Correspondence with a Presumed Proponent of Auto Bailouts

As a supporter of free trade, I’m used to getting angry letters and emails whenever I do media. Below is one of the more civil, reasonable emails, which I received following my appearance on last night’s Lou Dobbs:

I would have liked to see the rest of what you said about the auto industry on the show but what I did see angered me. You said something to the effect that bad business decisions by the Detroit automakers should not get them a bail out and that one of them should be allowed to fail is what I heard you say. I am assuming that the out of control greed that has run unchecked for years and terrible government policies have allowed the investment banks to basically destroy thousands of peoples lives should deserve a bail out. My thinking is that none of them should get one penny. As for the auto companies failing. Lets see. The banks fail then they will not lend to anyone now. I with a 780+ credit score can no longer get a loan for a car which then hurts the auto company is one cause. The fact that people are losing their jobs by thousands is not helping, the people losing their houses and high gas prices are killing the sales of cars. I don’t know if you know that if lets say GM goes under 100’s of thousands jobs could be lost. Engineers, designers, line workers, computer guys, and so on, not to mention all the other business that supply the automakers. Did you give any of this any thought? I also would like to know what you think about the good paying jobs that go overseas. Plus can you tell me one benefit to this Global economy has had for the USA. Please don’t give me the cheaper prices line either.

Here’s my response:

Thanks for your thoughtful comments.  More often than not, the messages I receive from people who disagree with my perspective tend to be nasty and poorly articulated.  So, yours is a welcome dissent.

I am opposed to interventions of any kind. The Wall Street bailout and the subsequent partial nationalization of what were private U.S. financial institutions is in essence a penalty on prudent behavior and a subsidy for risk taking. It is patently unfair and grievously unwise to use taxpayer dollars to insulate people or institutions from the consequences of their actions, as it is unfair and unwise to deprive risk takers of the full fruits of their efforts.

The story is no different in the auto industry. Yes, the industry employs thousands of workers and there are many jobs in related industries that depend on a healthy (or at least functioning) auto industry. I am sympathetic to your suggestion that auto’s woes are at least in some part attributable to the credit freeze, which is a response to, among other things, circumstances beyond its control. But there’s much more to the picture than the one you seem to want to paint of the auto industry as an innocent victim. 

The fact is that much of the Big Three’s problem is self-made. The credit crunch and the contraction of demand is just the latest dark cloud, and a problem that affects all industries, not just autos. Thus, if there is a bailout for Detroit, where, how, and why do we draw the line to exclude other manufacturers, home builders, coal miners, and masseuses, who are all suffering from the same contraction in demand caused in part by the credit crunch? Don’t tell me we should bail everyone out. For starters, we can’t afford that.

Detroit’s problems predate the financial meltdown. Management and labor, together, consigned the Big Three to a future of troubles when ridiculously liberal work rules that flew in the face of basic economics were agreed upon, requiring management to pay workers at 90% of their salaries when they were laid off. The “Cadillac Platter” of health and retirement benefits granted to the UAW also dramatically raised the cost of producing vehicles at unionized auto plants in the United States. And let’s not forget about the far-in-excess-of-average manufacturing wages that auto workers “won” through concessions by management over the years. Management agreed to all of these conditions — and labor pushed them — because both sides assumed that the U.S. governent would come to the rescue (that the industry was too big to fail) when the chickens came home to roost over this inefficient, uncompetitive cost structure. That, to my mind, reflects labor’s and management’s greed.

On the demand side, Big Three management demonstrated an egregious failure of imagination, if not downright dereliction of duty, in assuming that large pick-up trucks and SUVs would never fall out of favor. Of the top 10 selling cars (not trucks or SUVs) in the United States, Big Three offerings have barely made the list this decade. Not one has been a top 5 seller. Shouldn’t producers try to make things that people want to consume before scapegoating their failures and seeking government bailouts?

One of the points I made in my interview with the Lou Dobbs show that didn’t make it to air is that a bankruptcy and liquidation or two in the auto industry wouldn’t be the end of the world. In fact, it would be a welcome development for the producers and their workers who remain in operation. They would be able to compete for a larger share of a pie that is currently shrinking, but will again expand. Which companies remain and liquidate should be determined by market forces, not by the coercive, thieving actions of the Michigan congressional delegation and Governor Granholm. 

I think an instructive example for the auto industry is the U.S. steel industry. During this decade, the steel industry responded to waning fortunes and dozens of bankruptcies by finally allowing unproductive, inefficient mills to shut down. As a high fixed cost industry with dozens of producers at the time, the industry finally did what is should have done long ago: it consolidated. In 2001, 12 firms accounted for 75% of U.S. hot-rolled steel production. In 2007, 3 firms accounted for over 80 percent of hot-rolled steel production. The consolidation has afforded the steel industry an alternative to requesting bailouts in the face of declining demand: it curtails output, which affects prices favorably for the mills. If there were fewer automakers in the United States making products Americans wanted to buy, and if labor costs were more variable and less fixed by unaffordable contracts, the auto industry might be similarly equipped to weather storms.

As to your questions about my views on trade, there is plenty of commentary and analysis on our website (www.freetrade.org) that I invite you to check out.