Lynne Kiesling
For the past 30 years the U.S. auto industry has been like your alcoholic Uncle Bob: his self-destructive habits seem beneficial to him, despite the harm they cause him and the pain they inflict on his family and friends. You want to help him, but don’t know the best way to do so, and you know that if you confront him he will deny it and become angry and violent. You know deep down that Uncle Bob is a drunk bully, but the thought of a confrontation is so painful that you stay quiet and follow a strategy of conflict avoidance. Plus you know that the only way his health will improve is if he is the one who realizes that his habits are self-destructive and that he wants to change. At some point, the issue comes to a head, and the question becomes whether or not you have the courage to tell him what he needs to hear, for his own good and for the good of those who love him.
The issue coming to a head right now is that the U.S. auto industry has been unhealthy for decades. Chrysler’s 1979 bailout did not change that. The Big Three cannot compete with Asian and European manufacturers, particularly in the production of high-quality, reasonably-priced, fuel-efficient cars, because their labor costs eat all of the possible margins (GM and Ford manufacture such cars for sale in Europe, so it’s not a design problem). We have known this for three decades, and have followed a strategy of conflict avoidance.
In Saturday’s Wall Street Journal, David Yermack wrote a brilliant article: Just Say No to Detroit. His argument is peppered with extremely disturbing facts:
- GM and Ford are two companies that made the most money-losing investments in the 1980s; between them they “destroyed $110 billion in capital” in the decade, according to an analysis from the careful and renowned economist Michael Jensen.
- Over the most recent decade, “the capital destruction by GM has been breathtaking,” $182 billion, and Yermack estimates that the aggregate capital investment in GM and Ford since 1980 has let to a net reduction in capital of $465 billion.
- This is what I find particularly disturbing: with that $465 billion, “GM and Ford could have closed their own facilities and acquired all of the shares of Honda, Toyota, Nissan, and Volkswagen.”
- “When a company makes money-losing investments, the cost falls upon all of society.” This observation means that we have already reduced our future economic well-being by $465 billion by his calculations, due to the persistence of these firms and their poor business decisions.
Yermack makes other important observations, including one that is crucial for policymakers to remember: if any or all of the Big Three were to declare bankruptcy, that decision would not destroy the physical assets and physical capital of the industry, but would instead free it up to be purchased by others and to be redeployed in a more productive way.
But what about the human cost? I share Will Wilkinson’s and Megan McArdle’s combination of sympathy with people in changing circumstances and expectations that can create hardship, but also with the painful reality that none of us — none of us — has any guarantees in this world. That includes job guarantees. And in this case, a bailout would mean job guarantees for now, at a great cost to everyone else, because it would mean the perpetuation of the extremely flawed business practices of the U.S. auto industry as a whole.
As much as it pains me to cite politicians favorably, I think that Senators Shelby and Kyl put it well in this Wall Street Journal article from today:
Sens. Richard Shelby of Alabama and Jon Kyl of Arizona said it would be a mistake to use any of the Wall Street rescue money to prop up the automakers. They said an auto bailout would only postpone the industry’s demise.
“Companies fail every day and others take their place. I think this is a road we should not go down,” said Sen. Shelby, the senior Republican on the Senate Banking, Housing and Urban Affairs Committee.
“They’re not building the right products,” he said. “They’ve got good workers but I don’t believe they’ve got good management. They don’t innovate. They’re a dinosaur in a sense.”
Added Sen. Kyl, the Senate’s second-ranking Republican: “Just giving them $25 billion doesn’t change anything. It just puts off for six months or so the day of reckoning.”
What’s the alternative? Let the firms fail. Use bailout money to provide unemployment assistance, education grants, and relocation grants to individuals who lose their jobs. In the long term, not only is that approach more compassionate, honest, and courageous, it’s also cheaper than perpetuating the uncompetitive business models in this domestic industry that has shown a colossally abysmal inability to adapt to changing market conditions. As Will said in the post linked above, “There is no justice, and great harm, in diminishing the whole array of future opportunity to save a few people now from a regrettable fate.” I hope we have the courage to take the bottle from Uncle Bob and tell him that we are doing it for his, and our, long-run health.