Saturday, 15 November 2008

Auto Bailout?

Should the US government bail out US automakers?


  1. After listening to various arguments for and against an 'auto bailout,' I've think there should be a bailout. What it will look like, I'm not sure. But the automotive industry is a critical component of any industrialized economy.

    Auto production is the flagship by which nations are measured. Nolan explained the importance placed upon the auto industry by the China during their attempt to industrialize. Autos were a huge part of Japan and Germany's economic growth following WWII, and also an important part of S.Korea's recent success. In terms of employment and innovation--both direct and indirect--the auto industry is the most important manufacturing industry in the world. A collapse of GM or Ford would devastate the US economy.

    But there is a second problem facing the US automakers which should not be mixed up with the proposed bailout: the issue of mismanagement, lack of innovation, labor unions, lobbyists, government policy, etc. These are all the reasons US automakers have slowly lost marketshare to global rivals. But the bailout is a separate issue altogether. Consider that GM's sales dropped 45% in October, while Ford and Chrysler saw sales drop 30% and 35%, respectively. This is not because of mismanagement, a lack of innovation, labor unions, etc--but a result of tightening credit. People simply cannot afford to buy cars in the current economic climate. And this problem is not limited to US automakers. Toyota's sales declined 23%, Honda's slid 25%, and Nissan's were down 33% over the same time period.

    This is a global crisis which requires government intervention. It would be a mistake for any government to allow its automakers to fail in the current climate. I understand the skepticism offered by opponents of a bailout, but most arguments against are unrelated to the current situation (as shown by the recent difficulty of Toyoda, Honda, and Nissan). These problems can be dealt with after the economy recovers, and it will recover sooner if the government supports the auto industry.

  2. I too, support a bailout, but it should be very limited in scope and tied to strict conditions for both labour (lower labour costs) and management (fuel efficiency and alternative means of power). Given that, I would like to play devil's advocate here.

    Let's be clear, when we talk about a 'collapse' of an automaker, that does not imply that they would cease production. Rather, without a bailout, they would declare bankruptcy and a relevant court would take control of some of their assets. They would still continue to produce cars and employ workers, though there would likely be layoffs (as there will be even if a bailout is approved).

    Also, the current economic conditions only hastened this danger of collapse. The fact that other automakers have not requested or required nearly as much help as the Big 3 indicates that the Big 3 have had large structural problems for quite some time. There is an argument to be made that another auto bailout (remember, the Big 3 has already received a $25 billion bailout) would only encourage companies to continue acting irresponsibly.

    For these reasons, the bailout should be extremely limited in scope and tied to strict preconditions.