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Bailing on the Bailout By: Bill Steigerwald
FrontPageMagazine.com | Monday, November 17, 2008


Is the impending collapse of America’s Big Three automakers the next “crisis” that must be solved by a massive federal bailout? Most politicians of a certain ideological or geographic bent think so. But Dan Ikenson, the associate director of the Cato Institute’s Center for Trade Policy Studies, believes GM, Ford and Chrysler need a shakeout, not a bailout. I talked to Ikenson Thursday, Nov. 13, by telephone from his office in Washington, D.C.:

Q: Does the auto industry deserve a bailout?
A: That’s an easier question than "Will they get one?" The answer is “no.” They definitely do not deserve a bailout. Taxpayers, first of all, should never be on the hook to bail out private companies. They should definitely not be on the hook to bail out companies that have made terrible decisions time and again. And that’s what describes the Big Three: They’ve made bad decisions with respect to the products they make and they’ve made bad decisions with respect to their labor relations and the capitulations to the unions over the years that have really landed them with an uneconomic cost structure that makes it virtually impossible for them to compete going forward.

Q: What’s the worst thing the auto industry has done to put itself in this fix?
A: Well, I don’t know how to rank them, in particular. But two things strike me as particularly problematic. On the product side, management demonstrated an egregious failure of leadership by never envisioning the day when SUVS and big trucks would fall out of favor. ... The other big problem they have is they agreed to these ridiculous work rules. At GM, you can’t really lay off a worker and therefore reduce costs commensurately. Laying off a worker at GM requires that you still pay 90 to 95 percent of his salary for the period of the contract. You’ve heard of these job banks where people are paid not to work.

Q: Is there anything GM, Ford or Chrysler can do right now to save themselves?
A: I don’t know if there is anything they can do in the short run. If they are going to ask the government to do anything, they should ask it to make sure that the unions don’t get violent when the Big Three tell them they are severing their contracts. They need to go back to square one with unions and say, “Look, we’re either not going to deal with you at all or we’re going to deal with you on much more realistic terms.”

You can’t pay people not to work. The average compensation at GM is $75 an hour; at Toyota it’s $47 an hour. If that fundamental issue is not addressed, there’s no point in thinking much further into the future. There’s just no way they are going to be able to compete. That’s why I think the $25 billion bailout is a complete waste of money. It doesn’t address the problem.

Q: If it is OK or necessary to give government money to financial companies, why is it not OK to prop up GM or Ford?
A: My easy answer to that is that it wasn’t OK to bail out the insurance giant (AIG) and the financial firms and the banks. I was opposed to that, as were my colleagues. ... To engage your question in a more treacherous manner, I think there is a distinction to be made between bailing out the financial system and bailing out a manufacturing industry.

This country could survive without an auto industry at all. If the Big Three and the nameplates were gone, we would find a way to move forward. There would be some adjustment, but we don’t need an auto industry in this country to survive. But I think we need access to credit and I think we need banks. So in that regard I think that industry is more important to us than the auto industry.

Q: What about the idea that if GM or Ford went under it would be an economic catastrophe?
A: Yeah. There is something to the argument. I think the Michigan congressional delegation, Gov. (Jennifer) Granholm and Center for Automotive Research are engaging in massive hyperbole here. They have anticipated a response like the one that I have, which is, “Let’s let one of them fail and see what happens.” Their response to that is, “Well, one of them won’t fail. If one fails, the other two go down -- and all the supply network and all the related jobs that go with them and then we’re talking several million jobs.”

I don’t agree that that’s going to happen. It’s counterintuitive. If one of them goes down, yes, some of the parts suppliers that supply one of them exclusively, GM for example, will be in trouble if GM goes down. But the parts suppliers that supply Ford and Chrysler will suddenly see their orders increase. So I don’t buy the linkage that lands us in this situation where we lose 3 million jobs.

Certainly, there will be some job loss. But let’s face it; this is an economic recession that we’re entering. That’s what happens when economies recede. Congress, the president, can not insulate every American from every form of pain.

I’d like to be able to say that nobody is going to lose their job and that their salaries will continue to rise in real terms but that is not going to happen. If the government stays out, this will be sorted out. There will be some pain but the pain will be more short-lived and the solutions will be determined more quickly.

Q: So what do you think the government actually will do?
A: They’re going to want to do something, and in my view there will likely be a bailout. But I wouldn’t call it a bailout. It’s not a bailout. It’s simply tossing money down a pit. The beneficiaries of that will be Nancy Pelosi, Harry Reid, the Michigan congressional delegation, Gov. Granholm. They’ll be able to say, “Look, we went to bat for you. Now do what you can with it.”

But in four or five months when they come back, it will be Barack Obama’s chance to lay down his vision of what he wants to do -- and hopefully demonstrate that he’s not going to capitulate to these left-wing labor politics and say, “No, we’re not doing this. You were here four or five months ago. We gave you $25 billion. You just used it for operating expenses and prospects aren’t good. Let’s introduce you to the bankruptcy process.”

Bill Steigerwald is the Pittsburgh Tribune-Review's associate editor. Call him at (412) 320-7983. E-mail him at: bsteigerwald@tribweb.com.


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