The auto industry doesn’t need a bailout. It needs a shakeout.
Yes, it’s true, some iconic firms — with General Motors at the top of the list — are in serious financial trouble and could fail. But why should those firms be bailed out by the taxpayers? While there is some merit to the suggestion that the industry’s woes are attributable to the credit freeze, that’s just a small part of the story.
Many of the Big Three’s problems are self‐made. The contraction of demand is just the latest dark cloud, and a problem that affects all industries, not just autos. Thus, if Detroit should get a bailout, why not help America’s home builders, coal miners and masseuses, too?
Detroit’s problems predate the financial meltdown. Management and labor consigned the Big Three to a future of troubles when they agreed to preposterous work rules, requiring management to pay workers at 90% of their salaries when they were laid off. Those rules compelled General Motors in particular to keep pumping out vehicles in the face of shrinking demand earlier in the decade, ushering in the period of “0% financing” for five, six and seven years. Because labor costs were locked in, it made more sense to keep producing and selling at below the full cost of production.
Management also gave labor the “Cadillac platter” of health and retirement benefits, all of which substantially increased the cost of producing vehicles at unionized plants in America. Management and labor always assumed that the U.S. government would come to the rescue when the chickens came home to roost over this inefficient, uncompetitive cost structure.