t like. It’s been happening for a long time, well before the general economic downturn. Propping them up might just mask the problem and allow bad business models to fester instead of dying. That’s just not smart.

• Isn’t it a little inaccurate to equate the “industry” with the largest American companies? Profitable “foreign” companies operating in the US (employing and doing business with American assembly workers, mechanics, dealerships etc. as well as supplying American consumers with desirable products) are very much part of our domestic economy. They pay corporate taxes. They generate and support the same kind of satellite businesses that the Big-3 do (which they are pointing to as further evidence of the far-reaching consequences of letting them fail). These “foreign” companies may not be union shops, but they comply with our wage, hour, and benefits laws. I hear Toyota offers pretty good compensation (including profit sharing) to its workers. Does it really even make sense to talk about multinational corporations as if they were really tied to their countries of origin, when they (including the American ones) operate wherever the rules are favorable and are essentially free to go domicile-shopping? If Congress wants to address any inequities in that regard (and I’m not necessarily suggesting they should), then that’s a whole other legislative package that should not be confused with this bridge-loan deal.

• The idea that our economy would collapse if the Big-3 went into bankruptcy is highly questionable. Ron Gettelfinger of the UAW said that the “auto industry” (by which he means the Big-3), must not be allowed to fail because “it’s the backbone of our economy; we need this industry to survive.” By “we” he means the entire American economy. That’s just – and there’s no kind way to say this – drivel. It’s not 1950.

• Also true: domestic car production accounts for a small portion of the GDP (it’s been hovering around 4% for some time now, even the Chicken Littles – or is it Chickens Little? – generally agree with that figure). That might be bigger than many industries (not as big as others, e.g., the information technology industry) but in any event, not a large enough chunk of the economy to warrant some kind of mortal fear.

• As for satellite businesses that would also suffer along with the Big-3. I don’t really accept that as an argument for why we “can’t afford” their demise – at least not as being uniquely relevant to this industry. EVERY industry, indeed every thriving company, touches off some peripheral economic activities that “depend” on that industry or company. In this economy a multitude of companies are threatened with hard times or even failure, which will all have indirect impacts on other businesses (vendors and suppliers, communication service providers, transportation, utilities, service industries catering to an employed workforce). We can’t prop up all of them. We simply can’t. I’m not even going to argue that point. And if we prop up only the big guys, then what we do is subsidize those who are failing despite having had huge advantages. In other words, we shore up the worst elements in the economy and effectively preclude the rise of anything more vibrant or efficient. We let the “Too Big To Fail” become a parasitic, government supported aristocracy, living by the wealth generated through our work, and for what? For the opportunity to barely eke out an existence in “their” businesses? As I said yesterday, that’s feudalism.

Tomorrow, I’ll consider some pro-bridge-loan points but mainly discuss the autoworker compensation question.

2 thoughts on “Auto-Destruction-Sequence?”

  1. If you live in Michigan like I do, I’d bet that most people living here would like to see the Big 3 “bailed out.” At first I didn’t think much of what kind of crippling effect a shut down of the Big 3 would have but I’ve noticed it more and more here in West Michigan.First of all, Michigan’s economy has been in the crapper for a few years now. I guess you could say we had a jump start on the current recession by about 5 year. Unemployment in Muskegon is at the highest rate in the US.My sister works for an automotive supplier and they’ve been consistently laying off employees, engineers at that, for at least 4-5 years now.One of the largest Chevy dealerships in Grand Rapids is closing, just announced.I hear people say that the Big 3 makes crappy cars that no one wants anyways. Those people are the ones driving the SUVs so high in demand a few years back. Go figure.Bankruptcy, as opposed to a loan, will, I think, cripple this Michigan economy even more. I hate to think how much worse the Michigan economy could be. Bankruptcy will not only hurt the Big 3, but also hurt all of its suppliers, and so on.The auto industry is one of the backbones of the Michigan economy. There are roughly 1.6 million jobs tied to the auto industry. I don’t think we can let them fail or even go into bankruptcy. I don’t see that as a viable solution. It’s a frickin’ loan, not free money.Just my two cents.

  2. Grace, you are absolutely right that people are hurting and things will get worse as companies go into bankruptcy. Many will. But as you and I both pointed out, these manufacturers have been doing poorly for some time now. What makes you think that a $14 B loan will suddenly turn them profitable? I did call it a “bailout” because even though technically it’s a “loan” it’s money that’s unlikely to be returned. Why? because nobody actually believes that these companies will actually recover. The more likely scenario is that they come back for more loans, arguing that we REALLY “can’t afford” to let them fail now, as that would mean losing the money we already invested. I think your characterization of Michigan as having been in a “recession” for 5 years is right on point. But doesn’t that tell us something about whether the companies that dominate the Michigan economy are doing something VERY wrong? Should that kind of bad performance be supported with a cash infusion from the taxpayers, at a time when we are ALL doing so badly? However, as I admitted, there are points to be made for the opposing argument. I hope to look at some of them tomorrow, when I discuss the compensation issue.

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