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Domestic auto: The “don’t let them die” fallacy

Posted on 21 November 2008 by Jason Ardanowski

I am a Detroiter; to be exact, I lived from birth to age eight in Dearborn, where Ford World Headquarters was just another building I passed by almost daily. My aunt works in the Renaissance Center and my sole living grandparent has her savings tied up in now-worthless General Motors stock. I drive a Pontiac Grand Am made by union labor in Lansing, Michigan. My next-door neighbor works in the blast furnaces at a GM plant, and my Uncle Larry, semi-retired, leads the factory tours of the Ford Rouge facility. My friends’ families are full of active and retired autoworkers.

Hence, I say, with a heavy heart and with full awareness of the social upheaval this will cause in Southeast Michigan: a bailout for the Big Three, beyond the $25 billion already promised them by Congress, would be disastrous and foolhardy. It is time to let GM, Ford and Chrysler die – or, more accurately, to let them go into bankruptcy and be radically re-structured and pruned into profitable companies once again. You might ask, “What about the workers?” My answer is unpopular but necessary: cash handouts.

Henry Hazlitt, the great Chicago School economist, once wrote, “The essential political aims of [senators allied to the silver mining industry] could have been as well achieved, at a fraction of the cost, by the payment of a frank subsidy to workers.” The times call for a Hazlitt-approved solution. Bailing out the auto industry would transfer hard-earned tax revenue away from successful companies to a failing industry; more-over, the Big Three could not credibly guarantee that this bailout would be the last. Government subsidies are like Frito-Lays: bet you can’t have just one. In the next economic slump, domestic car companies would beg Washington for more money to cover their rear ends for another round of foolish and shortsighted business decisions.

The best solution to a problem without any good solutions is to penalize upper management and compensate the assembly-line grunts. GM, Ford and Chrysler, left to their own devices without federal support, would go bankrupt no later than 2014. Then bankruptcy protocol would take over. Ford and Chrysler are basket cases all around, so their operations would be drastically curtailed. GM is profitable overseas, and it makes excellent, globally competitive cars; its primary concern, other than health insurance, is domestic over-production. It needs to make and sell fewer cars, and that can be done at less invasive costs than Ford or Chrysler would incur. The Big Three, throughout, need strong bankruptcy receivers (a court-appointed guardian of a bankrupt firm’s financial balance sheet) who can work as free of political interference as possible.

Of course, a sizeable proportion of the 250,000 or so Americans now employed by the Big Three car companies would lose their jobs. Here’s where the compensation package fills the void. Every worker below a certain pre-arranged level of management (which could be decided in cooperation with the United Auto Workers) would receive a severance pay lump sum of $100,000, foregoing the right to a pension or any other type of compensation. This $100,000 would be a nest egg for laid-off autoworkers to pursue higher education in a different profession, start a business or stay home with his or her children while that person’s spouse works full-time. The nattily clothed executives and upper-tier managers, the people whose errors are responsible for putting the American auto industry in its predicament, would not see a single dime of this money.

In our response to the economic Panic of 2008, our elected leaders in Congress and both the outgoing and incoming Presidents seem to have thrown moral hazard out the door. Incompetence does not deserve federal money, except in the gravest of conditions. Despite what you may hear from John Dingell and Carl Levin, American automakers do not meet this stringent qualification. The costs to ordinary workers will be more painful tomorrow if we do not act decisively in their economic interest today.

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