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Fast on the heels of the $700 billion bailout for America’s banks and other financial institutions, the U.S. auto industry is now begging for a similar handout from Washington.
In another instance of a claim of being “too big to fail,” the senior executives from General Motors, Ford, and Chrysler want the American taxpayer to cough up $50 billion or more to cover their losses. At his first press conference as president-elect, Barack Obama stated clearly that he considers the auto industry to be crucial to America and deserving of a helping hand. He strongly suggested that the Detroit automakers should be among the most generously supported in any new stimulus package out of Congress. In September, Congress approved a $25 billion subsidy to the major automakers under the guise of financing improved fuel efficiency technologies. The Energy Department soon is to be disbursing these monies. Republican resistance, so far, to a bailout for the Detroit Big Three automakers means that an additional $25 billion may not be forthcoming in any lame duck Congressional session before the Christmas recess. But it would, most certainly, be part of any new stimulus package once the next Congress and the new president take office in January. Or under the fear of one of the Big Three going under before the end of December, the Treasury Department may be "persuaded" by the current Democratic members of Congress into using a portion of existing $700 billion bailout money to bolster the automakers' sagging balance sheets. But regardless of how this plays out, the Detroit automakers are no doubt expecting that they will get these tens of billions of dollars from the politicians in Washington, D.C. After all, they’ve paid for it. According to OpenSecrets.Org, which tracks lobbying expenditures by special interest groups, the Big Three auto companies have been spending a fortune on winning friends and influencing people in the halls of Congress and in the White House. In the first half of 2008, GM spent $7.3 million on Washington lobbying activities. Ford shelled out $3.8 million, and Chrysler another $3.3 million in gaining the ears of those who redistribute taxpayers’ wealth. As the table below shows, in the last 10 years, Detroit’s Big Three have expended $228.4 million in lobbying costs in Washington. Out of this quarter-of-a-billion dollars, GM spent $92.9 million, Ford spent $78.6 million, and Chrysler, $56.9 million. | Big Three Automaker's Lobbying Expenses, 1998-2008 | | (Millions of Dollars) | | | GM | Ford | Chrysler | | 1998 | 8.4 | 13.8 | 6.4 | | 1999 | 6.9 | 4.3 | 5.6 | | 2000 | 6.6 | 8.0 | 6.5 | | 2001 | 6.1 | 5.5 | 3.1 | | 2002 | 9.9 | 5.6 | 3.6 | | 2003 | 8.0 | 4.6 | 4.6 | | 2004 | 8.5 | 7.2 | 5.1 | | 2005 | 7.8 | 9.6 | 5.4 | | 2006 | 8.8 | 9.1 | 6.2 | | 2007 | 14.6 | 7.1 | 7.1 | | 2008-2Q | 7.3 | 3.8 | 3.3 | | Total | 92.9 | 78.6 | 56.9 | | Source: Data from OpenSecrets.Org |
In addition, America’s auto manufacturers donated another $20 million in support for various candidates over the last five presidential campaign cycles (1992-2008) . This has been in the form of campaign contributions from individuals and PACs. During most of these presidential elections, 60 to 70 percent of the contributions went to Republican candidates. This year the provisional data shows that Big Three contributions split fifty-fifty between the two major political parties. Besides the automaker’s combined lobbying expenses of $14.4 million in the first half of 2008, they have spent at least an additional $2.2 million dollars in supporting those who have been running for the presidency. This is a total of over $16.6 million just in the last year in influencing the political landscape in their direction. So whether the Big Auto-friendly stimulus package is passed before Christmas or after Barack Obama takes office in the second part of January, GM, Ford, and Chrysler will have made a pretty good return on their long-term investment in buying friends in high political office. Having invested nearly a $250 million in lobbying and campaign contributions over the last 10 years, they are likely to get, now, a hefty return on their political investment -- $50 billion. That is a dividend that even the most demanding speculator could relish. Of course, it will be the taxpayers of America who now will have to foot that extra bill.
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I think I understand what a bankruptcy proceeding is all about, having been the court observer for a major auto manufacturer in more than one supplier company failure. I certainly agree with the theory you advocate, and I believe there will eventually be one or more bankruptcies or major consolidations among the Big Three US auto companies. However well the theory holds together academically, (I majored in Economics too) I believe you are grossly underestimating the effect failure of one or more of these companies would have in today's circumstances, and the timing of the actions you advocate couldn't be worse. Please consider the following:
1) A vehicle represents a significant long term investment - an airline ticket lasts a day or two.
2) An independent study has indicated 80% of potential customers would not even consider buying a vehicle from a bankrupt manufacturer. The manufacturing and assembly plants would be forced to cease production immediately. Suppliers would realize an immediate volume reduction, enough to force some of them into bankruptcy.
