Bigger Than Detroit
If the auto industry fails, the pain will be felt across the country and throughout the economy -- not just in the Motor City.
Jul 31, 2020120.5K Shares2.2M Views
Image has not been found. URL: /wp-content/uploads/2008/11/dodd-111908.jpgSenate Banking Committee Chairman Christopher Dodd (WDCpix)
More than 50 years ago, when the head of General Motors said that what’s good for General Motors is good for America, few would have disagreed. But Tuesday, the company’s CEO couldn’t convince a panel of 21 senators that the idea still rings true.
Along with the heads of Ford and Chrysler, Rick Wagoner urged senators to lend $25 billion in emergency aid to the three teetering auto makers. Without that help, the executives warned, one or more of the companies could fail. GM says that it’s burning through cash at a rate that could drive it under before Christmas. The economic effect of the car manufacturer’s collapse, the executives claimed, would reverberate far beyond Detroit.
Illustration by: Matt Mahurin
“The costs would be catastrophic in jobs lost, income lost, government tax revenue lost and a huge blow to consumer and business confidence,” Wagoner testified before the Senate Banking Committee. “This is all about a lot more than just Detroit. It’s about saving the U.S. economy from a catastrophic collapse.”
While the debate focuses on Detroit’s auto makers, the issue, some experts say, is nothing less than the future of U.S. manufacturing — and the nature of the country’s workforce as a whole.
Thomas Geoghegan, a Chicago labor lawyer, said the failure of any of the Big Three would signal a cultural shift, signifiying the fall of the United States as the world’s premier industrial powerhouse.
“It would be a dramatic marker in what has been a very slow collapse of the U.S. as a manufacturer,” he said.
Geoghegan, who has represented labor unions, said he supports a bailout of Ford, GM and Chrysler — with reservations. If the proposal is part of a renewed government commitment to get the country manufacturing again, he said, it would be worth it. “Otherwise,” Geoghegan said, “it’s probably just a waste of money.”
Many leading economists say an injection of capital is worth the risk. Appearing Sunday on ABC’s “This Week with George Stephanopoulos,” Paul Krugman, the Nobel Prize-winning Princeton economist and New York Times columnist, warned that allowing the automakers to fail would jeopardize every other stimulus package and bailout bill Congress has passed this year.
Image has not been found. URL: /wp-content/uploads/2008/11/wagoner1-300x249.jpgGeneral Motors CEO Rick Wagoner (gm-volt.com)
“Letting GM go under is an enormous anti-stimulus policy,” Krugman said. “It would be working toward a major negative blow to the economy.”
Many Democrats tend to agree. Party leaders have introduced bills in both the House and Senate to use $25 billion from the $700-billion Wall Street rescue plan to prop up the sinking automakers. The money would cover the companies’ operating expenses, including wages, auto parts, health care and pensions. More important, supporters say, it would keep them making cars and trucks.
“We need this industry as a basic part of the fabric of our economy,” insisted Sen. Debbie Stabenow (D-Mich.), an ardent industry defender. “Somebody has to make something in America. Credit default swaps alone, moving paper, aren’t going to do it.”
Standing in the Democrats’ way are the White House and many Senate Republicans, who oppose tapping the Wall Street rescue fund to help Detroit.
“That money is specifically for the financial industry,” White House spokeswoman Dana Perino said Tuesday, “to help prevent collapse in our financial system.”
Republicans want Detroit to tap a $25 billion fund, passed in December, to help the automakers retool their factories to improve their fleets’ fuel efficiency. Republicans appear to have the numbers to kill the Democratic bill this week.
Sen. Chris Dodd (D-Conn.), chairman of the Banking Committee, gave a stormy forecast Tuesday for the bailout’s chances in the Senate. “I would like to tell you that, in the next couple of days, this is going to happen,” Dodd told the industry heads. “I don’t think it is.”
Image has not been found. URL: /wp-content/uploads/2008/11/cadillac1.jpgThe golden days of the American automobile industry are long gone. (Flickr: califrayray)
Much of the debate centers on ideology. Republicans, already stinging from government interventions to keep the financial system working, want market forces to determine the fate of the Big Three.
“Do the American people want to borrow from their children to prop up companies that are dinosaurs, that have failed models, that have no innovation to speak of, just to hold jobs?” Alabama Sen. Richard Shelby, the highest-ranking Republican on the Banking Committee, told CNN Monday. “The government is choosing winners and losers in the marketplace. It won’t work.”
Many critics of a bailout have suggested that bankruptcy is the answer for the struggling automakers. That, they contend, would allow the industry to continue producing vehicles — and keep employees in jobs. As an example, they point to the case of United Airlines, which operated under Chapter 11 bankruptcy protection for much of this decade.
But others see a series of pitfalls with the bankruptcy strategy. One is that consumers might be leery of buying cars from a bankrupt automaker. “What’s a five-year warranty worth if the company that produced the car might not be around next year?” asked John Schmitt, senior economist at the Center for Economic and Policy Research.
A bankruptcy in the airline business is different, Schmitt claims, because travelers tend not to care much about the long-term financial health of their carrier. “They may not be around two years from now,” Schmitt said, “but they’ll certainly be flying to Cincinnati this afternoon.”
There are other concerns with the bankruptcy option. Generally speaking, a company files Chapter 11 when reorganizing the business is thought to be more profitable than closing shop altogether. In the case of the auto makers, however, the revamping could have little effect if credit markets don’t finance the reorganization or the purchase of new cars. Even if GM were producing 1,000 Chevy Volts (the company’s plug-in hybrid) every minute, Americans couldn’t scoop them up if they couldn’t obtain credit.
“Chapter 11 quickly becomes Chapter 7,” Krugman said on “This Week, “which is liquidation. So we actually see the thing disappear.”
Such a failure could result in the loss of hundreds of thousands of jobs nationwide, experts predict. Susan R. Helper, economics professor at Case Western Reserve University, estimates that 500,000 jobs would be lost if just GM — as well as the companies that supply it exclusively — were to shut down. Faced with numbers like those, she said, a $25-billion investment would be well worth the risk. “The advantage of keeping jobs in a recession is pretty clear,” Helper said.
On one facet of the debate, all sides agree: It’s been a tough ride recently for Detroit’s automakers. Faced with slumping sales because of the credit crisis, the Big Three are burning through their cash at a breakneck pace. In the third quarter of this year, GM rifled through $6.9 billion, while Ford spent $7.7 billion and Chrysler $3 billion. On Tuesday, as the corporate heads were testifying before Congress, Ford’s stock price fell 4 percent, and GM’s nearly 3 percent, to lows not seen in decades.
The performance of the companies has led many bailout critics to wonder aloud why anyone would want to save them. “People who say General Motors is too big to fail have not noticed that it has failed,” conservative commentator George Will said Sunday on “This Week.”
The industry hasn’t done much to help its cause. After years fighting fuel-efficiency standards that might have made the Big Three more competitive in these lean times, the companies were quick Tuesday to attribute their troubles largely to the bad economy, not misguided internal decision-making. Meanwhile, foreign companies like Honda and Toyota are years ahead of Detroit in developing smaller, more efficient engines.
Many in Congress — even supporters of the auto bailout — doubt $25 billion will be enough to get the companies through the recession. “You’re asking an awful lot,” Dodd told the company heads at the end of Tuesday’s hearing. “And I suspect … that this $25 billion is not going to be the end of it.”
Rhyley Carney
Reviewer
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