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Debate: Bailout of US automakers

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Should the US government bailout US automakers (even with a low-interest loan)?

Background and context

The automotive industry crisis of 2008 is a financial crisis facing primarily the United States automobile manufacturing industry as of November 2008.
Other automobile manufactuers, particularly those in Europe are also suffering from the crisis. The Big Three U.S. manufacturers, (General Motors, Ford and Chrysler), have indicated that unless additional funding can be obtained over the short to medium term, there is a real danger of one or more companies declaring bankruptcy.

Significant debate surrounds whether the US government should "bail out" the US automotive industry. The controversy surrounds a number of critical questions. Is bailing out the US automotive industry sound on principle? Do the automakers "deserve" a bailout or are they "undeserving" of one? Are the automotive producers responsible for their own demise, or were there outside factors such as the failure of the economy and high oil prices? Is there a moral hazard in bailing out the auto industry? Does it teach the wrong lessons, possibly rewarding mismanagement and discouraging sound management? Does it unfairly disadvantage the competition? Can a bailout help revive the collapsing US automotive industry, or is the fate of this industry already determined, making it a waste of money? Will a bailout cause the automotive companies to avoid reforming? Is the failure of the US automotive companies unacceptable? Will it jeopardize a much broader financial collapse? Or is chapter 11 bankruptcy exactly what the US automotive companies need to regroup, reform, and get back on their feet? Will bankruptcy deter consumers from buying their cars? Are low-interest government loans to the auto companies a good idea? What about nationalization? In general, is it a good idea to bailout the US automobile companies?

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Markets: Is intervening in markets with a bailout justified?

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Yes

  • US autos are not just companies; part of American fabric Bob Herbert. "‘Drop Dead’ Is Not an Option". New York Times. 17 Nov. 2008 - "The ideological hard-liners have now cast their collectively jaundiced eye on Detroit’s automakers. Their response to the very real danger that General Motors might crumble into bankruptcy is: C’est la vie [...] But in the current environment, allowing one or more of the Big Three to go bankrupt would be like offering up your nose to Sweeney Todd to spite your face [...] It’s not just General Motors or Chrysler or Ford. The U.S. auto industry is the cornerstone of American manufacturing. It supports millions of jobs, directly or indirectly, in a vast array of businesses."
  • US govt. is responsible for protecting communities with auto bailout "Congress must bail out our auto industry". The Register Citizen. 16 Nov. 2008 - "why, many people are asking, must the American taxpayer once again pay to subsidize companies that just couldn’t compete?[...] Should Congress fail to act decisively and support the auto industry in its time of need, whole towns in the Midwest will become ghost towns. A great swath of the United States will be left with little to no means of supporting itself. Henry Ford helped shape modern American industry and, until now, many families are still reaping the benefits of the that vision [...] We in Northwest Connecticut know well what happens when industry shuts down. Cities and towns like Torrington and Winsted struggle to grow decades after a mass job loss, and the questions of how to revive local economies is still on the forefront of the agendas [...] Torrington, using its redevelopment plan, is trying to reinvent its downtown. But how can literally half the Midwest reinvent itself? How could all of those jobs be replaced? [...] They could never be replaced, and so they must be guaranteed by taxpayer dollars, however hard that might be."


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No

  • Bailout of US autos wrongly intervenes in marketplace David Brooks. "Bailout to Nowhere". New York Times. 18 Nov. 2008 - "Not so long ago, corporate giants with names like PanAm, ITT and Montgomery Ward roamed the earth. They faded and were replaced by new companies with names like Microsoft, Southwest Airlines and Target. The U.S. became famous for this pattern of decay and new growth. Over time, American government built a bigger safety net so workers could survive the vicissitudes of this creative destruction — with unemployment insurance and soon, one hopes, health care security. But the government has generally not interfered in the dynamic process itself, which is the source of the country’s prosperity [...] But this, apparently, is about to change. Democrats from Barack Obama to Nancy Pelosi want to grant immortality to General Motors, Chrysler and Ford. They have decided to follow an earlier $25 billion loan with a $50 billion bailout, which would inevitably be followed by more billions later, because if these companies are not permitted to go bankrupt now, they never will be."
  • US auto bailout would damage global free trade By showing heavy favoritism for domestic auto suppliers, the US would cause other foreign governments to become increasingly protectionist, damaging free trade and the broader global environment for foreign direct investment.


