Monday, December 15, 2008

Reanimator: US automaker rescue package

This is at least the third time since the early 80s that the US automakers have asked (and in now seems, received) some form of Federal bailout (or change in the regulatory framework), threatening with the end of Western civilization if they didn't get what they ask for.

First they needed help because the oil shocks would never let anyone drive ever again, then because the Japanese automakers were exploiting their workers with inhumanly low wages, and now that expensive oil and commodities can't be blamed, it's because of the financial crisis.

But this is not (mainly) a labor or finance cost issue, which is where most of the political "debate" seems focused on: the share of US automakers within the US market has been plummeting for some 30 years. That trend might have something, but not a lot to do with labor costs, something, but not a lot to do with the end of the securitization of 0% financing loans, and something, but not a lot to do with the operational costs imposed by the byzantine and anticompetitive contracts signed between the automakers and their autodealers.

The reason is much sadder and more terminal: terrible management and even worse innovation and quality policies have led growing numbers of US consumers to prefer "foreign" cars assembled in the US. And this despite American cars being $2,600 cheaper than the comparable foreign car (obviously not cheaper enough and inferior along some hedonic dimension not measured in the price comparisons). [See here for an excellent summary of the labor cost side of the equation and for the source of that number].

At the end of the day, automakers and unions negotiated brilliantly with the Feds; they didn't blink and ended up twisting the Treasury's arm when they failed with the Senate, though the White House will surely push back somewhat. Now TARP funds will be used to prop them up for a few months until they require more funds for more propping up.

Thus, Q: if what we want is to avoid putting workers and suppliers on the street and keep household expenditure going, wouldn't a more cost-effective use of taxpayers funds be to subsidize the transition of these companies' workers and suppliers into new jobs and contracts (or, more broadly and fairly, simply return money to taxpayers) and let the carmakers file for bankruptcy, instead of re-rescuing these dinosaurs who have shown themselves unable to face competitive challenges for decades?

It's a pity that a problem which could mostly be dealt with through restructuring under bankruptcy protection has become a political issue in which public funds will be used to raise zombies. There're too many vested interests against doing the right thing: executives would lose, union leaders would lose, current creditors would lose... and some politicians would lose face. It's only the other 300 million Americans who would benefit if things were done right.

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