– Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. The opinions expressed are her own. —
As disastrous auto sales figures for November were reported this week, the Big Three auto companies–GM, Ford, and Chrysler–told Congress that they want government loans to keep from going bankrupt.
The pleas of General Motors and Chrysler were the most urgent. Ford allowed that its cash position was better and that it might get through 2009 without tapping the federal line of credit it seeks.
The Big Three, who less than a generation ago dominated the car business, submitted business plans on Tuesday ahead of scheduled hearings before the Senate Banking Committee on Thursday and the House Financial Services Committee on Friday.
Should Congress authorize the requested loans of $18 billion to GM and $7 billion to Chrysler, and a $9 billion line of credit to Ford? How far should taxpayers go to rescue an ailing industry?
In their business plans, the three said that they would change their model mix and drop some brands, shrink their workforces, and consolidate and retool plants.
Unfortunately, neither loans nor the companies’ promises address the basic problem: Americans just aren’t buying cars, whether GM, Toyota, Ford, or Nissan.
Consider the November sales data, showing GM ’s sales down 41% from a year earlier, Ford’s down 30%, and Chrysler’s down 47%. Foreign brands were hurt, too: Toyota down 34%, Honda 32%, Nissan 42%, Hyundai 40%.
It’s not that Detroit isn’t making good cars. Although GM has offered to drop its Pontiac line in exchange for government loans, Americans like Pontiac. It’s GM’s third best-selling brand, with U.S. sales comparable to VW, Mercedes, and Mazda. The idea that former Pontiac consumers will just switch to Chevys doesn’t make sense.
And the Big Three are healthy abroad. Most sales of Ford and GM cars are made overseas. GM sold 1 million cars in China last year, including 300,000 Buicks, and over 12% of vehicles sold in Russia.
Detroit’s costly labor structure is a handicap that needs to be overcome through negotiation with unions or with reorganization in bankruptcy. But even foreign brands, with their lower labor costs, are unable to sell cars in today’s environment.
Until American consumers feel confident enough about the economy and their own finances to fill up dealer showrooms, the huge sums under discussion on Capitol Hill would be money wasted, merely postponing the inevitable bankruptcies of one or more companies—even though House Speaker Nancy Pelosi says that bankruptcy is not an option.
Potential buyers can’t get credit—and most new cars are sold on credit. In October, GMAC, the credit arm of GM, began to require a higher credit score to qualify a potential customer for a loan. According to GM, half of its sales decline in October—no word yet on November–was due to GMAC restricting its lending, costing about $1.4 billion a month in cash flow.
Congress needs to work on thawing out the credit market—and not just for autos but also for housing and other products. Until that happens, and it could take many months, if the lawmakers believe that the auto industry deserves special help, members could simply give Americans money to buy cars.
This could be done in several ways. The government could guarantee no-interest financing on cars—and itself pay lenders the cost of credit. It could issue vouchers worth thousands of dollars a car to consumers. Or, it could award tax credits to buy cars, as it did with the Toyota Prius.
All of these incentives might cost the taxpayers less, depending on amounts and duration, than giving money directly to the automakers, and could be rolled back as the economy strengthens.
So, rather than lending $25 billion to the Big Three, here’s another idea. Take the money and give consumers incentives to get into the dealer showrooms—and tell them to go car shopping for Christmas.
Spot-on. If the feds actually want to help automakers, then hand out vouchers to auto consumers that offer significant tax rebates in return for buying an automobile that is manufactured in the USA.
Of course, Americans might still opt for the supposedly "better" Asian brand cars manufactured in the USA, but that's capitalism. It is not the business of the federal government to underwrite corporate losses that are a direct result of decades of mismanagement.
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Citigroup gets about $45 Billion Cash and $300 Billion guaranteed backing of “Bad Asset Securities” with NO Stipulations - they didn’t have to go “Begging” to Congress - with any explanation for how they would spend the money (like Management Bonuses).
This problem was CAUSED by the Financial Industry who froze Credit - people cannot get car loans, Businesses cannot get loans to keep their business going.
We Need the US Auto Industry Jobs. I’d rather save the job of an Auto Worker making about $20 per hour - over a “Financial whiz on Wall Street making $100 per hour - and they helped gamble us into Economic catastrophe.
This article fails to acknowledge the fact that excess consumption and spending got us into this mess and more of the same will not fix the problem.
The same holds true for fed activities, you can’t solve the problem of an increase in the supply of money and credit with more of the same. What’s being done to solve the problem is totally wrong.
At most this economist’s proposal would impact the short-term and do nothing for the long-term. What we need is savings, which is sorely lacking right now. Capital can only come from true savings, not from printing press federal reserve policy. In other words, lets spend some more money we don’t have, or charge some more junk on our credit card that we can’t pay for, and that’ll fix everything.
