Why Bailing Out The Detroit Big Three Automakers Is A Bad Idea

In my previous entry, “US Auto Manufacturers And The Dodo Bird – Birds Of A Feather?”, I examined the current economic situation of the Big Three automakers in Detroit in regards to what led them into this predicament and what parallels can be drawn between them and the history of the Dodo bird. In this piece, I want to discuss the idea of bailing out these three failing automakers and why it’s not a good idea. As we’ll see, this all boils down to the basic economic concept of supply and demand.

At its most basic, the fundamental problem facing GM, Ford and Chrysler is that not enough consumers are buying their cars as people are understandably opting to buy more reliable and better built foreign cars, some with warranty coverages that were almost inconceivable a decade ago. The continual decline in car sales, among other factors, has resulted in all three manufacturers ending up with massive debts and with little capital to cover even basic operating costs. This is why GM, Ford, and Chrysler are now pleading with the Canadian and American governments for financial aid as without the injection of new capital, they’ll have no choice but to file for bankruptcy. And yet, what will the granting of public funds really accomplish in terms of addressing the problems these companies face? Will the granting of billions of taxpayers’ dollars actually rescue these companies from financial collapse? Obviously not, since the issue of declining consumer interest in purchasing their products would still remain. So all a public bailout would essentially do is grant a stay of execution, delaying but not preventing the inevitable.

But there are other reasons why a bailout of the Big Three automakers is not in the best interests of both the North American market and the pockets of the general public and this deals with the economic concept called opportunity cost. Essentially, this refers to what potential benefits you may have lost by choosing to take another course; in the case of a bailout of the Big Three automakers, the opportunity cost here is the funds we’d be providing to these companies at the expense of aiding other industries, the jobs we’d be trying to save with the car industry bailout at the expense of other jobs we could save in other sectors. It’s a very important tool as it helps analysts examine what the short-term loss might be for a financial decision and then compare that against the long-term gain to see if that decision is a financially sound one. In the case of the Big Three automakers, I don’t think it’s hard to see that the bailout isn’t a sound, financial one. It makes little sense to aid a manufacturer stay afloat so they can continue to build a product that few consumers are interested in purchasing at the expense of using these same funds to help other industries that are facing financial problems because their lending institutions are having credit issues or as a consequence of declining consumer confidence in the economy.

The other problem a bailout of these companies presents is the fostering of this notion that governments, and by extension the general public, should come to the aid of ailing companies regardless of whether their core business is healthy or sick and dying. This is a very dangerous prospect for the North American economies, indeed the global markets in general, because it fails to nurture competition and through that, the need for innovation and change, two factors that the Big Three must embrace if they are to continue to exist with or without public aid. By delaying the inevitable loss of jobs, we deny ourselves the ability to prepare for that predicament and ultimately, our economy will be in far worse shape than it would have been had we taken the other route.

Of course, the principal reason why there is any interest in providing a bailout for these companies is because of the misguided notion that it’s the best way to protect jobs in a declining economy. However, what we should be attempting to protect is not specific jobs and its related tasks, but rather the ability of these workers to earn regular wages. In that regard, what I would see as being a more effective use of public funds is not only increased investment in public infrastructure, but the creation of job re-training programs for all these workers who will be jobless with the fall or downsizing of these car manufacturers. One of the objectives in increasing the number of infrastructure projects is the creation of new jobs and these soon-to-be unemployed auto workers would be the ideal resource to tap as a place for human capital investment to ensure that we don’t have these individuals turning from productive contributors to our economy into ones who rely on governmental social programs like unemployment insurance or welfare to survive. Of course, the re-training that will need to be done to allow them to work in these new sectors should not be restricted to the hard skills needed for these positions; instead, a core set of soft skills should also be developed, ones that will allow these workers to have a greater ability to migrate to new fields and opportunities once the overall economy improves.

Despite the negative connotation surrounding the concept of corporate bankruptcy, the fact is that leaving the Big Three car manufacturers to fend for themselves and yes, ultimately file for bankruptcy will allow the North American car industry to finally shake off its dependence on tariffs and other governmental measures and focus instead on restructuring itself to not only be a self-sufficient industry, but one that can effectively compete on the global market. If the industry in the end proves itself incapable of making such changes to ensure its continued survival, then the public will have saved its limited supply of public funds for endeavours or projects that would provide our society with an opportunity cost that we can all benefit from in the long run.

Some other posts you may enjoy:

1. US Auto Manufacturers And The Dodo Bird – Birds Of A Feather?
2. This Picture Says It All
3. Is This The End of Mass Consumption?
4. The Fall of GM – Have the Lessons Been Learned?
5. Ignatieff’s Budgetary Gambit – Win, Lose, or Draw?
6. 4 Questions To Help You Figure Out If It’s Time To Move On

posted on January 21st, 2009 | 2 Comments » | Tags: automakers, bailout, Big Three, car manufacturers, Chrysler, economy, Ford, GM |