3) The NA content in non US owned companies is substantially less than the Big Three. Should they realize higher volumes due to a competitor's bankruptcy, their first efforts would be directed towards making as much as possible in their home countries. Such actions would put additional pressure on the US parts suppliers.
4) the non US auto "assemblers" would take years picking through the available assets before employing them productively. (The Japanese don't make hasty decisions)
5) The effects of such a shutdown would ripple through this already ravaged economy and we would not recover for years.
I do not believe that most people advocating bankruptcy at this time have a thorough understanding of the complexity of this problem, nor do I know of a Washington politician who is willing to acknowledge the government's role in the the many mistakes that have been made in the past. If the economy were healthy, it might be rational to weather a bankruptcy or consolidation and arrive at the same academic conclusions reflected in your paper. Adam Smith, after all was a great thinker, but the world has changed a bit since then.
Thank you for your response. It was nice to hear from the author himself.
Dean Gilchrist
Thank you for you thoughtful comment.
If one or more of the Big Three automakers were to file for bankruptcy, they would not stop producing cars and employing the vast majority of those now directly or indirectly working for them.
We have seen this before with several of the major airlines filing for bankruptcy. It enables them to make new arrangements with their creditors, and to renegotiate their often high-cost labor contracts.
In the meantime, the planes still keep flying, and the staffs are still working.
Bankruptcy enables a reorganizing of the company for it to have a "second chance" to see if it can still be made profitable and economically viable.
The same would happen if a big automaker had to follow this path.
And it is far better that becoming tied up with the government. Under bankruptcy, the eye still has to be on the ball of ultimate market profitability. This is not the case when the industry has $50 billion worth of dependency on the political types in Washington, D.C.
Already, we hear it said by members of the Democratic Congress that if the money is forthcoming at taxpayers' expense, there will be strings attached. These strings will now focus the automakers' attention not on the market, but on pleasing politicans -- whose interests and motives rarely have anything to do with the well-being of the consuming public or the taxpayers.
The politicans are concerned with in staying office by working with and "serving" the special interest groups who fund their campaigns and spent tens of millions of dollars lobbying Congress and the White House.
What if one or more of the Big Three automakers were to "go under"? So be it.
In the long run, the industry would be better for it. The American people will still want to buy cars, pick-up trucks and even, perhaps, SUVs.
The factories, machines and facilities to produce these automobiles will be bought up by, hopefully, more market-efficient owners, who will also employ many if not most of those presently working in the auto sector.
Otherwise, the rest of us are to be made to pay as taxpayers what we do not want to voluntarily buy as consumers. And the current auto company owners and managers will not be "nudged" by the experience of losses to properly mend their ways.
This will end up being another multi-bullion dollar boondaggle.
Dr. Richard Ebeling
Also, have any of you bothered to find out what the Big 3 has already done to compete in this market?
By the way, I heard Barney Frank on a talk show yesterday say they would legislate first claim on Big 3 assets if they couldn't repay the loan. So it is a loan- not a very good one, but a lot better than the outright gifts the Government has already handed out.
So if you guys are comfortable sourcing your next fleet of jeeps, humvees, airplanes etc to the Far East when needed for the next war, go ahead, stick with the uneven playing field, and don't take any risks with your government money.
Dean Gilchrist
How do the auto companies pay for their generosity? They turned to their suppliers and told them to cut the cost of the product supplied to the them. I've been told by more than one employee of a supplier to the Big Three that the were told to cut the cost of their product by 5% a year! Why do you think all of those suppliers went of business. Now the Big Three and the UAW wants us to reward this behavior! No way.
If the interest rates were dropped to say 12% some of us might be able to buy a car. For your information I am driving two 1991 G20
Foreign Infinity cars. Four Cylinder! I bought in 1991-Do the math? 17 Years ago - I paid $17,000 for the new one. and the used one was bought in 1996 I paid $9500.I just got the one inspected and placed my fifth exhaust system on the car. I used to drive a Chevrolet.HoweverI had to replace the Monte Carlo in 7 years.The Caprice in seven years.
Looking at GM's credit rating loaning them money would be a gift. There is a reason they are turning to the government for a loan, it's because no bank is stupid enough to lend them money. They have had a terrible business plan for years and years and have fallen prey to greedy union workers and executives. Let GM fail, let all of those union pigs loose their jobs and let a new, better, and more competitive U.S. Auto Industry take its place.
accident. I feel that the recent election is one giant
step which was directed and I anticipate more of the same
unless our American Public awakens quickly.
Bob Heinly
unemployed workers. This amount is far greater than the
requested relief.
Bob Heinly