The U.S. Auto Industry Doesn't Deserve a Bailout

Posted by Enrique on 11.20.2008

Drop dead...



On Tuesday, the heads of the U.S. auto industry "Big Three" were in Washington, begging our elected representatives to save them from themselves. General Motors CEO Rick Wagoner predicted a dire fate for America, saying the failure of U.S. automakers would lead to "economic devastation." Wagoner predicted at least three million job cuts in the first year after bankruptcy, as well as $150 billion in personal income lost. Wagoner assured the Senate Banking Committee that the $25 billion he and his associates were asking for is a small price to pay to avert catastrophe.

Naturally, when you're asking for a lot of money and need it very quickly, it helps to wildy exaggerate the consequences of inaction. After all, exploiting fear is the primary method of persuasion in political discourse. Just like the $700 billion Wall Street bailout, the American taxpayer is being asked to take it on faith that spending $25 billion to protect a few mismanaged corporations is sound economic policy, and don't ask for details. While the collapse of the U.S. auto industry would be regrettable in many ways, it wouldn't be the end of the world. And even if it was, it's not as if we can afford it right now. And even if we could afford it, the auto industry simply hasn't done anything to deserve it.

The story so far...

Support for an auto industry bailout is usually couched in terms of "protecting" jobs. Earlier this month, after a private meeting with the Big Three, Speaker Nancy Pelosi said, "Today, the Democratic leadership discussed how to protect hundreds of thousands of workers and retirees..." After this week's hearing, Senate Majority Leader Harry Reid said, "If we move forward, we can protect and create American jobs, help working families and prevent our economy from falling even further into recession."

If Pelosi and Reid want to protect jobs, they could make it illegal for any employer to lay off a worker. That would be the ultimate protection, no? Of course, that would also be very, very silly - no sensible person believes the government could guarantee immutable employment for all able-bodied American adults through legislation. But if that's silly, then it's no less silly (not to mention manifestly unjust) for the government to selectively guarantee certain kinds of employment in specific industries. With all due respect to our congressional leaders, this isn't about protecting workers - it's about protecting a labor union.

The federal government never bothers to protect retail workers with subsidies, as if the over 7,000 soon-to-be-former Circuit City employees don't have families to feed. Are those erstwhile Circuit City workers less worthy of protection than auto industry employees? Obviously, yes - they didn't belong to a union that gave $1.3 million to Democrats this past election cycle (with less than $7,000 to Republicans), and over $24 million since 1990. Other than greasing the wheels of the Democratic Party, why does the UAW deserve a bailout?

Even those who favor a bailout seem to acknowledge the U.S. auto industry business model is irreparably flawed. Some politicians fault Big Three management for focusing on the manufacture of large, gas-guzzling cars that are out of favor in the current market. The government often tut-tuts U.S. car makers for not making more fuel-efficient vehicles, but again, the UAW is chiefly responsible for these business practices. Smaller cars have smaller profit margins, and when your labor costs are excessive, you can only make money selling large, expensive vehicles. How excessive? Michigan-based economics professor Mark J. Perry provides this handy chart.



By any reasonable standard, UAW members earn exorbitant wages compared to the average American taxpayer. And yet, it's the American taxpayer that's expected to protect the jobs of the same workers who have effectively bankrupted their employers with outrageous compensation demands. If there was ever a group of people who have earned the right to experience the adversity of unemployment, it's the membership of the UAW. In fairness, we are all motivated by self-interest, and few of us will turn down job perks when offered. But I suspect most of us would be flexible with our employers during an economic downturn on the question of compensation - after all, it's better to take a pay/benefit cut than a job cut. Then again, most of us haven't been the beneficaries of ludicrous perks like Jobs Bank:

[O]ne of the U.A.W.'s most prized accomplishments — winning income security for its laid-off members — is not helping the union as it argues for money to help protect its workers at a time when employees across other industries are facing layoffs.

The U.A.W. program, called the Jobs Bank at G.M., provided nearly full pay for laid off workers while they waited for new jobs. A new version of it is less generous, but has left an impression in the public imagination of a place where workers sit around getting paid for doing nothing.

Working families, indeed. I understand that many Americans believe it's the government's job to redistribute wealth, but it seems crass to force taxpayers to subsidize a relatively affluent segment of the population. For all intents and purposes, UAW workers are "the rich." It's a pity that many of them will have to find less lucrative work when the auto industry collapses, but that's no justification for turning them into permanent welfare queens.

Contrary to popular belief, if the Big Three fail, it won't be the end of the American auto industry. The Big Three will reorganize under Chapter 11, but they won't shut down entirely. Meanwhile, without a government-subsidized competitor, existing car companies will grow, and new car companies will emerge (presumably with business models unburdened by union labor). Jobs are lost and companies fail every day, even in a good economy. The government can't be trusted to decide which businesses are worth bailing out, because it will discriminate in favor of political patrons. And the American taxpayer should not be held responsible for protecting a reckless union from a fate of its own making.

Let Detroit go bankrupt.