Should government help car makers?
Car makers are looking for government-sponsored loans so they can retool their assembly lines for fuel-efficient cars. Just don't call what they want a bailout. Commentator Will Wilkinson has more.
Commentator Will Wilkinson (The Cato Institute)
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Will Wilkinson's blog
TEXT OF COMMENTARY
Scott Jagow: I told you yesterday that carmakers were looking for some help from Congress -- low-interest loans. The CEO of Ford said Detroit is not looking for a bailout, ghat being a loaded term these days, and all. Commentator Will Wilkinson says you can call it whatever you want, but it's still an undue burden on taxpayers.
Will Wilkinson: Detroit's "Big Three" automakers are struggling. Instead of making cars Americans want to buy, GM, Ford, and Chrysler are clamoring for tens of billions in taxpayer-subsidized government loans. Sadly, these sub-prime borrowers will likely get their cheap money. Both McCain and Obama are backing the bailout, lest the American public be visited with the calamitous extinction of the Pontiac Vibe and Chrysler Sebring.
Just this week, the government took over mortgage giants Fannie Mae and Freddie Mac. This put taxpayers explicitly on the hook for their massive liabilities. And earlier this year, the Fed opened the spigot to keep flailing investment houses afloat. There's a decent argument for these interventions. In each case, quick action might have kept these medium-sized disasters from snowballing and bringing down the whole economy. If so, the extravagant expense is worth it.
But what if one or all of the Big Three fail? Well, other companies will buy their assets and use them more wisely and profitably. Some people will lose jobs, most will find new ones and the gains in efficiency will make the economic pie larger and job-growth more likely. Maybe you'll buy a Toyota Camry. Made in Kentucky. We'll pull through.
Here's a paradox for you. Government guarantees often create the very conditions they are meant to guard against. The implicit guarantee behind the privately-owned yet "government-sponsored" Fannie Mae and Freddie Mac contributed to the irrational risk-taking in the mortgage industry that has pushed our economy to the brink. When individuals and firms are made to bear the costs of their own decisions, their decisions will be more carefully made.
Detroit doesn't need taxpayer subsidized loans. It needs to make better decisions -- or else fail. The alternative to creative destruction is not stable prosperity. Propping up yesteryear's winners leads to stagnation at best, plain old uncreative destruction at worst. The best defense is often no defense. But politicians, who can see no further than the next election, have once again placed our bank accounts in harm's way.
Jagow: Will Wilkinson is a research fellow at the Cato Institute. You can find a link to his blog and share your thoughts at our Web site: Marketplace.org.
Comments
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From Detroit, MI, 09/13/2008
You can say what you want, that is certainly your right. It's also my right to point out what a moronic statement it is. It's okay for Lenders is not alright for an industry that employs millions of people. That's a load of you know what! It's painfully obvious to me that you are out of touch with the middle class and what manufacturing does for us. I suppose that we should all just move on and learn from this experience huh?
Do you live in Detroit? Can you honestly say that we will only lose a "few jobs"?! You have not seen with your own eyes the desemation that the loss of manufacturing jobs has done to our landscape here in Detroit. Your thinking is short sighted and elitest and proof of what is wrong with this country. Lets see how far this country goes once the middle class becomes poor. Tell me what will happen to all those stocks and the housing market then?! Or are we to bailout companies that don't support the American bottom line?
What a load of nonsense!
From Pascagoula, MS, 09/11/2008
Paying for mistakes is a universal fact of life. Are we still capitalist? Do we still have free markets? Is this still a democracy? Washington needs to tend to the peoples' business for a change and keep their hands off the rest.
From Austin, TX, 09/11/2008
We pay nothing for other countries' honest days of work. We export our work because we believe that we deserve a cheap, lavish lifestyle. We believe that we shouldn't be responsible for financial decisions, and that our young adults deserve to suffer because they haven't paid enough "dues" financially or emotionally.
The age of the manufacturing job that puts a roof over people's heads and puts kids through college is over. Now we have to do what we tell all people under the age of 30 to do: grow up. Remember that if GM could send its labor overseas and make a bundle without a PR nightmare, it would.
From Mckinney, TX, 09/11/2008
The big 3 are in trouble because the market that used to buy higher priced cars is shrinking because the realities of globalism are decreasing the income value of an honest day's work, combined with increasing prices for a days living. This decreases the price that people can afford to pay. That is why so many of the new cars in the neighborhood are Kia's.
They are also in trouble because they keep in the past with the old style steel box based car. The reality of our energy supply is creating the need to rethink the car but they just won't. The focus of our economy is no longer inovatione any more, everyone is obsessed with exploitation of the existing instead.
