In some cases, the urge to “just do something” in the midst of a crisis can be overwhelming; but sometimes the urge should be resisted. This advice is cogent in the present environment where each day brings a more urgent doomsday alert. The financial industry is on the verge of collapse, we must give them unrestricted access to $700 Billion! The auto industry is on the verge of a meltdown, we must give them additional loans of $35 Billion. The health care system is at risk, we must invest at least $10 Billion taxpayer dollars to increase payments to health insurers! In each case, the plea for infusion of tax dollars is plausible and nearly hysterical. Eager to curry favor with both constituents and lobbyists, members of Congress have been lining up to dole out resources from the already strained public treasury in order to show that they are “responsive” in a crisis.
In certain circumstances, it is better to step back and read the situation more broadly before reacting to the “Chicken Little” cries for salvation. Weeks and months after the dire warnings of collapse of the financial industry, the industry remains in place with the shakeout of a few particularly poor performers. Some would argue that the normal operation of the market should eliminate the weaker performers. In any event, the “bailout” seems to have resulted in three things that were not among the objectives of the legislative kneejerk reaction.
The first was evidence of large bonuses and lavish “retreats” for industry executives. This “feel good” gesture for the same executive who ran the industry to near collapse seems, at best, a little odd and poorly timed. The second was the use of bailout funds by certain recipient financial enterprises to purchase their weakened competitors. This amounts to a federally subsidized “turkey shoot” in which taxpayer dollars were used to help banks favored by the Bush Administration capitalize on the crisis and eliminate competition from other banks who perhaps had not been as generous in their campaign contributions to the GOP of late. The third interesting result is that credit is still virtually frozen and the banks are hoarding the taxpayer funds. In other words, taxpayer funds were used to make the banks healthier so that they would open credit to aid consumers and businesses. The money was actually used to make the banks healthier, but the public benefit of the expenditure seems to have gotten stalled somewhere.
So the reluctance of some in Congress to rush bailout funding for the auto industry is perhaps fortuitous. Don’t think for a moment that the objectors are doing so completely out of logic and a sudden fealty to their obligation of public stewardship. Reasons for opposition include a desire to see the US Big Three auto manufacturers in bankruptcy in order to advantage Japanese auto companies like Toyota and Honda that have plants in the legislator’s district. More cynical politicians want to prevent a bailout that appears to be Democratic Party driven, and by blocking Congressional action they can force the Bush Administration to use other bailout funds to help the automakers, a GOP driven solution. The result, however, is the same. The delay in a rush for bailout has allowed time to debate whether and under what conditions such public involvement should proceed. The delay and debate should be seen as beneficial. There needs to be a discussion of the “conditions” that should be placed on any public investment to prevent the same sort of fraud that has accompanied the finance industry bailout.
Ultimately, there should be some form of aid to the auto industry. Such aid should be strictly limited and highly conditioned to assure not only that the industry survives the current crisis, but also that there is a substantial and lasting change in the direction and management of the companies. However, the idea of handing over billions of dollars in taxpayer funds to prop up failed and intransigent management would be foolish. If considered with a calm and logical disposition, the requisite intervention would be viewed as similar to a conservatorship. In such cases, management who had run the enterprise into the ground would be dismissed and executives with experience in turning businesses around would be brought in. The proposals currently being floated would leave current management in place and require the reduction of wages and benefits of the auto workers.
Some adjustment of labor costs seems logical in light of the differential between Big Three costs and those of the Japanese automakers. However, it is also possible that a large part of the economic difficulties faced by the US automakers, i.e. drop in sales, could be due to the production of the wrong types of vehicles. That would point to failure of management strategy at least as much as labor costs as contributing factors. Any sound strategy for rescue of the auto industry would require a carefully considered and thorough examination of the restructuring needed to turn the companies. This rationale supports, in theory at least, legislators suggesting that a combination of Bankruptcy reorganization with guaranteed public loan support for a renovated would be more prudent. The idea and argument that consumers would refuse to buy vehicles, if priced properly, from a company that is being reorganized to function more competitively seems doubtful. It is so doubtful that one wonders why additional “independent” of consumer opinion have not been conducted.
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