Detroit Can’t Count on a Jump-Start From D.C.

Friday, November 14, 2008 at 10:57 pm
General Motors assembly line (by habfam flickr)

General Motors assembly line (by habfam flickr)

In a blizzard of partisan rhetoric, congressional leaders sparred Friday over whether America’s struggling auto makers should be the next benefactor in the lengthening series of federal bailouts.

Key Democrats have pushed furiously for an additional $25-billion infusion to help the sinking industry. Earlier this year, Congress approved $25 billion in low-interest loans to help the Big Three retool their factories to produce smaller, more fuel-efficient vehicles. Those funds, however, have been held up because of red tape. The Bush administration announced last month that it could take between six and 18 months for the money to reach the companies.

Senate Majority Leader Harry Reid (D-Nev.) vowed Friday to bring the proposal to give General Motors, Ford and Chrylser more money to a vote in next week’s lame-duck session. The $25 billion would come from the already approved $700-billion financial rescue package.

Illustration by: Matt Mahurin

Illustration by: Matt Mahurin

But the plan has hit a GOP wall of opposition. Many Republicans, who begrudgingly signed on to a bailout of the financial system, seem to have drawn the line at rescuing Detroit.

“I’m afraid it will be sending money down what we call a rat hole,” Sen. Richard Shelby (Ala.), the highest-ranking Republican on the Senate Banking Committee, said in an interview on MSNBC Friday. “It might be a temporary fix … but until some fundamental things are changed about their [auto makers'] model, it’s not going to work.”

Democratic leaders, including President-elect Barack Obama, have called repeatedly on Congress to pass legislation this month that would spend billions of dollars to buttress state Medicaid programs, extend unemployment benefits, make loans to auto makers and build roads and sewers. Obama has said his support for the Big Three hinges on their willingness to use the cash infusion to retool factories to produce more a fuel-efficient fleet.

In a letter to Senate Minority Leader Mitch McConnell (R-Ky.), Reid said that, at the very least, he intends to proceed Monday with two of the items — extension of unemployment benefits and more money for Detroit.

“These two provisions,” the Nevada senator wrote, “both address especially urgent needs and seem most likely to win your support and the support of your caucus.”

Reid shouldn’t hold his breath for passage. The administration opposes any new stimulus measures, contending that its $700-billion bailout strategy is enough to repair the economy — if it’s given the time to work. Officials in the Treasury Dept. also have rejected using any of that money to help Detroit. They have argued that the money would be more effective if it targets the finance industry.

GOP congressional leaders, already disgusted by federal interventions in the private sector, seem ready to let Detroit go under.

“There is a better way to get the economy moving,” Rep. Jeb Hensarling (R-Tex.), head of the Republican Study Committee, told CNBC Friday. “And it’s not helping out these [auto makers] who are the slave to the big labor unions and are making products that people don’t want to buy.”

Reid’s office said Friday that details of the Democrats’ plan are still being worked out.

McConnell issued a noncommittal statement questioning how anyone could endorse a proposal that has yet to be introduced.

“Taxpayers deserve to know if this bailout [of Detroit] would increase the national debt and raise their taxes,” McConnell said. “Perhaps when a bill is actually written, and its costs are known, both Republicans and Democrats can take a position on the legislation. But it sure would be helpful to actually see the bill before commenting on it.”

McConnell is hedging his bets on an Detroit bailout for another reason: The industry has a big presence in his home state of Kentucky. In 2005, roughly 20 percent of the state’s manufacturing workforce was employed by car manufacturers and related businesses, according to the U.S. Bureau of Economic Analysis. The auto and related industries accounted for $5.4 billion of the state’s gross domestic product. In 2006, Kentucky ranked third in the nation, behind Michigan and Ohio, in total light-vehicle production,

Kenneth Troske, director of the Center for Business and Economic Research at the University of Kentucky, said McConnell might not be a favorite of the auto unions but the industry’s prominence in Kentucky puts him in a bind. “He’s obviously in a difficult position,” Troske said.

Still, Troske added, an auto maker bailout would do more harm than good over the long run because it would set a precedent that some companies are too big to fail. The better alternative for the Big Three would be a Chapter 11 bankruptcy filing, Troske contended. Stockholders and pensioners would be hurt, but the companies would keep operating.

“They’ll continue to produce cars; they’ll continue to sell cars,” Troske said. “The executives would get fired, but they’ve already proven that they don’t know how to run a company.”

Auto industry representatives blame their predicament on external factors. Stephen J. Collins, president of the Automotive Trade Policy Council, which represents Ford, Chrysler and General Motors, pointed to high gas prices, less consumer spending and the credit freeze.

