“Why is GM (and Ford and Chrysler) seeking taxpayer subsidies when Toyota, Honda, Nissan, Kia, BMW, Daimler, Hyundai and other foreign nameplate producers, who are facing the same contracting demand and credit crunch quietly weathering the storm, are not? Because the latter have costs structures that haven’t been made obsolete and uneconomic by ludicrous union demands (see chart above, …). And, of course, they make cars that Americans want to buy.”
“A Cancer on the Big Three: The $29/Hr. Pay Gap”, Carpe Diem: Professor Mark J. Perry's Blog for Economics and Finance (14 November 2008).
http://mjperry.blogspot.com/2008/11/cancer-on-big-three-29hr-pay-gap.html
Dr. Perry is Professor of Finance and Business Economics at the University of Michigan-Flint.
The differences in costs between the Big 3 automakers of Detroit and the foreign transplants that also build autos in the United States is reflected in the $25-$30 difference in hourly pay. Given this difference, if the government bails out the Big 3, one might very well ask why an autoworker in the South should pay taxes to support his better paid Northern counterpart, when they work just as hard in the South as they do in the North. Indeed, one might ask why should any American should subsidize well paid autoworkers (or for that matter, extremely overpaid CEOs on Wall Street).
More generally, overpaid autoworkers are only one part of the difficulty before the American auto industry. Just as important, perhaps more important, is weak management and its years of failing to restructure an industry in desperate need of restructuring. In a recent article in the Wall Street Journal, David Yermack, a professor of finance at New York University's Stern School of Business, explained recently in the Wall Street Journal (15 November 2008) part of the problem before the country as it tries to decide what to do about GM and the other auto dinosaurs:
“Over the past decade, the capital destruction by GM has been breathtaking… GM has invested $310 billion in its business between 1998 and 2007. The total depreciation of GM's physical plant during this period was $128 billion, meaning that a net $182 billion of society's capital has been pumped into GM over the past decade -- a waste of about $1.5 billion per month of national savings. The story at Ford has not been as adverse but is still disheartening, as Ford has invested $155 billion and consumed $8 billion net of depreciation since 1998.
As a society, we have very little to show for this $465 billion. At the end of 1998, GM's market capitalization was $46 billion and Ford's was $71 billion. Today both firms have negligible value, with share prices in the low single digits. Both are facing imminent bankruptcy and delisting from the major stock exchanges. Along with management, the companies' unions and even their regulators in Washington may have their own culpability, a topic that merits its own separate discussion. Yet one can only imagine how the $465 billion could have been used better -- for instance, GM and Ford could have closed their own facilities and acquired all of the shares of Honda, Toyota, Nissan and Volkswagen.”
As the country considers what to do about GM and the other dinosaurs of the auto industry, it should keep in mind that one of the wonderful things about free market capitalism is that poorly run businesses are driven out of business, and their incompetent managers are, as Ludwig von Mises put it, “relegated to a place [unemployment] in which [their] ineptitude no longer hurts people’s well being”. Only intervention by government can save management so that it continues to inflict its damage on society.
Basically, two arguments are made for the auto bailout, that the auto industry is so important and so tied into the rest of the economy that large-scale damage would occur if Detroit were to go under and that if the financial sector is rescued, why not the auto industry, too. Yes, Detroit is big and its demise would be very, very damaging to the rest of the economy. Many jobs are at stake, not only at the auto companies but also at their dealers and suppliers, and the pensions and health care of many others would be adversely affected by the closing of these firms. But no one is talking about closing down the Big 3 completely. Rather, through bankruptcy they would be more completely reorganized and have a better chance at gaining long-term viability. And, with regard to bailing out the banks, clearly, saving one sector of the economy, in this case, finance, is not a reason to save any other. The web of finance extends far and wide and literally affects everything economic. Its central role makes it different.
The auto industry is declining in the U.S. for many reasons, some of them due to the industry’s inflexibility and some of them due to bad macroeconomic and regulatory policies, such as an exchange rate that has fluctuated in a way that has made long-term planning impossible and CAFE standards that distorted its market. Whatever the reasons for the failures of the industry, bailing out the auto companies will only allow the management in place to continue to mismanage the industry and destroy more capital.
Rather than being “rescued” by the government, the industry should be left to find its own way in an extremely competitive world market. This means allowing it to strive to make a profit without the burden of needless regulations and government intrusions that always accompany any government “help” to a distressed industry.
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