The Ripple Effect of Letting the Auto Industry Fail

One of our readers, Jim, is strongly in favor of the auto industry bailout.  He pointed me to this article at Time Magazine:

On Monday, an auto industry consulting firm, Planning Perspectives Inc., reported that 68% of participants in a survey of executives for industry suppliers said their companies would have to downsize if General Motors declared bankruptcy, while 12% said their businesses would likely close or would definitely do so. In the Midwest alone, some 275,000 jobs would be lost as a result of a GM bankruptcy. “If they go into bankruptcy, it’s going to have a catastrophic effect on businesses across the board,” says John W. Henke Jr., president of PPI, based in Birmingham, Mich.

There will certainly be a large wave of financial pain felt by many people if these companies fail now. Michigan will likely be one of the hardest hit states in the country if the Big Three fail, and as a former resident of the state, I would hate to see it happen. So many companies are intrinsically tied to the health of the automobile manufacturers, it’s almost terrifying to think of what would happen to those communities if the companies died overnight.

We saw a similar event happen with Flint, Michigan when General Motors pulled out of that city decades ago. That city went into a spiraling decay from which it has never fully recovered.  Crime went through the roof, real estate prices plummeted, and whole communities were abandoned.  This was because the company made the decision to abandon those factories which weren’t profitable enough to maintain.

Nearly 60,000 GM jobs were cut in Flint from the 1980′s to the 1990′s, resulting in massive unemployment.  The loss of the factory jobs led to lower demand for local suppliers, restaurants, and entertainment venues.  Only in the last couple of years has Flint started to recover in terms of lower crime and population growth.  It took roughly 25 years to accomplish this.

Today, we face the prospect of the entire U.S. automotive industry failing.  If this occurs, we will see a very similar story play out in many large U.S. cities.  But, the question shouldn’t be “how much taxpayer money should we hand them?”

There’s a whole slew of questions that need to come out of this situation:

• How did all 3 companies end up in an “imminent failure” position after only a couple of consecutive years of financial losses (shortly after record profits in the late 1990′s)?
• How much restructuring did they do when profits began their decline a few years ago? Why didn’t it work?
• How much of their current losses are attributable to excessive salaries (both at the corporate executive level and at the grunt labor level)?
• Which overseas divisions remain profitable, and what are the major factors which differ there?
• What government regulations are costing the companies the most money to live up to?  Can they be modified to achieve profitability?
• How far will a taxpayer-funded gamble of $25-40 billion really go since GM managed to lose $38.7 billion in 2007 alone (granted, some of that was just a “paper loss”, but…)?
• What have each of them done in the last week to reduce costs in their organizations?
• Why hasn’t fuel efficiency changed dramatically since the Ford Model T (which could get up to 21 mpg)?
• What guarantees do we have that they won’t just close down the U.S. factories anyway and increase foreign production once they have the money?  After all, most of the screaming politicians don’t care about these companies.  They just care about getting votes from the workers and receiving UAW endorsements.
• What’s the criteria that we’re going to use for the “Too Big to Fail” slogan to apply?  10,000 employees? 100,000?
• Should the government have stepped in to prevent the closing of the factories in Flint in the 80′s? Or, was that type of “failure” okay because it was a private-sector business decision?

There are countless more questions to ask, but the “solution” will still be to just hand over more taxpayer money.  We’ll consider it an “investment”, since there are immediate social and economic consequences whenever a large employer shuts down completely.

What are the long term consequences of these actions, though?  How much are we, the taxpayers, willing to give away before actually letting these companies die?  Will we nationalize the auto industry like we did with the banks?  Are there any lines left to be drawn?

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