Two months ago, Treasury Secretary Henry Paulson designated $25 billion in federal loans for struggling Detroit automakers, including $5 billion for General Motors to attempt to secure a fleet of more fuel efficient cars, a condition of last year’s Energy Independence Act. As GM executives cut spending and production, planning to close factories in Windsor, Ontario and Moraine, Ohio over the next year, they are also hoping that Mr. Paulson and the 110th Congress will deliver an early Christmas gift. Unfortunately for them, President Bush and Mr. Paulson don’t seem too keen on the idea.
It’s with good reason that much of the American Executive Branch opposes a General Motors bailout. GM’s financial woes have been a long time coming, and the troubles the company now faces are nothing compared to those it might were it to stay in world automobile markets; President-Elect Obama’s higher corporate tax proposals and national health care mandates are likely to cripple what emerges from GM come January, 2009.
But the growing infeasibility of domestic automobile production is not the primary reason GM has failed and certainly not the reason Mr. Bush refuses to give in to the business’ pleas for financial backing. General Motors’ consistent losses in market share over the past fifty years have been the result of corporate mismanagement and a failure or an unwillingness to adapt to the changing tastes of American consumers. Most recently, the rapid decline in sport utility sales and overproduction of such vehicles at the assembly line have proved a worthy example. Before that, it was the reluctance to negotiate with union workers on employee health insurance and retirement pensions.
When Congress has agreed to treat Mr. Paulson like America’s federal investor, the most important reason not to give funding to GM is that it’s not a good investment. Even Democratic Congressmen like Senator Kerry and House Speaker Pelosi agree that the purpose of government isn’t to employ workers. Neither is it the purpose of the capitalist government to save failing businesses from failure: most have been unsuccessful for a reason. If the federal government wants to encourage growth—or at least thwart decay—within the automobile industry, why not loan money to those who have run successful businesses? Why not grant Toyota and Honda $10 billion to establish manufacturing in Detroit?
The free market can sometimes translate to survival of the fittest. The free market also predicts that companies which cannot turn a profit in the past, often cannot in the future. If Mr. Paulson inflates the size of GM now, the company could cause greater collateral damage when it’s forced into closure at some point down the road. Either that or another bailout will be in order. And if the Treasury is going to spend that money later, it might as well spend it correctly now or if it can’t, not spend it at all. America has long been a history of winners and losers, and sometimes someone has to let the winners win, as they do the losers lose. Perhaps it will be some consolation for laid-off General Motors workers that Christmas is coming up, December 25th.
-David Lamb
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“Why not grant Toyota and Honda $10 billion to establish manufacturing in Detroit?”
Not a bad idea at all.
I highly doubt either company would be interested in the deal. The fact is these factories in Michigan can’t be profitable no matter what you do. It’s tough being the one saying it, but a lot of these people are going to need to find another profession.
Let these companies reorganize in Chapter 11. even if they are bailed out they won’t be able to compete since their costs are so high.
This whole bailout (or series of bailouts) has made my stomach turn.
The concept of joint-stock companies goes back to the 17th century where investors share in profits and losses. It’s ass-backwards when we (the public) never had the chance to share in the profits but money is forcibly taken from us to subsidize the losses of these greedy, incompetent pigs.
You may be on to something with the $10 billion offers to foreign companies and, let’s face it, many of them are doing it better than our own union-dominated manufacturers.
Rant over,
RHM
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It would be too funny if they got bailed out.
Exactly right David - The bailout can’t help the automotive companies because the business model is flawed. Throwing money at a dying business model will only prolong the agony. As for the comments about giving money to the foreign companies to come to Detroit, the state has actually tried with incentives, but being a union state, they’d rather go to places like Alabama or Texas which are right to work. Not surprisingly, the unions fight to stop Michigan from becoming a right to work state, with the catchy slogan “Right to work is wrong for Michigan” and don’t comprehend that companies would gladly come here if they didn’t have to deal with the quagmire that is forced unions.
I’ve said something a bit similar the other day. The best thing is for the companies to file for Chapter 11 and restructure. Shed off failing business lines, let the courts cancel the labor contracts with the UAW, and THEN give the companies an infusion of federal funds. Giving them funds prematurely only prolongs the current failed business practices of the companies. Forcing them to follow the path of any other company and then giving them a loan is the logical way to go.
[...] articles: Killer Buffalo - “General Motors and the Free Market: Why bankruptcy is in order” US News & World Reports - “What Will Happen If We Don’t Bail Out the Auto [...]
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