What Is The Point Of Bailing Out The Automakers If We Don't Want Their Cars?

The big decision looming right now is whether or not we should bail out the big three American automakers, and if so how should it be structured? There is a lot of talk about why we should, and why we should not bail them out, but little is made of one very important fact: we don't want the cars they are making. Why should we bail out automakers if we don't even like the product they are making? Mark Thoma from the Economist's View looks at this problem in his blog post below.

Labor costs aren't the biggest problem automakers face, the problem is making cars people want to buy:

$73 an Hour: Adding It Up, by David Leonhardt, NY Times: Seventy-three dollars an hour. That figure — repeated on television and in newspapers as the average pay of a Big Three autoworker — has become a big symbol in the fight over what should happen to Detroit. To critics, it is a neat encapsulation of everything that’s wrong with bloated car companies and their entitled workers.

To the Big Three’s defenders,... the number has become proof positive that autoworkers are being unfairly blamed for Detroit’s decline. “We’ve heard this garbage about 73 bucks an hour,” Senator Bob Casey, a Pennsylvania Democrat, said... “It’s a total lie...”

So what is the reality...? ... The calculations show ... that ... the ... $73 ... is the combination of three very different categories. The first category ... includes wages, overtime and vacation pay, and comes to about $40 an hour. ... The second category is fringe benefits, like health insurance and pensions. ... At the Big Three, the benefits amount to $15 an hour or so.

Add the two together, and you get the true hourly compensation of Detroit’s unionized work force: roughly $55 an hour. ... Honda’s or Toyota’s (nonunionized) workers ... make in the neighborhood of $45 an hour, and most of the gap stems from their less generous benefits.

The third category is the cost of benefits for retirees. These are essentially fixed costs... — dividing those costs by the total hours of the current work force, to get a figure of $15 or so — and end up at roughly $70 an hour.

The crucial point, though, is this $15 isn’t mainly a reflection of how generous the retiree benefits are. It’s a reflection of how many retirees there are. The Big Three built up a huge pool of retirees long before Honda and Toyota opened plants in this country. ...

These retirees make up arguably Detroit’s best case for a bailout. The Big Three and the U.A.W. had the bad luck of helping to create the middle class in a country where individual companies — as opposed to all of society — must shoulder much of the burden of paying for retirement. ...

[L]abor costs, for all the attention they have been receiving, make up only about 10 percent of the cost of making a vehicle. ...[T]he Big Three already often sell their cars for about $2,500 less than equivalent cars from Japanese companies... Even so, many Americans no longer want to own the cars being made by General Motors, Ford and Chrysler. ...

There is good reason to keep G.M. and Chrysler from collapsing in 2009. ... The economy is in ... recession... You can think of the Detroit bailout as a relatively cost-effective form of stimulus. It’s often cheaper to keep workers in their jobs than to create new jobs.

But Congress and the Obama administration shouldn’t fool themselves into thinking that they can preserve the Big Three in anything like their current form. Very soon, they need to shrink to a size that reflects the American public’s collective judgment about the quality of their products. ... If we had wanted to preserve the Big Three, we would have bought more of their cars.

With demand falling, carmakers somewhere will have to shrink, at least until the world economy recovers. And as the market tightens, automakers in other countries are beginning to ask for their own bailouts:

Volkswagen: if the American carmakers can get bailout funds, so can we, Credit Writedowns: It seems that the bailouts are now turning into a “Beggar Thy Neighbor” policy of aid for specific sectors of the global economy. First, it was finance as the banks were savaged by massive writedowns to their property and derivative holdings — with each nation competing with the next for the largest handouts to this vital sector of the economy.

Now, as the real economy has started to plummet, it is the auto sector. While all eyes are peeled on Washington and Detroit after the $15 billion bailout there, Volkswagen has quietly been lobbying the German government for its own bailout.

This is looking a lot like competitive bailout schemes as Daimler wants in as well. I can only imagine what Honda, Nissan and Toyota are thinking. Is this the 21st century version of competitive currency devaluations?

Below is my translation of a “Die Welt” article published just yesterday detailing Volkswagen’s manoeuvrings. ...

As you can see from this blurb, Daimler feels disadvantaged by the free money that VW is looking to get and I am certain all foreign car makers want to level the playing field with Detroit after they Americans have received massive injections of state aid. It looks like this process is just beginning. ...

Speaking of Germany:

Paul Krugman: ...Everyone here seems to be talking about two things: the fate of the auto industry, which is in almost as much trouble in Sweden as it is in the United States, and the German problem. At a time when expansionary policies are desperately needed, the leaders of Europe’s largest economy seem to have their heads in the sand. This is a huge problem: there are large spillovers in fiscal policy among EU nations — that is, a significant fraction of, say, French fiscal expansion ends up promoting employment in Germany or Italy rather than France. So there’s a crying need for a coordinated policy. But the Germans aren’t participating.

It will be interesting to see how coordinated the world response will be (for both monetary and fiscal policy), and how many countries will free-ride on the stabilization effort of their trading partners. If enough countries free-ride — and there is an incentive to low-ball the effort and let other countries do the heavy lifting — the total stimulus may be insufficient and undermine the recovery effort.

This article has been reposted from the Economist's View. The full post can also be viewed on the Economist's View.