The Debate Continues: Should U.S. Automakers Receive Federal Aid?

This week, the U.S. Congress is expected to take up a quick bill that will provide the domestic automakers with US$25 billion in emergency loans, by legislatively making them eligible to receive part of the US$700-billion Troubled Asset Recovery Program (TARP) fund overseen by the Treasury Department. The bid by Congressional Democrats to get such assistance passed will not be easy, however; increasingly stiff opposition to a bail-out of the U.S. automakers is being mounted by Congressional Republicans and the President George W. Bush administration. Yesterday, the two sides faced off on the popular Washington news programme, "Meet the Press", with Democratic Michigan Senator Carl Levin debating the merits of helping the auto industry stave off bankruptcy with Republican Alabama Senator Richard Shelby, the ranking Republican on the Senate Banking Committee, who took the position that they automakers should simply enter bankruptcy. "They're not building the right products", Shelby said. "I don't believe they've got good management. They don't innovate. They're a dinosaur in a sense." Shelby said that by giving the automakers the intended loan, politicians would be "just postponing the inevitable". Shelby advocated bankruptcy instead. "Get rid of the management. Get rid of the boards—the people who brought them to where they are today" he said. "This is a dead end. It's a road to nowhere and it's a big burden on the American taxpayer."

Levin was more accommodating, stating that the problems being faced by the automakers are not the fault of the industry itself, but rather the result of the economic collapse. The credit crunch, followed by the demise of consumer confidence and the resulting plunge in vehicle sales, is the more immediate cause of the problem and is affecting all automakers in the market, he argued. "We've got at least three million jobs dependent upon this industry surviving", Levin said. "This is a Main Street problem. All of us want conditions. All of us want to support the taxpayers. All of us want to continue the restructuring." But Levin also stated that he would support the replacement of top management at the automakers as a condition for federal assistance. "I'd be happy to tell [GM CEO] Rick Wagoner that he ought to consider resigning if that is the difference between getting this kind of support and not", Levin said.

Opposition Mounts, Revisions Suggested

Congressional Republicans have been scoffing at the notion of supplying the auto industry with an additional US$25 billion. The government changed its tune over the weekend as well, with President George W. Bush now stating that he would prefer the automakers' emergency assistance to be a repurposed version of the legislation that has granted them US$25 billion from the U.S. Department of Energy. That money, which has already been approved, was signed into law last year as a way to help fund the automakers' projects to meet more stringent corporate average fuel economy (CAFE) legislation. But the money is slow in coming, being distributed via the Department of Energy bureaucracy, and is limited in what it can be used for—primarily only the retooling of plants to make vehicles that are at least 25% more fuel efficient than their nearest competitors. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid have both stated that repurposing the Department of Energy money is unacceptable, as that money is also needed for its originally intended purpose. Instead, the Democrats want the emergency funding to come from the US$700-billion TARP facility controlled by Treasury Secretary Henry Paulson, who himself has said that he does not feel that it should be used for the automakers, but rather should remain exclusively for financial institutions. Pelosi said that repurposing the US$25 billion from the Department of Energy would be "a step backward".

But in an acknowledgement that the bill may not be popular unless some additional caveats are included, Pelosi also stated that additional strings are being attached to the legislation currently being prepared by Republican Barney Frank to bail out the automakers. Requirements to continue restructuring will be included, as will a stipulation that the government receive equity stakes in the automakers. Repayment of the loans will first and foremost go towards benefiting taxpayers, according to Pelosi. Frank also stated that an oversight board with veto powers over company management decisions would also be created, and that the money must be used with an eye towards the viability of the companies in question. President-elect Barack Obama also supposedly favours such an oversight board, perhaps chaired by the "car czar" that the incoming chief executive is reportedly considering. "So my hope is that over the course of the next week, between the White House and Congress, the discussions are shaped around providing assistance but making sure that that assistance is conditioned on labor, management, suppliers, lenders, all of the stakeholders coming together with a plan—what does a sustainable U.S. auto industry look like?", Obama said in an interview yesterday with news programme "60 Minutes". "So that we are creating a bridge loan to somewhere as opposed to a bridge loan to nowhere. And that's I think what you haven't yet seen", he added.

Unions Disagree

However, the idea of more concessions from the labour end of the spectrum has been met with a resounding "no" from United Auto Workers (UAW) President Ron Gettelfinger. The union boss said that it is unfair to blame the union members and retirees for the current situation that the "Detroit Three" are facing. "We have made dramatic, dramatic changes", he said, referring to concessions the UAW made in its contracts with the automakers. "We're here not because of what the auto industry has done", he said. "We're here because of what has happened to the economy." Gettelfinger said that no more union concessions are needed, noting that under the new labour agreements approved in late 2007, labour costs have now dropped to 8-9% of the total cost of a vehicle.

Outlook and Implications

To put some perspective on the current situation, Global Insight Chief Economist Nariman Behravesh has estimated that the impact to the U.S. government of just a General Motors (GM) bankruptcy filing would be US$100-200 billion, overwhelmingly more than the US$25-billion bail-out for all three automakers combined. Behravesh stated that this cost would arise from the need for "more aid to specific states like Michigan, Ohio, and Indiana, and more money into unemployment and extended benefits". The bill would encompass not only existing programmes, but also new efforts to revive economic growth in the afflicted states in the wake of millions of auto-related job losses. Unemployment in the United States would climb dramatically, jumping from the currently projected 8.5% to a possible 9.5%. The economic impact of a failure of the auto industry has also been projected in a widely distributed report from the Center for Automotive Research. It predicts that a complete collapse of the auto industry in 2009 would result in the loss of 3 million jobs in direct and indirect automotive industries, US$150 billion in lost income, and US$21 billion in lost Social Security benefits. The effects would be positively staggering. And yet, opposition to providing US$25 billion to an industry that is so integral to the health and vitality of manufacturing in the United States remains high. Part of the blame for this, frankly, rests with the automakers themselves.

The reason for this is simple: the main argument from anyone who has a public voice as to why the auto industry should not be saved is that the American automakers are "dinosaurs". Opponents claim that they do not innovate and that they are bloated, overweight, mismanaged monstrosities suffering from top-heavy cost structures and irrelevant products that nobody wants to buy. This refrain is popular across the country, but seems to be most prevalent on the coasts, where domestic automakers do not have as significant a portion of the market as they once did, and throughout the south, where foreign automakers have come in and proven that others can make cars in the United States without the UAW. What is lost on these critics is the progress that the "Detroit Three" have made over the past two years in terms of their turnaround plans. The UAW signed a transformational contract in late 2007 that will dramatically reduce labour costs in 2010 and eliminate healthcare liabilities from the automakers' books, significantly improving their balance sheets. Ford has trimmed nearly a third of its white-collar workforce, eliminated unprofitable vehicles, closed a dozen plants, and undertaken a sweeping effort to revamp its product development process with the aim of totally changing the kinds of vehicles it offers for sale in the United States, beginning in 2010. GM has finally begun to act like a global automaker, bringing together its far-flung operations under a common umbrella with the goal of using them as expert knowledge centres in developing platforms and powertrains best suited to specific regions. It too has eliminated tens of thousands of employees, invested billions of dollars into alternative energy powertrains, and begun a programme to offer an increasing number of smaller, more fuel-efficient vehicles in North America.

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