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Turnaround: Can a bailout help turnaround US automakers?

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Yes

  • US autos are productive and viable, should be kept alive. US automakers Ford, GM, and Chrysler are all fundamentally productive companies, despite having some poor management and strategic planning in recent years. To leave these companies to die, therefore, would be very wasteful of their productive capacity, as well as their potential to thrive again in the future.
  • US bailout can force needed changes on automakers. Bob Herbert. "‘Drop Dead’ Is Not an Option". New York Times. 17 Nov. 2008 - "At the moment, Washington has tremendous leverage over the failing auto industry. The government should craft a rescue plan that is both tough and very, very smart. That means dragging the industry (kicking and screaming, no doubt) into the 21st century by insisting on ironclad commitments to design and develop vehicles that make sense economically and that serve the nation’s long-term energy security requirements. What I would like to see is creative thinking on both ends of the bargain. Let the smartest minds design a bailout that sparks a creative revolution in the industry. Think of it as project synergy. Time’s wasting."
  • Withholding bailout is not necessary to US auto restructuring. It is wrong to assume that the only way to incentivize the US automotive giants to reform is by withholding a federal bailout or low-interest loan program. Even with a bailout, they will need to reform to survive in the long-run. And, the US government can use a bailout to force the autos to reform.


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No

Without that bailout, Detroit will need to drastically restructure itself. With it, the automakers will stay the course — the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check."
  • Bailout with strings attached will not help autos compete Daniel J. Ikenson. "Don’t Bail Out the Big Three". The American. 21 Nov. 2008 - "To dampen criticism, Congressional Democrats speak of a bailout “with strings attached.” But even a strings-attached bailout poses problems.[...]First, Congress doesn’t know enough about the auto business to dictate operational conditions. “Strings” that cap executive compensation will chase talent away. Strings that force Detroit to produce high-mileage vehicles when gas prices are plummeting will lead to a repetition of past mistakes. [...] Second, strings will make it easier for the Big Three to come back for more federal aid after they blow through the first $25 billion. Their CEOs will be able to say that they complied with the conditions of the original bailout, which happened to make matters worse for them."
  • Past US auto bailouts only fostered dependencies Bill Steigerwald. "Don't Bail Out the Big Three". Town Hall. 17 Nov. 2008 - "A One of the examples I'm hearing from proponents of the current bailout is, "Let's go back to 1979 when Chrysler was bailed out. That was a success story. Chrysler came out of bankruptcy and paid back the U.S. taxpayer with interest after four years." Well, to me, the fact that the government stepped in back then has been an enabling implicit guarantee for the Big Three ever since. Had Chrysler gone under back then, I am convinced that the unions would not have had as much power as they had during the 1980s, because they would have been dealing with two companies instead of three. So they would have had less leverage. So had Chrysler had gone under then, the "Big Two" might not be in the position that they are in right now."
  • Bailout would diminish global market for US autos By showing significant favoritism, a US autos bailout would increase global auto protectionism and make it harder for US auto companies to find global markets for their products, which is exactly what they need to do to compete and survive.


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Bankruptcy: Are the consequences of bankruptcy unacceptable?

