by Daniel J. Ikenson

edited by Larry McCart

This article appeared in The American on November 21, 2008.

One day before the Chief Executive Officers of General Motors, Ford, and Chrysler told the Senate Banking Committee that their industry faced imminent collapse without an emergency infusion of $25 billion, a new automobile assembly plant opened for business in Greensburg, Indiana.  Although the hearing on Capitol Hill received far more media coverage, the unveiling of Honda's latest facility in the US speaks volumes about the future of the US car industry — and shows why the proposal for US federal government subsidies for GM, Ford, and Chrysler is wrong.

The intellectual arguments against auto industry subsidies are well established.  Taxpayers should never be forced to subsidize any company, let alone a poorly run company.  Subsidizing GM, Ford, and Chrysler would be subsidizing failure.

A few incompetent US automakers are now in dire straits, but the car industry itself is not in crisis.  If GM, Ford, and Chrysler went into Chapter 11 bankruptcy and were declared unsavable by bankruptcy judges and closed down, there would be plenty of strong auto companies operating throughout the United States.  GM, Ford, and Chrysler account for slightly more than half of all light vehicle production and slightly less than half of all light vehicle sales in the United States.  The rest of the US auto industry includes Honda, Toyota, Nissan, Kia, Hyundai, BMW, and the other foreign nameplate producers who manufacture vehicles here.  These companies employ American workers, pay US taxes, support local businesses, contribute to local charities, have genuine stakes in their communities, and face the same cyclical contraction in demand as do GM, Ford, and Chrysler.  They have been making products that consumers want to buy, and they will endure this recession without any taxpayer assistance because they have more efficient cost structures.

The decline of GM, Ford, and Chrysler is not a recent phenomenon; they have been losing market share for decades; they have not produced a top-five selling passenger car in years, and their once-popular SUVs and large pickup trucks have fallen out of favor with consumers.  GM, Ford, and Chrysler failed to sufficiently diversify into reliable, efficient, and aesthetic passenger cars when they were earning big profits and had the money to do so.

Want proof that automobile production remains alive and well in the United States?  Just look at the success of Honda's operations in Ohio, Toyota's in Kentucky, Nissan's in Tennessee, BMW's in South Carolina, and Hyundai's in Alabama, as well as the proliferation of new plants across the nation, such as the new Honda facility in Indiana and the new Kia plant in Georgia.

If GM, Ford, and Chrysler were closed down by bankruptcy judges, people would lose jobs.  That is what happens in an economic recession, when less competitive firms are forced to contract.  The job losses would not be as large as predicted by some auto industry executives.  Realistically, the failure of one or two major auto producers would improve prospects for the firms and workers who remain in the industry.  If GM fails, the market shares of Ford and Chrysler (not to mention those of the foreign nameplate producers) are likely to increase, as they compete for GM's former customers and best workers.

US federal government subsidies for privately-owned businesses are unfair to taxpayers, and are unfair to successful firms in a particular industry, who are implicitly taxed and burdened when their competition is subsidized.  In a properly functioning market economy, the better firms — the ones that are more innovative, more efficient, and more popular among consumers — gain market share or increase profits, while the lesser firms contract.  This adjustment process ensures that limited resources are used most productively.

The government subsidies sought by GM, Ford, and Chrysler would interfere with the adjustment process, while not doing anything to make the subsidized companies more competitive.  A $25 billion infusion for companies that are losing $6 billion each month is not a rescue plan; it is an expensive way of delaying what happens to incompetently managed companies in a non-communist economic system.  Russian federal government subsidies for companies run by incompetent communist-party-member managers resulted in the collapse of the Russian economic system and the end of the Soviet Union.

Funneling $25 billion to GM, Ford, and Chrysler would amount to a waste of taxpayer dollars and also a tax on successful auto companies, such as Honda and Toyota.  Subsidizing GM, Ford, and Chrysler would cause successful auto companies to open fewer new facilities in the United States.

To dampen criticism, Congressional Democrats speak of subsidies "with strings attached".  Strings-attached subsidies pose problems.

First, Congress doesn't know enough about the auto business to dictate operational conditions.  "Strings" that cap executive compensation will chase talent away.  Strings that force a company to produce high-mileage vehicles when gas prices are plummeting will lead to a repetition of past mistakes.

Second, strings will make it easier for subsidized companies to come back for more federal aid after they blow through the first $25 billion.  Their Chief Executive Officers will be able to say that they complied with the conditions of the subsidies, conditions that made matters worse for them.

Giving government subsidies to GM, Ford, and Chrysler is not necessary.  We have the bankruptcy process.  If companies in Chapter 11 can be salvaged, a bankruptcy judge will help them find the way.  In the case of GM, Ford, and Chrysler, a bankruptcy process would almost certainly require them to dissolve their current union contracts.

Solving the labor cost problem caused by the United Auto Workers union (UAW) should be a high-priority objective of GM, Ford, and Chrysler — and is the one problem that many pro-subsidy Democrats wish to ignore.  The wages paid by GM, Ford, and Chrysler are ridiculously high.  Their inability to properly control wage costs have resulted in their competitors having a $30-per-hour advantage in labor costs.

GM, Ford, and Chrysler, the United Auto Workers (UAW), the Michigan Congressional delegation, Michigan Governor Jennifer Granholm, House Speaker Nancy Pelosi, and Senate Majority Leader Harry Reid probably know that $25 billion is not enough money to fix the problems ailing GM, Ford, and Chrysler.  Chapter 11 bankruptcy is the better course for auto companies and their workers; Chapter 11 bankruptcy could save 100,000 jobs.  The United Auto Workers union arranges for big-time money to be given at election time to politicians who strongly support the United Auto Workers union, and the United Auto Workers (UAW) leadership is opposed to Chapter 11 bankruptcies for GM, Ford, and Chrysler because United Auto Workers labor contracts with GM, Ford, and Chrysler probably would be thrown out by bankruptcy judges.

The US auto industry needs a shakeout, not subsidies.  What we are witnessing, unfortunately, is an attempted shakedown.  Let's hope it doesn't succeed.

Daniel J. Ikenson is associate director of the Cato Institute's Center for Trade Policy Studies.