Not So Sure About Bailouts
July 28, 2016 at 4:25 p.m.
By Gary [email protected]
You know it's really pretty strange the way government has embraced the whole concept of bailouts.
Our lawmakers are giving huge sums of tax dollars - which they don't even have - to companies that are in trouble financially.
Now, by any stretch of the imagination, these companies are in trouble through no one's fault but their own.
Financial institutions made bad loans and carmakers made bad management decisions, but nonetheless, lawmakers are feeling compelled to help them anyway.[[In-content Ad]]And it's completely counter to what both parties say they believe in.
Republicans for decades have been extolling the virtues of a free market and limited government involvement in private corporations.
Democrats for decades have been decrying tax breaks for corporations as "corporate welfare."
Aren't these bailouts all of the above?
And why, when the vast majority of Americans are against them and a whole bunch of economists say they are a bad idea, are some lawmakers bent on passing them anyway?
I don't know for sure, but I think it's because lawmakers are scared.
They're scared that as bad as the economy is, it will get even worse if they don't do the bailouts.
But I, and lots of other people, aren't so sure that the bailouts might not just make things worse.
So I think it was the right move Thursday night when the Senate failed to pass the bailout for the automakers.
And while I agree with Congress' reluctance to bailout automakers, it doesn't make much sense from the government's standpoint.
On the one hand, government is pumping hundreds of billions into select financial institutions with virtually no debate and no strings attached.
On the other hand, lawmakers debated and argued and beat the auto execs to death over a tiny percentage of what the financial guys got and then voted no.
Regardless of what the government does, it seems to me the car companies need to make some significant changes to return to profitability.
Giving the car companies a big chunk of taxpayer money might have pushed the problems down the line, but eventually, the same pressures that made them unprofitable in the first place would have come to bear again.
It was almost comical to me when I heard lawmakers talking about the bailout as a loan and saying that the car companies would have to pay it back by a certain time next year.
Are they kidding?
The car companies are broke. They can't even meet current debt obligations. How are they going to be able to pay the government back?
There is a day of reckoning coming for the U.S. auto industry. The bailout would only have pushed that day farther down the line.
So what's the problem with the auto companies anyway?
Mainly, they aren't profitable because of excessive labor and benefits costs, too many nameplates and networks of dealers that are quite a bit less than efficient.
For example, Toyota has 1,700 dealers. Ford, the healthiest of the U.S. car companies, has around 4,000. Toyota has sold 2.07 million vehicles so far this year. Ford has sold 1.77 million.
I think these are the kinds of things that need to be restructured. And these things wouldn't have been restructured under a government bailout.
Sure, there would have been changes around the margins, but substantive reforms like renegotiating labor contracts, reducing dealer obligations and restructuring brands wouldn't have happened.
The only way that stuff is going to happen is through bankruptcy and reorganization under Chapter 11 laws.
The key there is the word laws.
The companies have to follow the law. There is a judge who oversees everything. The judge settles issues between the companies and its unions, suppliers and dealers.
That's the purpose of Chapter 11. That's how reorganization gets done.
Failing that type of reorganization, automakers won't come out on the other end much healthier than they are now, regardless of economic conditions.
The Wall Street Journal reported in September, 2006 that "on average, GM pays $81.18 an hour in wages and benefits to its U.S. hourly workers."
Those costs, including the cost of health care for workers and retirees, were passed along to consumers and added $1,600 to the price of every vehicle GM produced.
After a buyout of 74,000 employees in February of this year, the Center for Automotive Research estimated the average wage, including benefits, for current GM workers had dropped to $78.21 an hour.
Non-union Toyota has total hourly U.S. labor costs, with benefits, of $35 per hour.
That gives Toyota a $1,000 cost advantage per vehicle before the first screw is turned.
James Sherk, of The Heritage Foundation, says, "The typical hourly employee at a Toyota, Honda or Nissan plant in America makes almost $100,000 a year in wages and benefits, before overtime."
Sherk continues, "competition, not corporate greed, is the real problem facing labor unions. When unions negotiate raises for their members, companies pass those higher costs on to consumers."
This means lower prices for comparably equipped Japanese cars and value-conscious Americans are buying them.
Some say a bailout of Detroit will save more than 100,000 jobs in auto and related industries.
But how long can those jobs last if consumers aren't buying enough U.S. cars to make the automakers profitable?
Renegotiation of labor contracts is the kind of restructuring that only happens under bankruptcy - where a federal judge uses laws to decide what's fair and equitable among the parties.
