Tuesday, November 25, 2008

Saving the auto industry

The airwaves and the print media are brimming with prescriptions for saving the US auto industry, warnings about what will happen if it is allowed to collapse, and finger pointing at auto executives, unions and governments.

Much of the rhetoric assumes that if the government fails to bail out the automobile industry, it will collapse, leaving millions of people jobless and millions of retirees without their pensions.

Clearly the auto industry is in serious straits, and some serious measures will be needed to save it. However, a government bailout, or loan as the auto executives insist on calling it, is precisely the wrong solution. A bailout will give the auto companies breathing space – which they can use to wait for the programs they already have in place to bear fruit, and for economic conditions to improve. But the auto companies have serious problems that need to be dealt with now: worker and retiree pay and benefits, union contracts that give overseas manufacturers a huge advantage, management’s tendency to concentrate on big cars and SUV’s because they have higher profit margins (or did until recently). These problems can only be solved by the auto companies, possibly under new management. A Chapter 11 reorganization would allow the auto companies to continue operating while they sort out their problems.

Does government have a role in the automotive turnaround? Certainly. Government can help by freezing the unfunded mandates they have imposed on the auto industry: fuel consumption, emissions, crashworthiness. Not that anyone is opposed to cleaner, safer, more economical cars, but how much better off would we be if the government offered a prize to the first auto company to meet a goal instead of fining those who don’t meet it?

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