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Yes

  • US autos may never get out of Chapter 11 bankruptcy Daniel Gross. "In Defense of Detroit". Newsweek. 13 Nov. 2008 - More significantly, Chapter 11 proceedings for GM would be far more complicated than that of a retailer, or of Lehman Brothers. Recent experience shows that for auto companies, Chapter 11 is like the Hotel California. You can check in any time you like, but you can never be able to leave. Auto parts supplier Delphifiled for Chapter 11 in October 2005, and still languishes there. Getting out of Chapter 11 can be tough when (a) the bankrupt companies are capital-intensive manufacturers; and (b) creditors are reluctant to give up on their claims. Among those with the biggest claims on the automakers, and GM in particular, are the United Auto Workers."
  • Bankruptcy is not best way to turnaround autos Daniel Gross. "In Defense of Detroit". Newsweek. 13 Nov. 2008 - "is a Chapter 11 filing the best way to reach these goals [of reforming of the autos]? Answering yes presumes that the case would be resolved quickly, that the entities would be able to obtain ample debtor-in-possession financing, that parties with legitimate legal claims on the company's assets and cash flows would give them up willingly. But many of the questions surrounding the Big Three's future can't be resolved in law firm conference rooms or in the chambers of bankruptcy court, and won't center around legal questions."


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No

  • Bailout deters car buyers as much as bankruptcy would. People have claimed that Americans wouldn't buy from a company that declared bankruptcy. The fact is people are already not buying the cars or there wouldn't be a problem. And how exactly is getting a bailout any different than Chapter 11? Both suggest incompetence.
  • Chapter 11 bankruptcy will help autos restructure and regroup. "Saving Detroit". Economist. 13 Nov. 2008 - "The United States created Chapter 11 precisely to help companies that need protection from their creditors while they restructure their liabilities and winnow out the good business from the bad. If the North American businesses of GM and Ford filed for Chapter 11, their activities elsewhere would be largely unaffected. Even in North America, their businesses could continue to make vehicles as they shed costs and renegotiated contracts."
  • Chapter 11 bankruptcy may not deter car consumers "Saving Detroit". Economist. 13 Nov. 2008 - "The carmakers retort that being in Chapter 11 will poison their business. Buying a new car is a long-term gamble on there being dealers, spare parts and a thriving second-hand market for your vehicle. Drivers overwhelmingly tell surveys that they would not take the risk when Mercedes and Toyota make perfectly good alternatives. But $50 billion is a lot to stake on a hunch. A wiser bet is that whatever consumers say today, the stigma of being in Chapter 11 would fade, obscured by price cuts, advertising and most of all news that the car companies were tackling their remaining problems. Remember that, in many ways, Chapter 11 is more stable and predictable than depending upon the government."
Jack Kelly. "Auto Bailout Won't Prevent Bankruptcy". Real Clear Politics. 2 Dec. 2008 - "If the Big Three sought Chapter 11 bankruptcy protection now, one strong company could emerge from the wreckage. Surely the United States would be better served by having one healthy car company instead of three terminally ill ones. But good sense, alas, rarely makes political sense."


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Moral hazard: Does a bailout set a bad precedent (moral hazard)?

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Yes

  • Autos are exceptional; other companies will not get bailouts. Opponents argued that a bailout will set a precedent that will cause other companies to seek bailouts for their financial difficulties. Yet, the auto industry is uniquely important to the American economy, jobs, communities, American society, energy security, and even national security. The simultaneous failures of The Big Three, in addition, and the prospects of these failures devastating the US economy, make the case for bailing them out exceptional. No other companies in American are so unique nor will they be able to offer such an exceptional case. Therefore, the bailout of The Big Three will not set a bad precedent.



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No


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Financial bailout: Are autos as deserving of a bailout as financial firms?

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Yes


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No



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Management: Have the big three been egregiously mismanaged?

