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Ford, Chrysler, and General Motors have borrowed a page from the United Auto Workers in their quest for a government bailout. They are bargaining collectively. Rather than arguing the merits of their cases before Congress individually, they come to the table as a single entity. This involves much more than semantics. By doing this, the Big Three have successfully shifted the terms of debate from the failure of individual firms to the failure of an entire industry. This lets them use much more frightening language and quote far more terrifying statistics in making their case for a taxpayer-funded bailout.
News organizations and politicians have fed this misconception. Consider this lead from a story by Julie Hirschfeld Davis:
WASHINGTON (AP) - Detroit's Big Three automakers pleaded with a reluctant Congress Tuesday for a $25 billion lifeline to save the once-proud titans of U.S. industry, pointedly warning of a national economic catastrophe should they collapse. Millions of layoffs would follow their demise, they said, as damaging effects rippled across an already-faltering economy.
-- (Nov 18, 6:56 PM ET)
The article quotes General Motors Corp. (GM) CEO Rick Wagoner as saying, "Our industry ... needs a bridge to span the financial chasm that has opened up before us." The article reports that Ford CEO Alan Mulally told senators the auto industry was a pillar of our economy.
Most people would find it surprising that the CEO of a major corporation would openly beg Congress to assist his company's competitors. Yet that is exactly what is happening. GM’s CEO is asking Congress to subsidize Ford and Chrysler. He does this is because as long as his counterparts at Ford and Chrysler sing the same song, the three separate companies won't be forced to bargain individually. And they are much more likely to be successful.
But treating these three companies as "the industry" is fundamentally misleading. The Big Three are not the industry itself but rather three separate companies facing similar but separate problems. Presenting them as one entity tends to mask an important fact: The chances of all three members of the Big Three failing simultaneously are vanishingly small. A good analogy is the airline industry: Delta Airlines, United Airlines and USAirways all failed and entered Chapter 11, but not at the same time. None of the members of the Big Three have provided any evidence that troubles in one will cause all three firms to fail simultaneously.
Treating three companies as a single industry allows bailout proponents to quote estimates of job losses that are far too high because they assume that all three companies fail simultaneously. A much more realistic scenario assumes that if any or all of these three companies fail, then they fail one at a time. This changes the analysis.
Suppose the federal government refuses the Big Three's pleas for a bailout. Then one of two things happens. First, it is possible that none of the Big Three fail. In this case, we can say with the certainty of hindsight that no bailout was necessary and that the government acted appropriately in refusing the Big Three's requests for support. Second, it is possible that one of the companies does indeed fail. Suppose that the failed firm is GM, and consider the most extreme result of the failure, which is the one promoted by the most ardent bailout proponents. Bailout proponents assume that all GM employees would be unemployed instantly and would be unable to find other employment for an extended period. In addition, they assume that GM's failure would trigger massive failures and layoffs in firms that supply parts and other supporting industries.
If this extreme case were to occur, then it would indeed be an economic shock. However, because only one firm has failed, the shock would be much smaller than proponents of a bailout claim. In our example, both Ford and Chrysler would continue to operate, at least for the present. What's more, they now operate in a market absent a major competitor. Along with Toyota, Honda, Nissan, BMW, Hyundai, and other manufacturers (most with production facilities in the United States), Ford and Chrysler would capture a portion of the sales that GM no longer makes. This can only improve their economic prospects, making the failure of a second member of the Big Three less likely.
In contrast to the dire scenario presented by bailout proponents, opponents of a bailout would argue that massive layoffs are unlikely, pointing to the failures of airlines such as Delta. They would remind politicians and voters that bankruptcy is not the same as liquidation. Bankrupt airlines continued to operate, suppliers continued to provide parts and services, and workers continued to be paid.
Meanwhile, regardless of whether the costs of the bankruptcy are large or small, politicians and taxpayers will have gained an enormous amount of information. Having seen the result of a bankruptcy by a single member of the Big Three, they may decide that the economic dislocation caused is so great that a bailout of the remaining two companies is advisable. Or, they may instead decide that the economy handled the loss of a single auto and truck producer efficiently, or at least more cheaply than the cost of a bailout (which in any event may have only delayed the company's failure rather than prevented it.)
Aside from the informational advantage, the economy will enjoy another huge benefit from treating the Big Three as individual firms rather than as if they comprise the entire industry. Rather than collude at the bargaining table, the Big Three would have powerful incentives to compete to win what amounts to a game of last-man-standing (or more precisely, second-to-last-man-standing). GM would have powerful incentives to compete with Ford and Chrysler, and Ford and Chrysler would have those same powerful incentives to compete with GM and with each other. So long as they are not the first firm to fail, their economic prospects are brighter whether or not the economic fallout of their competitor's failure is severe. If the cost of the first firm's collapse is large, then the remaining firms have a much stronger hand at the bargaining table when they return to Congress seeking a bailout. But even if the costs of a single firm's failure prove to be manageable, and no bailout is forthcoming, then the remaining firms are stronger because they face one fewer competitor.
As it stands now, Congress will decide whether or not to bail out the Big Three as if it were a single entity. Taxpayers and consumers would be better served if Congress recognized that the Big Three are distinct corporations. Congress should not grant them the status of the entire automobile industry. Perhaps a bailout will prove to be necessary, but if so, then Congress should bail out a remaining member of the Big Two, not all members of the Big Three. Ramon P. DeGennaro is the CBA Professor of Banking and Finance at The University of Tennessee and a Visiting Research Fellow at AIER.
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We do not have to worry about the terrorist, Our govt. Is going to cripple America, or the 3 Auto Giants will. I know they already have crippled me. Who is going to be made accountable for all my losses? I can't buy a car, I can't afford the Big prices they have, or the Payment. When the gas was high, it was even worse. Who is going to give me back all the money they stole from me? Who is going to be made accountable . Everyone in govt. started to complain about welfare for the people who really needed it, Were talking , children, women, seniors, etc, and they cut cost for it, because of a very low percentage that would not work, but now it is Coporate Welfare, and no one seems to be stopping this.. They are all getting all the money they are asking for. I am very unhappy with the Government,Poulson,Bernake, Wall Street,etc. and I fear for Our Country, and For the People. We pay these Congressman and women to handle our problems, Who should be fired? The peple need to call for someone to be fired. I would like to have some money for my losses that I struggled for so many years to have.. Please give my money back, so I can pay my bills. Please Help Me. Who is being held accountable for the peoples losses???? I feel the people need to take a hard stand on what has happening in the financial world, and someone needs to pay and give back to all those who are now hurting from all the greed,and no good. Gm is to be getting billions of dollars from over seas. Before you give it to them, send my moeny back to me. mj
So which is it, an extreme economic shock, or easy bankruptcy proceedings for all three companies? .... or is it an economic exercise which would provide all the information and answers we don't have and that obviously have you guessing??
How many thousands of dollars would be saved if there was a restructuring of the auto industry? What if the top employees had to take a pay cut and stop the fringe benefits? Can you imagine paying for a vehicle at a more realistic price than the inflated price that people are paying today? When will it end?