Still, U.S. auto makers are hardly blameless for their troubles. For years, the industry kept making gas-gulping SUVs while fighting tougher fuel-efficiency standards that would have made them more competitive when gas prices skyrocketed this summer.

But the question some lawmakers are asking is not who’s to blame, but what would be the economic consequences if one or more of the Big Three is allowed to fail.

In an interview with CNBC Friday, Sen. Debbie Stabenow (D-Mich.) said the effects any company declaring bankruptcy would be dire. She argued that the debate is not merely about the Big Three but about “whether or not we’re going to make things in this country — whether or not we’re going to manufacture anymore. … This is a bottom-line question of jobs and the future of the economy in America.”

Detroit’s woes should be a cautionary tale for the protectors of the industry. Many lawmakers, led by Michigan’s powerful Democrats, defended the auto makers’ opposition to new fuel-efficiency standards. Blind defenders of labor, which created a costly pension and health-benefits system that has made the Big Three increasingly less competitive in the global economy, also contributed to the problem. For example, the cost of health benefits owed by GM to employees and retirees over the next 80 years is estimated to be $55 billion, The New York Times reported last year.

Complicating Detroit’s plight, the Detroit Free Press reported Friday that Chrysler is paying its top executives $30 million in retention bonuses, even as the company is hemorrhaging cash and employees. Company leaders, who are scheduled to appear before Congress next week, will no doubt hear an earful from lawmakers over their priorities.

Such news will likely not sit well with Sen. Charles Grassley (R-Iowa). Grassley, the ranking member of the Senate Finance Committee, wrote to Democratic leaders Friday urging that any legislation to help Detroit should “include restrictions on executive salaries, compensation packages and excessive internal spending.”

Maybe Congress has learned something from the finance bailout after all.



Henry Overby
Comment posted November 14, 2008 @ 9:51 pm

Republicans in congress are perfectly willing to stop the bailout loans to the auto industry to
destroy the auto unions even if it means putting thousands out of work and pushing the economy
into a full-scale depression.

UAW Needs Reform
Comment posted November 15, 2008 @ 5:19 am

The US automotive industry has been stuck in the mindset of the 60s with creating bigger and faster vehicles such as the Yukon, Hummer H2, Suburban, the 300, the Charger, Mustang, as opposed to creating fuel efficient vehicles. Toyota and Honda have been utilizing greener cars for some time now. Many of the 'foreign imports' are made in the USA, anyways.

A lot of the US made vehicles are made at such as higher overhead, that there is little room for improvements to move in line with the likes of Toyota. The greener technologies will take years before the US automakers can outfit, design and produce the technology. The UAW needs to back down on the salaries that have driven up the cost of making vehicles in the US. Management needs to be restructured, reorganized, overhauled and re-engineered.

So the outcry is that 10% of the jobs of America will be lost. Yes and no. There will be a 'firesale' of goods and the auto industry will dry but the cars on the lot will still sell. The corporate executives who live in their mansions and have elite country club memberships will go down. Why? Because of poor management and a lack of foresight.

Many of the US automotive industry vehicles are less reliable than their Japanese counterparts. Just check consumer reports. Quality, reliability and even style are in question. Why are we re-hashing the US 'musclecars' in a time of oil scarcity? Why even 'relive the past' when we need to move forward with the changing needs of energy/technology?

I will be glad when the US auto-industry goes down in flames. It is an old dinosaur working on life support. A short term aid will not help. It is a band-aid that will not stop major hemorrhage. You cannot treat a gunshot wound with a band aid and you will not save the US automakers from a deep hole that they dug themselves into.

Why not subsidize the sale of the products already on the lot? It will help the dealerships and get more cars on the road. The bottleneck is not at the corporate level, it is at the car lot. Cars are not selling. Sales have been at an all time low. Have the government give incentives to the consumer to buy American.

WAKE UP, CHRYSLER, FORD AND GM! Your days are numbered, and well deserved!

Darryl D Anderson
Comment posted December 31, 2008 @ 6:14 pm

I have 2 interesting blogs that talk about this very subject.……

Darryl D Anderson
Comment posted January 1, 2009 @ 2:14 am

I have 2 interesting blogs that talk about this very subject.……

louis vuitton
Comment posted August 1, 2010 @ 1:09 pm

I will be glad when the US auto-industry goes down in flames. It is an old dinosaur working on life support. A short term aid will not help. It is a band-aid that will not stop major hemorrhage. You cannot treat a gunshot wound with a band aid and you will not save the US automakers from a deep hole that they dug themselves into.

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