One of the most important, but dividing, issues currently facing
Pros – Why the bailout is necessary
- Approximately 10% of US employees are employed in the auto industry or by its suppliers/dealers. Of this, the Big three and their suppliers employ more than 2.5 million people, amounting to nearly 2 percent of the nation’s work force. So by letting them going under or having to undertake massive cost cutting layoffs could result in a sharp spike in US unemployment and further depress consumer spending. It will virtually wipe out the
- GM, Chrysler and Ford (NYSE:F) are iconic brands and letting them fail will further shatter market confidence. The perception that the
- A bailout with strict conditions will allow a government mandated restructure of the US automakers and forcefully overcome resistance of the strongest union in the nation, the United Auto Workers (UAW) union, that has strongly pushed back on change to the relatively generous terms it is used to operating under.
- The pressure on the
Cons – Why the bailout is a bad move
- Throwing good money after bad. Spending billions of taxpayer dollars with no promises to reform the root causes of US automakers' chronic lack of competitiveness will end up being a massive waste of funds. Given the automakers and their union’s opposition to change in the past, this may be a real possibility.
- By extending the bailout to the car industry, it will be only a matter of before other struggling sectors and industries (like retail and steel) line up for their share of bailout funds. Workers and investors in other key industries have the right to ask, “why do they deserve it more than us?"
- It is questionable how effective government funded bailouts have been. The financial sector bailout plan – TARP – has already spent half of its $700 billion budget and little has changed in the economy which continues to worsen. While the financial sector will recover in the long term because it is more efficient (due to competition and lower entry barriers), it is questionable if any amount of help will be able to help the chronically under performing US automakers.
- Some free market advocates have argued that Bankruptcy may be a more effective way for the
My view is that the bailout of the Big three US automakers will happen and the proposed $25 billion package will be approved by year end. Despite critics on both sides, the US automakers bailout proposal has strong bipartisan support and the President-elect has publicly stated his backing of a constructive bailout plan. It is just too important (perceived and actual) to the nation’s economic recovery. The key will be how the bailout package is structured for short term and long term reform. For it to be successful the US automakers will have to undergo a radical make-over in terms of labor rates and union structures, past and current worker benefits and accelerating the move to cleaner energy vehicles. Further their executives, need to be replaced by new talent whose focus will be on making the companies as efficient as possible to compete in the 21st century and to eventually repay (with interest) the taxpayer funded bailout.