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Yes

  • US autos didn't build green cars because Americans wouldn't buy them Kate McLeod. "Help Detroit!". Wow O Wow. 2 Dec. 2008 - "They didn’t build green cars," you say? Well, we wanted pickups and SUVS. It just so happens that we liked pickups and SUVs, and they are still the best-selling vehicles. Sure, Detroit should have built better-looking, better-performing and better-quality cars — but how can we blame them for selling us what we wanted? By the way, today’s Detroit cars are pretty good — from the Ford Mustang to the Chevy Malibu to the Chrysler minivan — still the best-selling minivan in the world.
  • Unexpected oil prices share blame for auto failures Kate McLeod. "Help Detroit!". Wow O Wow. 2 Dec. 2008 - "It is easy to list the lame decisions that brought Detroit to its knees [...] True, they did this to themselves, but not entirely. Others can share the blame[...]Detroit didn’t cause the high gas prices, the subprime-mortgage mess or the stock-market collapse. All those led to the collapse of the auto business. Greedy Wall Streeters and bankers and a government that shut its eyes caused the problem. Detroit is paying the price for their mistakes."



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No

  • US autos forgot product development; don't deserve bailout Bill Steigerwald. "Don't Bail Out the Big Three". Town Hall. 17 Nov. 2008 - "On the product side, management demonstrated an egregious failure of leadership by never envisioning the day when SUVS and big trucks would fall out of favor. In the 1980s, the Big Three made predominantly cars. And over a 20-year period they have shifted to predominately SUVs and trucks. I think in 2006 about 75 percent of Ford's output were big trucks and SUVs; slightly smaller for Chrysler and GM. Now those are high-profit margin cars for them, so I can understand why they would want to produce those. But you have to diversify your products and you can't just rely on trucks and SUVs."


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Unions: Have the auto unions been appropriately managed?

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Yes

  • US auto labor wages not to blame for automaker's failures Norman De Bono. "Workers not to blame for auto industry crisis". Fort Frances Times Online. 27 Nov. 2008 - "It’s not about union wages, CAW economist Jim Stanford said. It is about the inability of banks to lend money in the U.S [...] “We are hearing a lot of negative rhetoric every day about union wages,” said Dave MacArthur, chairman of the Sterling Truck plant in St. Thomas, Ont., which is closing in March 2009. “I even heard from my own mother that unions make too much money, but now we can communicate to our members what the truth is.” [...] Wages and benefits of auto workers here are comparable to those in the U.S and lower than many European nations and Japan, said Stanford [...] “No convincing economic case can be made that labour costs are the cause of the Big Three’s global decline. CAW members can work without wages for one year and it will offset the operating losses of the Big Three for 11 days,” he said."
  • Class bias influenced reluctance to help Detroit The belief that US autoworkers are paid too much stems from a class bias that those that work with their hands should not be paid any wage that would allow them to transcend the middle or lower classes.
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No

  • US autos have failed to control labor cost Mitt Romney. "Let Detroit Go Bankrupt". New York Times. 18 Nov 2008 - "I have several prescriptions for Detroit’s automakers. First, their huge disadvantage in costs relative to foreign brands must be eliminated. That means new labor agreements to align pay and benefits to match those of workers at competitors like BMW, Honda, Nissan and Toyota. Furthermore, retiree benefits must be reduced so that the total burden per auto for domestic makers is not higher than that of foreign producers. That extra burden is estimated to be more than $2,000 per car. Think what that means: Ford, for example, needs to cut $2,000 worth of features and quality out of its Taurus to compete with Toyota’s Avalon. Of course the Avalon feels like a better product — it has $2,000 more put into it. Considering this disadvantage, Detroit has done a remarkable job of designing and engineering its cars. But if this cost penalty persists, any bailout will only delay the inevitable."


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Government loan: Is a government loan to US autos a good idea?

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Yes

  • US should make low interest loans to automakers Steven Pearlstein. "The Road to a Bailout They Don't Deserve". The Washington Post. 3 Sept 2008 - "the best of a set of bad options might be for the government to step in and provide the Big Three with low-interest long-term loans, just as it did years ago with Lockheed and Chrysler. The government should insist that its loans get first priority and be used only for investment in new technology that can be shared with competitors, or in new plants and equipment that could be sold to other car companies in the event of a bankruptcy. The government might also insist on further cuts in shareholder dividends, executive salaries, blue-collar wages and retiree benefits, at least until the current crisis has passed."


