Is it time to take a timeout from bail-outs?

Many Americans are upset that although they managed their money wisely and lived within their means, they are now being penalized for making smart, responsible choices For instance, those who were on the cusp of retirement, now find themselves having to work longer. After enduring the recent months of market volatility and witnessing investment accounts decline, many Americans are left wondering, “Where is my bailout?”

To bail or not to bail (to paraphrase Shakespeare) seems to be the current question plaguing Congress regarding the auto industry. An argument can be made that the financial problems the auto industry is suffering from are not the product of the current economic downturn, but are instead the legacy of an uncompetitive structure of its manufacturing and labor force. Right now many politicians are asking themselves, “When is enough, enough? If the dividing line separating financial institutions and individual corporations is crossed, where does one draw the line?”

Arguments For a Bail-out

If the Big Three fail, so too will many suppliers. That will create a ripple effect that may be bigger than anyone imagines. Even if the companies are forced into bankruptcy, they still might not be able to pay money owed to their suppliers. If those suppliers do not receive the money they are owed, some would likely have to shut their doors as well. Thus a bail-out, not bankruptcy, is the only real option.

  • Injecting capital into the Big Three is actually more of a long-term investment than an expense.
  • Through the bail-out process, a new type of transportation industry could be constructed which will position America for energy independence and help us attain a better environment.
  • Not bailing out the Big Three would lead to higher car prices, the end of incentives, potential vehicle shortages as consumers flock to other car brands due to concerns regarding warranties or resale prices, and difficulty finding replacement parts for owners of American cars, since a single supplier typically makes specific parts.
  • Because automakers share suppliers, bankruptcies in the parts sector would quickly cut into production of all brands of vehicles made in North America. That would feed into the shortage of vehicles and cause prices to rise.

Arguments Against a Bail-out

  • The Big Three compensate their workers 52.5 percent more than the market when compared with industry peers and the market at large (that’s 54 percent more than management and professional workers, 132 percent more than the average manufacturing wage, and 157 percent more than the average compensation of all American workers).
  • Bailing out the Big Three offers no net gain to society. It is a straight transfer of resources from one sector to another.
  • There is a big difference between saving the financial industry and saving the auto industry: a bail-out involving billions of taxpayer dollars should be premised under the promise of helping the people it is supposed to help. Saving the Big Three provides no benefit to society at large.
  • It does not make sense to take an inefficient, poorly run, and non-competitive industry and shore it up. Many are skeptical that the aid would lead to actual change that would make the companies viable in the long-term. Spending taxpayer dollars without receiving promises from the Big Three that they will reform the root causes currently crippling them is neither fair to taxpayers nor sound fiscal policy.
  • In comparison to the troubles of the financial companies, which happened more short-term, much of the trouble facing the Big Three has been decades in the making. An infusion of cash will not infuse wisdom into management, reduce labor costs, or attract talented new employees.
  • Bailing out the Big Three is a slippery slope. When will the bailing out stop? The bail-out of the auto industry would set a precedent for every single politically connected corporation. There is a long line of lobbyists vying for federal money as it is. If the auto industry receives money, then every industry has a case. After all, are the employees of Circuit City, Linens-N-Things, or the newspaper industry less deserving than the employees of Chrysler, GM, or Ford?
  • Is bankruptcy such a terrible option? Airline, steel, and retail companies have gone through bankruptcy proceedings and adjusted—often emerging as stronger, better and wiser competitors in an every-expanding marketplace.

The outcome will likely lie somewhere between what constituents, politicians, and the auto industry itself ultimately want. The Big Three (Ford, GM, and Chrysler) have one last chance this week to convince the country that they have long-term viability and have earned a place in America’s future.


Katie Johnson, J.D.

Katie is the professional consultant for Brad Koeneman.

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