If we do help the big 3, we must as a condition of receiving the help, require them to do the right things, like completely new design of the car around lightweight structural materials, efficient shapes, alternative energy powered. And we must also help the new startups that are changing the car concept, like the Aptera. It would not be fair to subsidise the big 3 to the end of forward thinking startups who are just about to come to market.
This Aptera is cool. This is the future of the car. I am considering the hybrid version if I still have a decent paying job when it comes to market. Not even thinking about a big 3 anything.
From Brighton, MI, 09/10/2008
Regarding "Bailouts", I tend to think it's OK as long as the perpetrators (!) are thoroughly wamped in the process. There should be no opportunity to repeat in the near future. This means: Freddie/Fannie COEs and top management (and investors) who had _any_ involvement need to be nailed.
I'm OK with Detroit 3 getting thier own bailouts as long as they suffer the same consequences as anyone else getting a bailout.
Another question: I'm all in support of good ol' Amurican industry, but what about level playing fields for level players? Is this _really_ level playing fields? [Many foreign competitors have benefitted in recent months becuase they had already developed vehicles for markets that had set a Demand driving policy (huge fuel taxes). Since Detroit 3 didn't expand to those markets and develop globally salable vehicles, does that mean they should get a bonus (bailout) or a wamping (to emphasize the lack of product leading/planning/engineering).] How many vehicles does Toyota make in the US? (I'm not personally sure) How many does Ford or Chrysler make here? (again, not sure) I've heard (from a Ford employee) that he could only consider Toyota like any other competitor becuase Toyota built more vehicles here than Ford did. (Fact check anyone?)
Regarding CAFE: what kind of rediculous plan is this? Trickle-Down Fuel Economy? Notice how quickly the fleet fuel economy changed when it actually cost sonsumers (the "Demand") something so we had to be worried about it. Does forcing "Supply" to produce an undemanded item really drive "Demand"? Why do we think SUVs were so profitable and small cars not? Mr. Wilkinson, care to comment?
From Gainesville, FL, 09/10/2008
I’m always worried when journalists and commentators miss small details. Mr. Wilkinson used the Pontiac Vibe as an example of the failed brands of America. Perhaps he does not realize that this vehicle is a joint venture made by GM and Toyota. The Vibe is sold under a different nameplate as the Toyota Matrix, the same manufacturer who makes the best selling Camry he mentions later. If Mr. Wilkinson is unaware of subtleties in automotives such as this, what other subtleties is he not taking into consideration? Perhaps I’m just missing the point, or perhaps I’m just getting bad Vibes from this article.
Full Disclosure: 1. I own both Ford and GM stock, so I’m rooting for them. But, it’s not going to break me if they go under. 2. I own and drive a Japanese car and I love it.
From Charlotte, NC, 09/10/2008
I think Mr. Wilkersons comments are right on the mark. For years the big three have opposed every sensible government initiative (removing lead from gasoline, catalytic converters, air bags, MPG standards etc) They always claimed thousands of jobs would be lost and kicked and screamed all the way to their political allys while Toyota and Honda quietly worked to meet the new requirements and took market share. Now the big three are caught with their pants (or mileage) down and they're crying to Uncle Sam for help. How ironic. You would think the big three would have learned by now to look forward and focus on the future. I don't see Toyota and Honda asking for government help.
From Dayton, OH, 09/10/2008
On the face of it, Mr. Wilkinson's argument is sound, however i think his premises are faulty. "Instead of making cars Americans want to buy..." - what? The big three dominated the SUV market, which Americans gobbled up en masse - until gasoline hit $4.00/gallon. America has lived in a bubble of cheap petroleum prices and lax CAFE standards while ignoring the reality that fossil fules are a finite resource. Sure, oil production may increase, and prices may fall again - until the next time. What we are paying for now is a lack of foresight in public policy - and the myopic nature of the market.
I've heard many learned economists on Marketplace say that the global economic effects of allowing FANNIE and FREDDIE to fail might rival those of the great depression of the 1930s. Is that what Mr. Wilkinson means when he says "we'll pull through"?
While these emergency measures are by any measure repugnant, the lesson to be learned is *not* "let the free market take care of it" - the lesson should be that government regulations aimed toward the good of the public *must* be enforced. If lending policies and regulations had been enforced instead of allowing creditors to play fast and loose the result of the burst might not have been so deep. The market will do what ever it takes to make a profit. The role of public policy is to establish - and, as importantly, enforce - the rules of the game. If the referees are absent, the game will get bloody quickly.
