photo credit: Wigwam JonesI have been doing a lot of thinking lately about the fate of the auto industry and specifically General Motors. I am debating what I think the government should or should not do to help bail the Big 3 companies out. Part of me says - Why should we reward money to companies because of poor management? The other part of me says - What about all the employees of these companies that could lose their job? I decided to break this issue down into several key areas below.
- Depression - I have read some analyst predictions that if General Motors were to fold, it could throw us into a depression. I am not an economist, but the thought of GM failing scares me. Not only would we lose thousands and thousands of jobs from GM, all of the smaller auto suppliers would be hurt. Think of all the money these employees put back into our economy. These employees are a big part of the middle class and they spend money. They buy homes, eat at restaurants, go to movies, purchase clothing, and yes – Buy Cars! The trickle down effect from this could be disastrous. Some of these employees could possibly get picked up by one of the other auto companies, but even the foreign automakers are hurting right now and are probably not looking to hire people.
- UAW - The UAW has not done the Big 3 any favors in the past few weeks. They have recently said they will not offer any concessions. I really don’t think this is the time to be making these comments when one of your major employers is about to disintegrate. I have mixed feelings on unions in general. I majored in management in my undergrad degree. I am also a stockholder in several companies that have unions and I know that they don’t always help the bottom line. On the other hand, my father is in the UAW and has supported them for a long time. I think unions are necessary and good for some things, but I think they have gotten out of control and have contributed to some of the crisis in the industry.
- Management - The management of the autos has been poor at best during the past decade. Why should we be held accountable to foot the bill for mistakes made by these highly paid executives? Regardless of what happens, most of the highly compensated executives of these companies will be fine financially. It is the factory workers, white collar office positions, and the 3rd party suppliers who will feel the brunt of the possible collapse.
- Banking Industry - I know that they are different industries, but how can the government help bailout the banks because of very poor lending practices and awful management, but will ignore the auto industry? You mean to tell me that AIG deserves more and more capital to keep them afloat, but they won’t help GM out at all? I am sorry, but I really don’t see the difference.
- Precedence - So we tried to bailout the banks, and we may bailout the auto industry. When and where will it stop? Will the restaurants and the retailers complain to Congress next year that because of the slow holiday shopping season they need help? Bailing out the autos could set a bad precedence for other industries that need desperate help. We helped the banks because we thought we had to. It has to end somewhere.
- Blinders - Up until the last 5 years, a lot of people got fat in the auto industry. This includes executives, dealerships, white collar, blue collar, etc. They either ignored the need to build fuel-efficient cars, or were too greedy to change. We built heavy gas-guzzling monster vehicles and ignored our foreign competitors. We kept our “blinders” on because these big vehicles had huge profit margins and we got greedy. It is time for consolidation in this industry, but what is the price?
- Personal - I have mentioned it before, but the auto industry is personal to me. My father worked for one of the Big 3 for 30 years, and I have many friends and family who are employed by these companies. I use to work for a company that was a supplier of General Motors. Whatever happens in the next few months, I believe that I will know someone who is impacted by these events. I can only hope that the results will be as minimal as possible, but I have a strong feeling they won’t. The collapse of a company the size of General Motors could through the Michigan economy further into a recession along with much of the country.
When I think about all the advantages and disadvantages of bailing out the auto industry, I am 50% in favor of a bailout and 50% against a bailout. I guess in the end, I would tip a little towards a bailout only because of my personal relationship with many people who will be impacted. A close friend just told me this morning that the State of Michigan is in such financial troubles that it is going to have troubles plowing wintery roads and spreading salt this year. If the state losses any more of its fragile economy, it could be a complete collapse.
What do you think our government should do with the Big 3? Do you think if GM or one of the other companies folds it will cause a depression?
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Authentic Connecticut Republican 11.17.08 at 12:53 pm
It looks like the folks in DC are hell-bent to give the stimulus package another try seeing as the first one didn’t have any real effect.
This time it’s the car industry.
While the sanity of blowing cash around and running the national debt up even further is questionable; it seems inevitable - so this time let’s target unemployment, create AMERICAN jobs and pump up the economy all at one time.
Consider the following:
Manufacturing costs of motor vehicles are 65% labor (i.e.: W-2 income), that’s not all direct but due to suppliers. GM alone has over 1300 suppliers. (That’s a lot of jobs!)
1 in 10 Americans makes all or part of their income due to the automobile industry.
Money turns over 5 times in a year.
Thus a vehicle with a manufacturing cost of 20K produces 13,500 in W-2 income which in turn becomes a total of 65K in 12 months due to the 5 turnovers.
(This isn’t magic, it’s simply how the economy works.)
Our domestic car makers are saddled with legacy costs, most of which will reduce dramatically in 2010 due to contract changes. They need to survive to get there.
Our own over-zealous government with a virtual alphabet soup of regulatory agencies has been no help either.
Foreign competitors have worked off-shore collectively to meet various US gov’t. imposed emission and safety standards, thus dramatically reducing those R&D costs. American car companies are prohibited from that by our FTC.
Make no mistake; it’s no surprise that once again government has been a major part of the problem.
Here’s the solution.
Instead of either shipping cases of cash off to car makers; or sending us all another check:
Send out a voucher for say $1,000 good on a motor vehicle for the percentage of the vehicle that’s domestic. (Civic = 70% Ford Explorer=80%)
Let those not interested in a new car sell or give away their vouchers (Ebay would be loaded with them in no time flat) and those that are so inclined can use as many as they can get their hands on up to the full MSRP of the vehicle.
This would bail out the car industry without giving them a dime directly
Further it would reduce the overall age of the nation’s cars which would in turn;
increase overall fuel economy & decrease pollution.
Strengthen the dollar!
Since vehicles with a higher domestic content would be moving better this would reduce our imports, strengthening our dollar which would in turn further reduce what we pay for anything imported …like gas!
Jobs
Instead of simply bailing out a few big companies, this would cause such a run that it would create employment throughout the industry affecting over 1300 suppliers and their workers.
That would give the economy good swift kick right where it needs one!
Pays for itself!
Since money turns over 5 times, and the vouchers are only good for the domestic content of the vehicle, every dime would be spent in the United States creating taxable income.
What is the income tax on 65,000 anyway?
(Remember? 20K manufacturing cost = $13,500 W-2 income x 5 = $65,000)
Another Stimulus Package?
I’m sure you’ll agree that this makes more sense than simply sending out checks; many of which will be used to buy new flat screen TV’s usually made in Malaysia or some such place.
Dawn 11.17.08 at 2:02 pm
Being in Michigan makes it hard for me to be objective. It is not just the auto companies - it is all the people who work at companies that supply parts, materials and support to those companies. And it isn’t like in this economy (bad everywhere but especially bad in Michigan) people and industries are going to be able to easily switch industries. I don’t support helping companies that made bad decisions, but the consequences from letting these companies fail is larger than most people realize.
Dividend Growth Investor 11.18.08 at 12:27 pm
You could create another income stream by purchasing GM bonds at current levels. They are yielding double digits, but odds are you will end up as a new shareholder in the worst case scenario.. Of course if GM goes down, that doesn’t mean noone will be making cars in the US. It just means that the new company will be a new GM..
passivefamilyincome 11.19.08 at 10:18 pm
ACR - Very interesting perspective I must say.