16.11.08

FINDING THE PUBLIC INTEREST. In a long post, I suggested it would be served by the bankruptcy of the legacy car companies (which ought not be confused with U.S. auto manufacturing). Michael Barone puts it bluntly: "But I will wonder if in preserving the past we are giving up the chance to get to a better future." Acre of Independence elaborates.

But what are the three automakers going to do in the next one hundred days that they have not done over the past decade? Can they restructure, innovate, and operate in a way that creates lasting economic effects worthy of the taxpayers’ investment? And should the American taxpayers risk billions of dollars on the Big Three in the hope that they can become profitable again?

My answers to these questions are “Not too much”, followed by a bunch of “no’s”.

Chrysler, General Motors, and Ford have failed to meet the primary social responsiblity of corporations in a capitalist system: they are unprofitable. It is not merely stagnant economic conditions that have led to their decline; their competitors, for the most part, produce superior automobiles, and have a more effective business model. Most of the rival automakers produce cars more economically due to lower labor inputs and a more streamlined production system.

That's despite the Chrysler loan guarantees and the Voluntary Export Restrictions late in the Reagan administration. Perhaps the best defense of those restrictions is that they scared some overseas car producers into building capacity in the United States. That provided the legacy companies one more reason for business as usual.

Blame decades of collective bargaining with unions, the whims of crude oil and, most of all, trucks. The truck is Detroit's salvation and its downfall. Pickups and sport utilities threw off so much profit in the days of cheap oil that the Big Three could lose money on dull, less-reliable cars and simply shrug.

Plus, the Midwestern-flavored designs of Big Three cars didn't exactly overwhelm status buyers on either coast; eventually even loyalists in the Heartland have given up on the Heartbeat of America's sedans and coupes. Do you see the teenage tuner crowd drooling about the prospect of buying aftermarket mods to soup up their Chevy Cobalts or Dodge Calibers?

Lacking any incentive to improve fuel efficiency and battle imports on style notes thanks to the cushy truck business, the Big Three doubled down on gas-guzzlers just before crude oil prices soared.

In the era of $4 unleaded, the Big 3 spit out fleets of guzzlers that required $100 fill-ups and tepid sedans that, while better than '90s era Detroit metal, still choke on Accord and Camrydust. As the economy slowed and consumers put off new car purchases, the trucks are still too expensive to drive and even deep discounts won't move the inventory. GM's sales were down by nearly half in October.

If there is one bright spot, it is that the fringe-benefit heavy pay packets are an incentive for the legacy companies to rely more heavily on overtime and expand workforces more slowly than their competitors. There are fewer people affected by cutbacks at the legacy companies than would be the case if the irreversibility inherent in those fringe benefits didn't limit hiring.

There is one additional point readers ought ponder. Yes, the reorganization or the closure of one or more legacy car companies will be disruptive. On the other hand, that will release resources that have been diverted from other uses into the preservation of the existing order.

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.

The implications of this story for Washington policy makers are obvious. Investing in the major auto companies today would be throwing good money after bad. Many are suggesting that $25 billion of public money be immediately injected into the auto business in order to buy time for an even larger bailout to be organized. We would do better to set this money on fire rather than using it to keep these dying firms on life support, setting them up for even more money-losing investments in the future.

Two main arguments are being raised to justify a government rescue of the auto industry. First, large numbers of jobs may be at stake, perhaps as many as three million if one counts all the other firms that supply the Big Three. This greatly overstates the situation. Americans are not going to stop driving cars, and if GM, Ford and Chrysler disappear, other companies will expand to soak up their market share, adding jobs in the process. Many suppliers will also stay in business to satisfy the residual demand for spare parts even if the Detroit manufacturers go under. If the government wants to spend $25 billion to protect auto workers, it would do better to transfer the money to them directly (perhaps by cutting each worker a check for $10,000) rather than by keeping their unproductive employer in business.

Via TigerHawk, who has additional observations on the legacy companies' corporate culture.

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