NO TO AUTO BAILOUT by Mickey Hepner

The Edmond Sun

After years of fighting Congressional efforts to regulate the auto industry, The U.S.’s Big Three automakers — General Motors (GM), Ford, and Chrysler — are now turning to Congress for help. While such assistance might make good political sense for Democrats, it is very bad policy.

The Big Three automakers have struggled for decades against foreign competitors like Toyota and Honda, but with the current economic downturn those struggles have become a struggle for survival. The automakers poor performance and the worsening state of the economy have led some analysts to conclude what was once unthinkable, that bankruptcy might be inevitable for one or more of these iconic companies.

Not surprisingly the automakers are turning to Congress for help, and Democrats eager to build upon electoral gains in the Midwest, are eager to listen. To justify their request for governmental aid, the automakers point to a recent report by the Center for Automotive Research (CAR), a group that receives funding from the auto industry, that estimated the U.S. economy would lose 3 million jobs in 2009 if GM, Ford and Chrysler all ceased operations that year.

But there are several reasons to think that this number overstates the true cost to the U.S. economy. First, the CAR report assumes that if the Big Three cease production, then all foreign automakers will have to cease their U.S. production too. In other words, the job losses reported by CAR assume that if GM, Ford, and Chrysler lay off all their workers, that Honda and Toyota will have to lay off all their U.S. workers too — a claim the foreign automakers deny.

Second, any job losses are only temporary. We know that unemployed workers do not stay unemployed forever, they find new jobs with new firms or in new industries. In fact, the CAR report estimates that after just two years the job losses will total only 1.8 million. After five years, the job losses would be even smaller.

Third, the demise of one automaker will make all the remaining firms stronger. It is better for Ford in the long-run if GM disappears, and vice versa. With fewer firms there will be less competition, greater market share, and higher profits for the remaining firms. In fact one of the quickest ways to improve the status of any industry is for the weakest firm in that industry to exit, as the weakest firm is serving to drive down prices, market share, and profits for the entire industry. Thus, the demise of one automaker will have a negligible effect on employment in the long-run as other firms expand their market share.

Fourth, bankruptcy is not a bad option for struggling firms. Numerous airalines have filed for bankruptcy protection in recent years. This protection allows them to reorganize their operations, renegotiate their contracts, and restructure their debts. Consequently, airlines like Delta, United, and Northwest Airlines all emerged stronger after bankruptcy. The U.S. automakers can also enjoy those same benefits and emerge from bankruptcy in their strongest competitive position in decades.

We must remember that the problems facing the U.S. automakers are not recent, nor were they unexpected. GM, Ford, and Chrysler have been struggling for the past three decades because they have been poorly managed for three decades. For three decades these three companies failed to provide consumers with the automobiles consumers demanded, failed to foresee the staggering cost of their long-term labor concessions, and failed to differentiate their offerings. As a result, they have been overtaken by foreign competitors.

In a market economy poor management decisions get punished, as they should be. There is nothing magical about the auto industry. There is no special need to reward bad management in this industry with taxpayer dollars. In fact, a governmental reward for bad management can only serve to encourage more poor management and stifle the pressures for the automakers to innovate. Government aid today only serves to harm the industry in the long-term.

While I understand the political benefits to bailing out the auto industry, I also understand the economic costs of doing so are far greater. Thus, I urge Congress to just say “no” to a bailout for the automakers.

MICKEY HEPNER is an associate professor of economics at the University of Central Oklahoma.