Tuesday, November 18, 2008

Automaker bankruptcy will lead to streamlined operations

Nobel Laureate Gary Becker opposes an automaker bailout:
The big three American auto producers General Motors, Ford, and Chrysler, are in terrible financial shape. They have asked the government for a bailout, and the Democratic leadership in Congress is eager to give them one. The United Auto Workers union was a strong supporter of President-elect Obama and of Democratic candidates.

These companies have lost tens of billions of dollars during the past few years, and they will shortly run out of cash. ... All three companies were heavily into producing trucks and SUV's when the sharp run up in gas prices induced consumers to shift away from these gas-guzzlers and toward smaller and more fuel-efficient cars. ...

If GM is not bailed out, the company claims it will be forced into bankruptcy within a few months, and Ford's situation is only slightly better. ...

Nevertheless, I believe bankruptcy is better than a bailout for American consumers and taxpayers. The main problem with American auto companies is that during the good times of the 1970s, 1980s and 1990s, they made overly generous settlements with the United Auto workers (UAW) on wages, pensions, and health benefits. ...

It is not that cars cannot be produced profitably with American workers: the American plants of Toyota and other Japanese companies, and of German auto manufacturers, have been profitable for many years. The foreign companies have achieved this mainly by setting up their factories in Southern and border states where they could avoid the UAW, and thereby introduce efficient methods of production. Their workers have been paid well but not excessively...while still maintaining good morale among their employees. ... As a result of lower costs, better management, and less hindrance from work rules imposed by the UAW, about 1/3 of all cars produced in the US now come from foreign owned plants.

Bankruptcy would help GM and Ford become more competitive by abrogating significant parts of their labor contracts with the UAW. ... Bankruptcy should also help bring the wage rates of GM and Ford in line with those of foreign producers in the US. ...

Bankruptcy may also force out the current management of GM and Ford. ... When a company consistently does badly while some of its competitors (like Toyota) are doing well, its time to fire the management team, and see if another team can do better.
Much of why the Big Three can't compete, summed up in a single graph courtesy of Mark J. Perry:

Felix Salmon is critical of Mark Perry's graph.

Update #2: Megan McArdle criticizes Felix Salmon's reasoning.


  1. I would argue that the real reason they can't compete is because the Big-3 management is grossly incompetent. Highly bloated, unimaginative, and currently they are making exactly the wrong vehicles for the current market.

    I have no doubt that they would like to break the unions if they could, but I think they are using the unions as a scapegoat for their own bungling.

    But in terms of a bailout, I am in agreement in that I think GM and Ford would merely squander it and then come back for more.

  2. Anyone know Toyota's public opinion of Detroitsky*?

    I would think they recognize the bailout as just a temporary stay of execution and continue what they're doing: developing a better battery.

    *stole this term from RealClearPolitic's Tracinski

    If this bailout passes, we're looking at a lifetime of handouts to the UAW. But as counter-productive as that is, the most damaging union to our country will always be the AFGE at 600,000 bureaucrats strong.