Actually, the oil companies gain as car sales slow, because old vehicles are less fuel-efficient than new ones. So oil companies have no incentive to bail out auto companies–nor should they have to do so.
I think the best solution is not to bail out auto companies. They would then go bankrupt–which is not failure–and reorganize with labor contracts that look more like the labor contracts of Toyota, Honda, and Nissan in the south. United Airlines went bankrupt and is still flying.
However, if Congress insists on throwing money at the auto industry, funds should be structured in such a way as to get cars sold–without differentiating between domestic and foreign, gas guzzler or hybrid. Consumers are smart enough to know what they want, and auto sales are down for all companies. A bailout without increased car sales will be more wasted txpayer dollars.
Diana
When a private enterprise turns definitely unprofitable or unprosperous and there is no clear indication of near-term improvement, the owner naturally thinks of getting out of the business and recovering as much of his capital as he can. This is not true of publicly owned corporations. No matter how poor the performance, their continuance in the field seems to be taken as a matter of course. The results is often an extra-ordinary depreciation of the market price of the common stock, forcing many of the owners to sacrifice their shares at ridiculously low levels compared with the realizable value of the business.
Thus if a company’s showing is bad or unpromising, it is thought to be the logical and proper move for stockholders to sell their shares individually, but not a logical and proper move to consider selling or discontinuing the business as a whole. Why should this be so? Is it necessary and sound that public stockholders of unsuccessful companies should make sacrifices to a degree not expected of private business?
I have worked at GM for 32 years and I’ve seen the good and the bad of the North American Auto Industry. If it were not for the current financial fiasco that was caused by deregulation and the “greed” of the banking industry this request for loans, not handouts,would not be happening. Please focus your comments to the fact that people and corporations cannot receive credit to make puchases as long as banks refuse to lend. I strongly believe the auto industry was on the right path prior to the credit crisis.
I recently purchased a new GMC vehicle out of necessity…our family was growing and needed a larger vehicle. Me and my husband had no outstanding vehicle loans and thought we would purchase an American car this time after having owned foreign cars for over 10 years.
If the automaker goes under, even with a bail out, I still have to pay my note so I don’t get a bad credit rating. GMAC is not going to forgive the balance on my car loan…they need every penny they can get to pay UAW employees they lay off.
This is just a frustrating issue all around with a lot of questions surrounding accountability and fiscal responsibility. As a consumer, I’m hosed. Thanks American automakers.
That’s the best idea I hear. The bailout should be 40% discount on the cost of cars that goes to the consumer directly and finance at 0% over 5 year the loan. To make sure the big 3 hear us, this is only valid on car that give more than 24 miles / gal highway in 2009, more that 30 mi/gal in 2010.
And only if car prices remain.
That is an interesting suggestion: have the oil companies bail out the automakers. It makes sense, given that the oil industries would see a significant portion of their profits deteriorate if the number of cars on the road decreased through attrition because there were no more car manufacturers (although that would be unlikely- but then we’d have more of a problem with price!). I agree a bailout geared more at auto-buyers is needed- no one is going to look at a car if they’re having trouble making ends meet- and those of us not having trouble now are saving up every blessed extra nickle against the time when the layoff hanging over our heads finally happens. Tax incentives have to work, and they have to go to both the automakers building ‘greener’ vehicles and the consumers who buy them. Everyone I’ve talked to this year who thought about buying a car was able to put it off because they all said “they don’t make the car I want yet”. I do worry about the impact a meltdown of the industry would incur- it’s not just the automakers; it’s suppliers, dealerships, after-market parts manufacturer, microchip makers, etc., and everyone else who depends on the business they create as well. It would have a huge domino effect on the economy. Besides, if you want to know what a place looks like with no new car or parts markets- look at Cuba. Do we really want to go there?
Enough is enough. I don’t think Congress should bail out any business. Period. Senator Dodd is talking tough saying he’s going to bring back the bankers and hold them accountable because the funds they were given did not trickle down, as was the plan.
He is simply talking to hear himself talk (as all of them are wont to do). I’ve listened to the radio broadcast of CSPAN while at work all day today and am pleased to hear protesters. Members of Congress have got to hear from us that we are tired of them spending OUR money. Just say no!
Many good comments here- clearly any corporate welfare is a tough sell, as it should be. It’s getting a bit old that our Congress is allowing the automakers to tie up our national business, begging to expand the foolish economic bailouts, as they have been. Yes, one of the problems with starting bailouts- whose next- the airlines? I say let capitalism take it’s course- don’t interfere- the domestic automakers have been offshoring jobs for years, & would continue to do so- why bailout mexican labor & hedge funds who gambled on Chrysler stock & junk bonds??!? Let there be CONSOLIDATION, the Big 3 should become the Big 2, let the weakest go by the wayside, helping the other 2 & the foreign manufacturers with assembly plants in the U.S. No taxpayer money needed!!!
