Thursday, November 20, 2008

Should the Government Help the Ailing Auto Industry?

"Traffic lights in the evening" courtesy of 13dede

CEOs of the Big Three (General Motors, Ford, and Chrysler) along with the head of the U.A.W. (United Auto Workers) appeared in Washington recently, hoping to talk Congress into providing desperately needed aid. A question now being heavily discussed and reported is should the government help the ailing auto industry? At the moment Washington seems unable, unwilling, and incapable of helping to resolve a crisis that has spread far beyond Wall Street and has brought the world to a crossroads.

Before proceeding any further I should state that I am biased and though I have tried to write this post without being effected by my biases, you should realize this at the onset. Having been born in Detroit and having lived in the Detroit area much of my life, it is hard not to have cars and trucks in your blood. I have family and friends that work at the Big Three, and suppliers, and other car companies (maybe we all do, if you think about it), so when I read and hear the numbers being batted around they’re real people to me and not just some cold faceless number to callously brush off.

Why should the U.S. government even consider helping the Big Three you might ask? The car companies have argued one in 10 U.S. jobs depends on the big three. As GM, Ford, and Chrysler employ close to 250,000 people in the U.S. and some supporters claim they touch more than 4 million other jobs between suppliers, dealers, and other related industry and business. Losing all, or even a portion, of those jobs would further amplify current economic problems being felt in the U.S. and would spread beyond. The Detroit area is so dependent upon the auto industry as all of the Big Three have world headquarters in the area and there are a whole host of suppliers that employ many people as well, that losing one or more of the Big Three would be cataclysmic on a region that is already down. In addition areas where assembly and manufacturing plants are located, closing them down would surely strain their economies. In many of the plant locations the local economies are often very dependent upon those plants. Although many manufacturing jobs have been moved to locations outside of the U.S. in the last couple of decades, the Big Three still make up a huge chunk of manufacturing in the U.S (and much of Europe for that matter). What is often overlooked or probably not given enough consideration in this discussion is the rippling effect; much like the waves follow when you cast a stone in the water that goes beyond the initial water displacement. In your economics 101 (or whatever macro and micro economics classes you had) they referred to it as the multiplier effect: figuring the loss of all (or part) of those jobs and thinking about what it would mean to the economy as the effect is spreads beyond the obvious businesses associated with producing cars. A colleague of mine sent me to the video that I have embedded below. Some of the numbers mentioned in it might be in question, but it gives you a good idea of the magnitude of that we’d be facing if the Big Three were to fail. They used to say that “when General Motors sneezed that America caught a cold”, well given how the financial meltdown has shown some of the negative effects of globalization, if the Big Three fail, the effects will go way beyond Detroit.

The Auto Industry and the Ripple Effect Video

In Europe there have been discussions about what aid (if any) should be given. Opel is a wholly owned division of G.M. that has been doing pretty well in Germany but there are fears that failure of G.M. would bring it down, prompting talks with the German government about what they can do to help. I saw on television the other day that 1 in 7 jobs in Germany is automotive related (note, I didn’t get a breakdown of those figures). The region that I live in would be severally impacted should Opel fail.

My Mindmap

When I started putting this post together yesterday I created a Mindmap asking the question posted in this article. On the right side I came up with some reasons that the government shouldn’t help (or that they shouldn’t use the “bailout” money or that it should come from funds intended for “alternative fuel” development) and on the left side I put some of the reasons why the government should become involved. The list is not exhaustive by any means and there are certainly some valid points on both sides. I don’t wish to restate them all, but you can see them if you look at the Mindmap.

When looking at the government’s role in business there are several different theories and views. One view would be that the government could “encourage” the Big Three to do the kind of research and development of use of alternative energy and fuels that they wouldn’t ordinarily have budgeted, putting the R & D on steroids if you will. This could also be the chance to encourage the use and development of more eco-friendly products. I don’t have any idea of how much plastic is in the average vehicle now a day, but it is a lot. Can you imagine if world moved away from the use of plastics and a more environmentally friendly material was developed and used in its place that didn’t rely on oil?

I read and heard many of the critics of helping the Big Three indicate that they should go through bankruptcy or that probably even one of them should go out of business because there is too much capacity at the moment. While letting nature take its course as it were, might sound good at first, it doesn’t take into account how bitter a pill it would be to swallow and how those people that lose their jobs as part of “the natural process” will get by when their savings have gone (if they even have any left) and if there are any other jobs available that don’t pay nearly enough to adequately take care of their families. It is easy to make those statements when you don’t believe that you’re affected. It would make sense if the changes that are needed can occur in a more structured way that can minimize or dampen the ill effects. All those jobs lost in America would be your friends and family, not just numbers.

When you look at the list I put together for the reasons not to help out the Big Three, there are some good points there, but maybe the aid can be set up so that the Big Three are “encouraged” to address some of the auto industries failings (like too much upper and middle management receiving too many perks). There has been a lot of discussion about limiting CEO bonuses when the government is providing some kind of financial assistance (especially with the financial bailouts) and certainly some limitations on management bonuses could be “suggested”. Higher fuel economy and use of alternative fuels engines, hybrids, and other targets could be tied in the aid. While I don’t wish to touch a debate on national healthcare, in many of the countries where cars and trucks are produced, there is some sort of national supported health care, meaning that the cost of providing health care coverage is not borne within the cost of the vehicles. One of the biggest expenses faced by the Big Three is their outlay for health care coverage and other benefits for current employees and their obligations owed to retirees (based on past labor contracts). If the Big Three had moved all or the bulk of their operations to places where they don’t have to negotiate with unions and could drastically reduce their labor costs, the discussions going on today would be of a different nature, but one of the reasons that we should even care about the lost jobs is because they would be in America (and Europe for those of us over here) and the effects would be here (as well as around the world). I could go on at length about high union wages and the movement of work via globalization but it would only detract from the main discussion (maybe this it a topic to be explored at another time?).

A final point to be made here and that is while many of the problems facing the Big Three are of their own doing, the severity of their current situation has been amplified many times over by the Financial Meltdown. Credit has been tightened and it isn’t so easy to get a car loan or financing and people are hesitant to buy or lease a new car or truck when they’re not so confident about their own jobs and well being, so they put off buying a vehicle. The President is reluctant to act, and the Treasury doesn’t want to use the “Bailout” money outside of the financial markets. But in all honesty, buying a vehicle is the second largest cost to most of us and is only smaller than buying a home but it has every bit as large an impact on the American economy (and the world) for that matter as it the financial markets that are being bailed out. We can not let the Big Three fail, the cost of doing nothing is too great. Other car makers outside of the Big Three are starting to feel the pinch from people not buying vehicles, there are loads of non Big Three cars sitting in dealer lots in America as well and this is beginning to happen in other countries around the world as well. The financial crisis has moved well beyond Wall Street. Please have look at the video, I realize that many people will say it is only scare, but even if the figures presented in the video are only slightly exaggerated, you can begin to comprehend how far reaching letting the Big Three fail could go. Please contact your Congressional representative and Senators and let them know that we can’t let the Big Three fail.

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