Saturday, November 22, 2008

My thoughts on the auto bailout.

I'm against it...emphatically so in fact. We've already gone much to far down the road of bailing out poorly run companies. It's stupid and the one rule of government is you always get more of whatever you subsidize...right now we're subsidizing bad economic behavior.

The awkward fact is that if Congress gives the big three the money they're asking for, it won't change a thing. At current rates they'd run through the bailout money sometime in March and we'll be right back where we started and they'll be looking for more of your cash.

The time has come to face reality: the Big Three simply can't sustain their current business model. There have to be big changes.

Amazingly enough, the problem isn't the cars anymore. The quality is quite good by global standards. The problem is what it costs to make them. The total cost per hour of a GM employee is something like $75.00 per hour (wages+health benifits+pensions). For Honda's made in the United States the figure is more like $35.00. Obviously the difference is enormous. The question is why.

I'll stipulate that Honda is a smarter company: their executive compensation is less generous, they don't waste money on stupid perks, and labor/management relations are better than those at the big three. That's all true...and all that put together adds up 1-2 dollars of the hourly differential I mentioned above. In other words it's chump change. Rail all you want about car executives flying to Washington in private jets only to beg for tax dollars to keep their companies running...that sort of thing is only significant in the symbolic sense.

The truth is it all comes down to pensions.

Honda has been making cars in the U.S. for...twenty years? GM...considerably longer than that. GM is paying benefits to hundreds of thousands of former employees while Honda isn't.

Over the past 30 years the big Three and the UAW have agreed to a series of labor contracts that have created this mess. Both sides knew, or should have known that the numbers didn't add up, but they signed them anyway. Now that reality has smacked them in the face, they'd like you to pick up the tab. Now I like to think of myself as generous person, but after bailing out badly run banks, airlines and apparently now, folks who bought houses they couldn't possibly afford I'm feeling a little less generous than usual.

The hard truth is that we can spend the rest of forever subsidizing bad business decisions or we can let the parties take a hard look at economic reality and come to terms that both sides can live with.

Update: Actually I think I misstated the choice. It's not gutting the pensions vs. keeping them indefinitely via taxpayer subsidy. Rather it's cutting the pensions and saving the companies vs. letting the companies eventually fail after massive subsides and the workers still don't get their pensions. For those who doubt this I recommend looking at the history of government bailouts and nationalizations in the British auto industry.

Related.

It seems Mitt Romney agrees.

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