Losing Taxpayer Money to Detroit: It's Auto-matic!!!

So Detroit is bleeding money... so much so that GM and Chrysler could be bankrupt in a matter of months if Government action isn't taken to keep them afloat until they can re-tool.

This is something that was probably written on the wall for a while now. Even while GM was at the top of its game (which actually wasn't all that long ago: 2003, to be exact), several groups were concerned about the implications of where the sales were coming from: namely, trucks and SUV's. When gas was cheap (before the price surge... and subsequent drop) SUV's were THE big-ticket item. Everybody wanted one... and everyone was buying one.

Fast-forward 5 years, and nobody is buying them because nobody has the money. That is an outcome brought about by two factors: 1) the economy as a whole, and 2) the lack of foresight of auto-executives, who put all their eggs in the one SUV/Truck basket. But the two factors are both at work, make no mistake. Factor # 2 would likely not be an issue if the economy as a whole were in better shape. Remember that.

Now, here we are, watching our legislators in Washington debate whether or not to float short-term loans to the "Big 3" auto-makers in an attempt to help them "re-tool" their business before they run out of cash.

We have two sides to this issue -- Those who say something along these lines: "Detroit has not changed with the times, and has not been competitive with foreign auto-makers. Their current predicament is their own fault. We should let them go bankrupt!"; and those who say something along these lines: "Detroit is such an integral part in our economy, that letting these companies fail would have devestating consequences for so many Americans that we HAVE to do something to ensure their survival."

Now, granted, those are probably grossly over-simplified versions of the arguments, but this is a blog... if you want to get the full picture, you can find it elsewhere!

This argument has so many different factors, I could spend all day talking about it... but I want to point out something which I think is important to note: Whether or not Washington gives the $15 billion, we the taxpayers will lose $15 billion. The difference is whether we lose it in the short-term or the long-term. In the short-term, we lose it in the form of a loan to the auto-industry. In he long-term we lose it in the form of lost tax revenue (through sales taxes, income taxes, etc.), unemployment insurance, food stamps, etc.

The difference also could be much worse for the long-term scenario...

Critics of the Big 3 like to point out that foreign-owned companies operating in the USA are doing just fine. America's "other" auto-industry is located in the South, and is largely non-union. These companies (like Kia, Honda, Toyota) are not having the troubles of the American auto-industry, and critics of the American industry point to the UAW and the costs of labor associated with the union's contract as being to blame for the difference.

This came to a head yesterday in the Senate, when Senate Republicans demanded that the UAW make steep wage cuts to bring them in-line with the foreign auto-makers located in the American south. At first glance, this line of reasoning by the Senate Republicans could make sense -- after all, if the problem truly IS the wage disparity between UAW workers and non-union workers, then bringing the cost of labor down for the Big 3 would clearly make them more competitive with the foreign auto-makers. Problem solved, right?

Not so fast. Remember what I said earlier -- GM was making their largest profits EVER just 5 years ago. The difference in wages has not dramatically changed since then... only our economic conditions as a whole. I posit that GM and the other US auto-makers would be doing just fine today if they had the foresight to produce more economically viable products for consumers like their foreign competitors.

This doesn't even touch on what would happen to the labor movement as a whole if UAW were to do what the Senate Republicans suggest. Here is a nice link from the Economic Policy Institute which talks about what exactly unions do for workers. Something which is easy to forget is that unions not only help the workers who are a part of the union, but also provide benefits for non-union workers -- because they set a standard for wages and compensation to which other employers have to respond.

IF the UAW were to agree to lower wage levels such as those of the foreign auto-makers, then it wouldn't be long before those foreign auto-makers would lower their starting wages considerably, as well. The dynamic between union and non-union would stay the same, but wages of all workers would drop.

This brings me to my question to you, and gets to a deeper philosophical outlook on confronting economic troubles. Is it more prudent to bring down wages in order to help business recover, or is it more prudent to ensure that workers are making a living wage and can afford to buy the things they need. After all -- if nobody has any money to spend, then they can't buy any products... and a vicious cycle ensues.

I am of the belief that it is DEMAND which drives the economy, not the other way around. When people have money in their pockets, they buy things. It's that simple. Lowering wages for all workers simply lowers their ability to buy products and services... which, in turn, lowers demand... and leads businesses to cut production (i.e. -- layoff workers.) This is NOT the way to go, and I am going to be squarely behind the UAW on this one.

A while back I wrote about the bailout of the financial services industry and my opposition to it. I am on the other side of the fence on this current issue, and find it perplexing that congress is so willing to hand over $700 Billion to banks and financial institutions, but balk at giving $14 billion to companies which actually employ hundreds of thousands of Americans and who actually build tangible products.

As John Stewart put it on The Daily Show: at least when Detroit loses money, we actually get a product out of it.