Posted 7:40 am Tuesday, September 30, 2008
Automaker Bailout Slid By Unheralded
Only in the shadow of a proposed $700 billion Wall Street intervention could a $25 billion bailout of the auto industry be considered a minor news event and excite little comment.
The bailout of the automakers occurred last week. General Motors, Ford and Chrysler say they need help in transitioning from big cars and SUVs to fuel-efficient vehicles.
The $25 billion is just half of what the Big Three were requesting. But it still dwarfs the $1.5 billion bailout of Chrysler in 1980. And there are far fewer strings attached than in 1980.
Experts with the Heritage Foundation say there are serious problems with the bailout, and that its implementation bears watching. Closely.
"The bailout would do little to solve the very real long-term problems of the U.S. automobile industry, which include not just fuel inefficiency but large retirement, health, and other costs," say James Gattuso and Nicolas Loris. "Meanwhile, American taxpayers would be left to pay the tab for years of bad business decisions by Detroit. And the cost is unlikely to end there. If Detroit receives a federal handout, more industries would come for their own dollop of aid."
There are striking similarities between the automaker bailout and the Wall Street measure; both are a response to bad business practices.
In Detroit's case, the auto industry failed to react quickly to increased consumer demand for smaller, more fuel-efficient cars. Now they say they need help responding.
"But why should taxpayers be asked to pay for this change of business model?" Gattuso and Lori ask. "Detroit's dependence on big, non-fuel efficient vehicles was its own doing. The strategy, not shared by rivals such as Toyota, was long a profitable one; for many years SUVs and minivans were a golden goose for the Big Three. But now this strategy is proving costly. Moreover, not all of Detroit's current woes are due to the lack of energy-efficient cars; high retirement and other labor costs may be more to blame. In any case, there is no reason taxpayers should bear the cost of the Big Three's business decisions."
It's true the bailout this time involves loans that will, in theory, be repaid over time.
"The proposed deal for taxpayers, in fact, is in one sense worse than that shouldered by the taxpayers 25 years ago when the federal government bailed out the Chrysler Corporation," Gattuso and Loris point out. "At that time, the federal government assumed ownership of Chrysler shares, providing them with a benefit if the firm did well. This time around, there is no upside potential for gain for taxpayers but only a downside risk of loss."
The bailout of the automakers just shows that in the present chaotic climate in Congress, there seems to be no business that's not too big to fail.
Where will it end?