Are you people INSANE????? I work at an auto dealership…I, and my fellow dealership employees, did not cause this! GM and the rest of the world built vehicles that the residents of the world WANTED TO BUY!! Ever heard of “SUPPLY and DEMAND”?? If people don’t demand them, we don’t build them,so in effect ALL the people who have ever bought a truck or SUV contributed to this mess! Don’t get me wrong, the executives of these companies have made bad decisions, along with the unions, BUT when 1.6 MILLION people are suddenly UNEMPLOYED no one will have the money to buy the product or service that YOUR COMPANY offers! WAKE UP AMERICA!! 1.6 MILLION PEOPLE without jobs WILL have a detrimental effect on EVERY SINGLE ONE OF YOU! Have a nice day
The only industry I see Blathering in Bucks these days is the oil industry…( despite Current prices) Why is it that the Auto Industry hasn’t approached the Oil Industry for a 34 Billion loan?
I mean there is a synergy between the two because Cars need oil and Gas and diesel to run. And Banks are too busy trying to buy each other with their new found Taxpayer wealth…and the lowly consumer is busy watching their backs for the boss’s ax… Maybe if the Oil Companies are not interested in bailing out the single most important USER of their products maybe a merger of Oil and Auto is on the Horizon we are not seeing ???. My next vehicle will be electric Plug in that gets at least 400 miles to a charge.! Detroit… Get to work on it.
So, if the demand for crystal meth and heroin drops, are we supposed to bail out the drug cartels?
i’ve got a better idea. don’t loan these companies a single nickel. this is a capitalist country, not a corporate welfare state. let the marketplace sort things out. if they really wanted to increase their cash flow, they’d drastically lower the prices of their product. you can bet that my neighbors, myself, and millions of other Americans would run out and buy a new car or truck tomorrow if the prices were lowered by 50%. The cost of cars has gotten as inflated as houses. It’s a simple rule of business; charge what the market can bear.
I have another idea. Restructure the credit rating system so that people who have not had any problems paying off credit get preferred status and lower bureaucratic scrutiny. Let those who have shown that they don’t value a good credit rating be penalized for straying from the “my word is my bond” concept. Good credit risks are careful to know how the credit gets paid back and they have a record that demonstrates this. Exceptions can be made for payment problems due to catastrophic developments such as illness or national financial collapse. We need to stop treating all debtors as equals. They are not.
When and who will bail out the American taxpayer? Enough is enough. The big three caused all their own problems - they didn’t worry whether or not their products were selling when they were building junk vehicles and gas guzzlers. Now all of a sudden they want to build a decent car, this after years of hogging all the money their greedy CEO’s could get their hands on. Who are they kidding?
This is a loan, not a gift. When you relieve a bank by buying their bad assets, it is a gift.
Nacy Pelosi recently said, “It is ridiculous to ask American taxpayers to support an industry that is handing out millions of dollars in bonuses while it is losing billions of dollars”. Was she talking about the banks or the automakers? It must have been the car builders because she ramrodded the bank bailout through. After we supported them with trillions, they hoarded the money forcing thousands of companies to close and tens of thousand of people to lose their jobs, continued to foreclose on our homes, continued to charge us loan shark rates on our credit cards, and continued to pass out millions in bonuses while flying around in corporate jets.
You would think that our legislators could loan out 50 billion instead of trillions so that millions of us could keep our jobs.
http://ewebsmith.com/gov/autobailout.htm l
Spot-on. If the feds actually want to help automakers, then hand out vouchers to auto consumers that offer significant tax rebates in return for buying an automobile that is manufactured in the USA.
Of course, Americans might still opt for the supposedly “better” Asian brand cars manufactured in the USA, but that’s capitalism. It is not the business of the federal government to underwrite corporate losses that are a direct result of decades of mismanagement.
There is no incentive for union workers at GM, Ford and Chrysler to build vehicles with the quality of other companies. A UAW auto worker in the US will receive 95 percent of their pay if they are laid off. These workers can be laid off, find another job and increase their overall income by without any regard for the quality of their work. A bailout the union based automobile companies would be building assembly lines to a junk yards.
Coming form the Detroit-Flint industrial zone (ok what use to be industrial, now its a rust belt) I feel no mercy for these “american” companies that feel free to destroy entire regional economies in the name of cheap labor. GM pretty much wiped out eastern Michigan when they decided to move the BULK of there manufacturing either over seas or south of the US border.
If these companies want US tax payer dollers they should become US companies again