A GM essay worth reading

As a follow up to the series of commentaries I’ve posted here, building on this post from the other day, there has been so much news about the second round of hearings over the auto industry crisis and the desired bailout… it’s too frustrating to me to try to cover it. The blackmail of the taxpayer, to the tune of $75 to 125 billion, makes me cringe – the Detroit firms, their elected advocates, and their unions have such nerve to demand the country pay for their shortsighted weakness.

One of the Freakonomics authors pointed to an interesting essay last week. Written by  Josh Rauh and Luigi Zingales, it can be found here. An excerpt follows:

If the US government provides GM with a $25 billion loan that allows it to continue operating under current conditions for another year or two, the money would simply be wasted and the problem postponed. GM would still be completely unable to survive in the long term. We are very sympathetic towards the pain of the hundreds of thousands of workers whose jobs are at stake. It is precisely because we are concerned about their long term welfare that we oppose a bailout. Throwing money at a drug addict only enables the addict to continue abusing drugs and ultimately shortens his life. Similarly, government money aimed at a company that needs restructuring enables it to avoid taking responsibility of its future, condemning it to a certain death.

Big Three CEOs Flew Private Jets to Plead for Public Funds

In case there was any question about how flat footed the auto industry is in gauging public sentiment and portraying itself in ways that build sympathy, well, here’s a reminder…

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Big Three CEOs Flew Private Jets to Plead for Public Funds

via Marc Ambinder

George Will on the auto industry bailout

As a follow up to the series of commentaries I’ve posted here, builidng on this post from the other day, the below is George Will commenting on the impending bailout.

Six decades later, a rescue without bankruptcy will make those four entities wards of government. Doing so would make the five entities including Washington collaborators in unfair competition with Americas thriving automobile industry that employs 113,000 Americans making vehicles containing many American-made components, but with foreign, mostly Japanese, nameplates. As Detroit continues to shrink, many American jobs lost will be regained in this industry, and its American suppliers, as Americans continue to buy cars.

Tom Evslin on the auto industry bailout

Ignore for a moment the fact that Detroit may not have a design ready to satisfy the following plan. Ignore also the time it would take to retool their plants. What appeals about this idea is the combination of aid to the auto industry that is coupled to a more innovative agenda than simply enabling them to continue failing in the same manner they have been for decades.

The US government should order a complete replacement for its vehicle fleet to be delivered over the next four years. The new vehicles must be either plugin electric hybrid, pure electric, or possibly natural gas. Obviously retooling both at the manufacturers and suppliers is required to deliver this order so the government should be willing to prepay a significant part of it as it does for new weapons systems. That gets money into the system fast and creates/saves jobs almost immediately.

Via Fractals of Change: Saving US Auto Manufacturing [Hat tip: Daring Fireball]

Robert Reich: The Real Difference Between Bankruptcy and Bailout

While I am on the topic of the auto industry, bailouts, this gem from Robert Reich:

When a big company that gets into trouble is more valuable living than dead, there used to be a well-established legal process for reorganizing it – called chapter 11 of the bankruptcy code. Under it, creditors took some losses, shareholders even bigger ones, some managers heads rolled. Companies cleaned up their books and got a fresh start. And taxpayers didnt pay a penny.

So why, exactly, is the Treasury substituting government bailouts for chapter 11? Even if you assume Wall Streets major banks and insurance giant AIG are so important to the national and global economy that they cant be allowed to fail, that doesnt mean they have to be bailed out. They could be reorganized under bankruptcy protection. True, their creditors, shareholders, and executives would take bigger hits than theyre taking now that taxpayers are bailing them out. But theyre the ones who took the risk. We didnt.

The Treasury seems to have lost sight of its real client. Its client is not the creditors, shareholders, or executives of any of these firms. Its sole client is the American people.

Hat tip: Get the Flick.

Ryan Avent: A bailout for carmakers wont save jobs or the economy |

Via his blog, Ryan Avent commenting on the impending auto industry bailout in the Guardian:

More important still is the opportunity cost of saving the automakers. It is suggested that millions of jobs might be lost if the firms folded. That may well be true, but those workers wouldnt remain unemployed forever. At present, the Big Three suck up labour and human, physical and financial capital that might instead be employed at more productive firms in healthier industries. Allowing the automakers to fail creates an opportunity for a much-needed reallocation of resources. From their ashes, anything, including an automaker free of the institutional burdens of the Big Three, might emerge. Standing in the way of this process will damage the long-term outlook of the entire region.

Previous posts on this topic here and here.

Friedman on the auto industry bailout

Tom Friedman, writing in today’s NYT, about the same topic I covered yesterday.

The blame for this travesty not only belongs to the auto executives, but must be shared equally with the entire Michigan delegation in the House and Senate, virtually all of whom, year after year, voted however the Detroit automakers and unions instructed them to vote. That shielded General Motors, Ford and Chrysler from environmental concerns, mileage concerns and the full impact of global competition that could have forced Detroit to adapt long ago.

He also points to a WSJ column by Paul Ingrasia, which can be found here.