From AUSTIN, TX, 09/10/2008
Top notch! If US automakers were as efficient in their management & leadership as the author is with his verbiage, this situation would have been avoided. Personally, as I think back to when the big three made the risky call to push their highest margin lines, SUVs & trucks, in the face of peak oil and growing foreign energy demand--especially as they killed-off lines like the EV-1 while purchasing Hummer--I find much wisdom in Wilkinson's "Propping up yesteryear's winners leads to stagnation at best, plain old uncreative destruction at worst. The best defense is often no defense." We cannot keep encouraging undue risk-taking by the very rich at the expense of the muddled class.
From Brighton, MI, 09/10/2008
Mr. Boggs,
Please be consistent. Either you support government bail-outs or you don't. You say it is brilliant if someone says Detroit doesn't need taxpayer subsidized loans. Yet you say nothing about the government using tax dollars to prop-up struggling lenders. Lenders who made bad decisions by lending to people who obviously couldn't repay.
From McDonough, NY, 09/10/2008
The American auto industry is on the edge of collapse and Mr. Wilkinson says we should let it happen. I disagree. The failure of the American auto industry is not just due to a lack of management vision, but also due to an evolution of Federal policy.
There was a time when the Federal Government was very pro-union. Federal policy supported union labor in American industry. Over time, the American auto industry locked itself into expensive and inflexible contracts with the UAW. Critics like to blame the industry for betting its future on large SUVs, but it was forced to invest in vehicles that provided large profit margins to support its higher expenses. Only two years ago, those vehicles were what the public wanted.
Now the Federal Government supports policies that undermine American unions and support the flight of industry to "emerging markets". Foreign auto makers are more nimble and able to adapt to changing conditions because they lack the union contract constraints.
The American auto industry has been caught in the evolution of Federal policy.
Unfortunately, Mr. Wilkinson's position would contribute to the loss of American industry. The American working class is in crisis. Our trade imbalance is not sustainable. Free trade advocates like Mr. Wilkinson never told us about the down side of "free" trade. Now the American government supports the flight of industry to countries that will not open their markets to our products. People like Mr. Wilkinson don't like to talk about the long-term implications of a chronic trade imbalance, loss if industrial base or worker dislocation.
From Brighton, MI, 09/10/2008
Mr. Wilkinson needs to do his homework. His flippant remarks relating to the demise of the Big Three indicate that he does not understand the ripple effect that would ensue. Millions of jobs would be affected when the suppliers and their suppliers are considered. To use Mr. Wilkinson's words, this medium-sized disaster could snowball and bringing down the whole economy.
From MI, 09/10/2008
Will Wilkinson's commentary on the Detroit automakers this morning (Marketplace) exposes his personal contempt for Detroit's people and industry. He begins by acknowledging that Detroit's big three automakers are struggling. That much is certainly true. Next he claims "Instead of making cars Americans want to buy, GM, Ford, and Chrysler are clamoring for tens of billions in taxpayer-subsidized government loans." While it is true that right now the automakers are seeking loans, the preceding statement is utterly false. I have worked in product development in the auto industry for decades. I assure you, that in reality we are all about trying to build cars that Americans want to buy. Our success or failure is determined by the market. Indeed, when Americans wanted trucks and SUVs we made the best of these and profited from that. Now our smaller fuel efficient vehicles are selling well despite an overall slow economy.
My complaint with Will Wilkinson's commentary is his negative bias towards an industry he does not truly understand. Exemplified here in this paragraph;
"But what if one or all of the Big Three fail? Well, other companies will buy their assets and use them more wisely and profitably. Some people will lose jobs, most will find new ones and the gains in efficiency will make the economic pie larger and job-growth more likely. Maybe you'll buy a Toyota Camry. Made in Kentucky. We'll pull through."
Detroit's big three employ people and suppliers all over the USA and many other nations as well. Our quality is on par with or exceeds our foreign competitors. NPR programming seems eager to further the tired old story of failing American industry. I think you should investigate the other side of the story and give more airtime to people that truly understand the domestic auto industry and it's importance in the United States (our) economy. In particular I would like to hear coverage of the changes and progress that has been made at the big three. NPR and much of the nation seems to have a perception of Detroit's big three that is stuck some where around 1982. If you decide to provide your listeners with the other side of the story please don't go looking for it in people like Will Wilkinson or the auto industry journalists that you have called upon in the past. I challenge you to go closer to the source, or go directly to the source itself.
Sincerely, Mark Grech
From Zebulon, GA, 09/10/2008
Absolutely brilliant. I feel empowered knowing that there is at least 1 other person out there that understands how Gov't cannot get involved in free market concerns. best line -- "Detroit doesn't need taxpayer subsidized loans. It needs to make better decisions -- or else fail." Tax dollars for failing businesses (or people) drives me crazy ! Thank you Will for being that Beacon of Light today !
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