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No

  • Low-interest loans to automakers will not solve their problems. The automobile makers have greater problems than a simple lack of liquidity. They have been on a downward spiral for years. Giving them money will not all of a sudden makes things better.
  • Low-interest loans are just another liability for car-makers. While there are some advantages to low-interest loans, the fundamental problem is the same; it adds another liability on-top of existing liabilities for the US automakers to have to deal with.


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Nationalization: Should US autos be nationalized?

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Yes

There is a third option: a government takeover of these companies with a mandate to make the green cars of the future. Only the creation of a government corporation with the power to take these companies over, shake up their management, unshackle them from their pension and healthcare liabilities, renegotiate union contracts, and give them a clear mission to produce the ultra-efficient, green cars of the future will save the American automobile industry."


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No

  • Nationalization of US automakers would increase US debt. The US debt is already absurdly high. Nationalization of the US auto industry would add to this debt significantly, which is something that should be avoided, particularly when one examines the effect it would have on US monetary policy.
  • Nationalization of US autos wrongly advances socialism in the US. The US is already leaning toward socialism significantly with its major $700 billion bailout. Nationalizing the auto industry would further this unfortunate series of events.


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National security: Are US automakers key to US national security?

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Yes

  • Auto companies are key to US military during war The chief executive for Chrysler LLC, Robert Nardelli, told the Senate on Tuesday that crippling the auto industry "would undermine our nation's ability to respond to military challenges and would threaten our national security."[2]


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No

  • US automakers no longer essential to US security Richard Lardner. "Automakers: Rescue a matter of U.S. security". Associated Press. 19 Nov. 2008 - "Desperate for a $25 billion government rescue package, U.S. automakers and their allies in Washington are warning that U.S. national security would be harmed if Detroit goes under and takes its vast chain of parts suppliers along with it [...] Truth is, that argument is a tough sell. General Motors, Ford and Chrysler long ago exited the defense business. Many of their suppliers make the axles, transmissions and engines used on military vehicles, but defense experts see little risk to the armed forces beyond paying higher prices [...] 'It's a stretch, quite frankly,' said retired Army Lt. Gen. John Caldwell, chairman of the National Defense Industrial Association's combat vehicles division. 'I think they're grasping at straws.'"


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American identity: Are the US autos important to America's sense of identity?

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Yes


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No

  • Buying from foreign car companies supports American workers. If you want to buy an American-made car, go buy a Toyota or Volkswagon, or BMW. Many foreign companies make their cars here because of America's legendary work attitude. A bailout will just kill that work ethic even more than it already has been.
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Environment: Would aiding the US auto industry help the environment?

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Yes

  • Bailout allows US autos to produce needed green cars Al Gore wrote in a November 9th, 2008 New York Times editorial, "we should help America’s automobile industry (not only the Big Three but the innovative new start-up companies as well) to convert quickly to plug-in hybrids that can run on the renewable electricity that will be available."[3]
Matthew DeBord. "Bail Out Detroit -- Right Now!". Huffington Post. 20 Nov. 2008 - "if -- and this is a big if -- we can get Detroit back on its feet, with much needed concessions to raise its sustainability game, then we will have established a vanguard for a Green New Deal. There's a very real, once-in-a-century opportunity to utterly transform a major American manufacturing enterprise. It will cost anywhere from $25 billion to $50 billion, depending on how the deal is structured. That's a bargain."


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No

  • Bailout of autos will take money from green economy. Bailout of autos will take money away from the green economy in the sense that it will make it more difficult for the government to subsidize and invest in the emerging green economy.
  • Non-American automakers are better suppliers of green cars. Foreign automakers have been much better at producing fuel efficient vehicles than US automakers. European and Japanese car companies have been producing 35 mpg cars for years, and are set to produce 45 MPG cars by roughly 2015. It is better, in the context of global warming, to rely on these "greener" automakers than on US automakers.


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Pro/con sources

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Yes



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No


See also

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