It sounds bizarre, but I think the best thing that could happen to carmakers right now is for them to go bankrupt.
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You know it's really pretty strange the way government has embraced the whole concept of bailouts.
Our lawmakers are giving huge sums of tax dollars - which they don't even have - to companies that are in trouble financially.
Now, by any stretch of the imagination, these companies are in trouble through no one's fault but their own.
Financial institutions made bad loans and carmakers made bad management decisions, but nonetheless, lawmakers are feeling compelled to help them anyway.[[In-content Ad]]And it's completely counter to what both parties say they believe in.
Republicans for decades have been extolling the virtues of a free market and limited government involvement in private corporations.
Democrats for decades have been decrying tax breaks for corporations as "corporate welfare."
Aren't these bailouts all of the above?
And why, when the vast majority of Americans are against them and a whole bunch of economists say they are a bad idea, are some lawmakers bent on passing them anyway?
I don't know for sure, but I think it's because lawmakers are scared.
They're scared that as bad as the economy is, it will get even worse if they don't do the bailouts.
But I, and lots of other people, aren't so sure that the bailouts might not just make things worse.
So I think it was the right move Thursday night when the Senate failed to pass the bailout for the automakers.
And while I agree with Congress' reluctance to bailout automakers, it doesn't make much sense from the government's standpoint.
On the one hand, government is pumping hundreds of billions into select financial institutions with virtually no debate and no strings attached.
On the other hand, lawmakers debated and argued and beat the auto execs to death over a tiny percentage of what the financial guys got and then voted no.
Regardless of what the government does, it seems to me the car companies need to make some significant changes to return to profitability.
Giving the car companies a big chunk of taxpayer money might have pushed the problems down the line, but eventually, the same pressures that made them unprofitable in the first place would have come to bear again.
It was almost comical to me when I heard lawmakers talking about the bailout as a loan and saying that the car companies would have to pay it back by a certain time next year.
Are they kidding?
The car companies are broke. They can't even meet current debt obligations. How are they going to be able to pay the government back?
There is a day of reckoning coming for the U.S. auto industry. The bailout would only have pushed that day farther down the line.
So what's the problem with the auto companies anyway?
Mainly, they aren't profitable because of excessive labor and benefits costs, too many nameplates and networks of dealers that are quite a bit less than efficient.
For example, Toyota has 1,700 dealers. Ford, the healthiest of the U.S. car companies, has around 4,000. Toyota has sold 2.07 million vehicles so far this year. Ford has sold 1.77 million.
I think these are the kinds of things that need to be restructured. And these things wouldn't have been restructured under a government bailout.
Sure, there would have been changes around the margins, but substantive reforms like renegotiating labor contracts, reducing dealer obligations and restructuring brands wouldn't have happened.
The only way that stuff is going to happen is through bankruptcy and reorganization under Chapter 11 laws.
The key there is the word laws.
The companies have to follow the law. There is a judge who oversees everything. The judge settles issues between the companies and its unions, suppliers and dealers.
That's the purpose of Chapter 11. That's how reorganization gets done.
Failing that type of reorganization, automakers won't come out on the other end much healthier than they are now, regardless of economic conditions.
The Wall Street Journal reported in September, 2006 that "on average, GM pays $81.18 an hour in wages and benefits to its U.S. hourly workers."
Those costs, including the cost of health care for workers and retirees, were passed along to consumers and added $1,600 to the price of every vehicle GM produced.
After a buyout of 74,000 employees in February of this year, the Center for Automotive Research estimated the average wage, including benefits, for current GM workers had dropped to $78.21 an hour.
Non-union Toyota has total hourly U.S. labor costs, with benefits, of $35 per hour.
That gives Toyota a $1,000 cost advantage per vehicle before the first screw is turned.
James Sherk, of The Heritage Foundation, says, "The typical hourly employee at a Toyota, Honda or Nissan plant in America makes almost $100,000 a year in wages and benefits, before overtime."
Sherk continues, "competition, not corporate greed, is the real problem facing labor unions. When unions negotiate raises for their members, companies pass those higher costs on to consumers."
This means lower prices for comparably equipped Japanese cars and value-conscious Americans are buying them.
Some say a bailout of Detroit will save more than 100,000 jobs in auto and related industries.
But how long can those jobs last if consumers aren't buying enough U.S. cars to make the automakers profitable?
Renegotiation of labor contracts is the kind of restructuring that only happens under bankruptcy - where a federal judge uses laws to decide what's fair and equitable among the parties.
It sounds bizarre, but I think the best thing that could happen to carmakers right now is for them to go bankrupt.
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