This past week, executives from the Big Three automakers — General Motors, Ford and Chrysler — pitched key congressional leaders for an increase in bailout funds to $50 billion. Mounting legislative opposition, especially from almost all Republican senators, could derail any rescue efforts.
An auto industry bailout must be viewed in terms of balancing various groups in society, such as shareholders, lenders, workers and taxpayers. The automobile industry employs about 1 million workers, or about 7.5 percent of the entire U.S. manufacturing work force. Its failure could pull down the entire economy.
The downward spiral of the Big Three threatens the American dream because the industry has provided millions of middle class jobs. Workers enjoyed enviable health and retirement benefits.
Policymakers need to weigh the manner of resuscitating the Big Three. The government guarantee of debtor-in-possession financing under a Chapter 11 reorganization might serve three fundamental objectives.
* Provide blanket assurance that the Big Three will continue to operate.
* Discharge onerous financial burdens.
* Recapitalize to obtain healthy balance sheets.
The United Auto Workers agreed to a landmark new contract last year that nearly eliminated the labor cost difference between the Big Three and Japanese automakers.
Washington needs to ask these questions before funding the Big Three:
* Should the government take an active role in the selection of the board of directors and management?
* What energy efficiency goals should be imposed?
* Should the Big Three merge with each other or foreign manufacturers to compete globally?
* Should taxpayers subsidize employee benefit packages?
But focusing on just the Big Three is myopic. Their problems have in turn devastated auto parts suppliers such as Collins & Aikman and Delphi.
U.S. automobile sales plummeted in October to levels not seen in 25 years. Their expected cash drain threatens bankruptcy within months. $50 billion might be just an expensive Band-Aid and not a long-term solution.
The establishment by foreign automobile companies of major manufacturing plants (called “transplants”) in the United States has been a counterweight to the shrinking fortunes of the Big Three.
Toyota, which enjoys a market capitalization 16 times greater than Ford and GM combined, could easily absorb or extinguish them.
Moreover, foreign manufacturers such as Toyota and Mercedes-Benz remain cash flow positive.
Honda employs heavily robotized production lines to manufacture fuel-efficient cars. Honda can switch models to match swings in demand within minutes versus days for their American competitors.
On three occasions the federal government has intervened significantly during national emergencies. In two cases, the Supreme Court ruled the actions by the government unconstitutional. In 1935 the Supreme Court in “Schechter Poultry v. United States” ruled unconstitutional the 1933 National Industrial Recovery Act, which created codes of fair competition” such as establishing minimum wages and allowing industry heads to set minimum prices.
In 1952’s “Youngstown Sheet & Tube Co. v. Sawyer,” the Supreme Court ruled unconstitutional President Harry Truman’s seizure and operating of most of the nation’s steel mills during the Korean War.
The Supreme Court supported the U.S. mobilizing its industrial establishment to focus almost exclusively on war production during World War II.
In conclusion, giving the Big Three $50 billion will not get them off death row.
Congress has a fiduciary obligation to impose much stricter guidelines on bailout for Detroit automakers than the Troubled Asset Recovery Program. The financial recipients of the first $250 billion of TARP funds blindsided them.
Specifically, bailout proponents conjured up images of intensive care rendered in the emergency room for heart attack victims. To date, the banks have not recycled their bailout funds. Instead, cash provided a war chest for strategic corporate acquisitions, the retention of dividends and funding bonus pools. We need to tie in bailout remedies for the Big Three with strategic vision that assures a balance between meeting our long run transportation and environmental needs.
Originally published in the Sarasota Herald-Tribune
