Last week Representative Thaddeus McCotter of Livonia spoke passionately about the real needs for preventing the collapse of the auto industry but we still failed to pass anything to help the auto industry. Now, if you read back through this blog you’ll know that I don’t have any particular love for cars or the automotive industry. What I do care about is the economy in particular the US economy. I like when it’s stable and not in crisis mode where fear runs through the streets and business activity stops. I don’t like when every day we hear that the economy has yet again experienced something unprecedented or which last occurred during the Great Depression.
These are interesting times.
After all that’s recently happened to our economy I fear what could happen if it were to experience another devastating economic shock. That’s what the sudden collapse of the domestic auto industry would be. The Big 3 directly employ a quarter of a million people and up to 2 million indirectly. But I’ve read estimates that if only one of the Big 3 were to go into bankruptcy 2.5 million jobs would be lost next year. Our economy has already been bleeding millions of jobs causing a downward spiral effect that has not stopped.
“If GM were to discontinue operations, the cost to local, state, and federal governments could reach $156.4 billion over three years in lost taxes, and unemployment and health care assistance.”
Automakers are different from other companies that might go in to bankruptcy. If I buy a television from a company that goes bankrupt I might lose the warranty but most likely the television wasn’t going to have any problems anyways and if it did I was probably planning on replacing it soon and either way it’s not a huge amount of money. But when it comes to cars, no matter who breaks them expensive things inside them will break and a warranty is essential. Enough people would stop buying cars from that company because of warranty fears that the company would spiral down until those fears became reality. So that’s how bankruptcy, which is supposed to protect a company, would actually do the opposite in the case of car companies.
“The idea that the U.S. economy is based on unfettered free markets is, and has long been, a cruel joke.” - Eugene Robinson , The Washington Post
These are interesting times. Perhaps in another down cycle of the auto industry the rest of the economy might have been stable enough to withstand the loss of millions of auto related jobs. But what we’ve seen is a collapse of the global financial system, the free market showing that it can only exist with outside help. Free marketeers would have said that no governments anywhere in the world should have done anything after the economic destruction of October 2008 but clearly doing nothing was not a choice. It’s not clear that the things that governments did do were the right things but we saw how markets reacted when we tested the idea of doing nothing.
The main argument that people bring up for not helping the auto industry is that in a purely free market governments should not stick their fingers in any company due to the moral hazard of not allowing certain companies to be punished. The conditions we are seeing now are not normal nor is the credit freeze any fault of the automakers. It’s true that automakers have been losing money recently and part of this is due to the restructuring that they have already been undergoing new regulations that have been imposed on the industry by the government. So the failure of the credit markets came at a particularly vulnerable time for the auto industry.
The thing is whether we choose to make the “morally correct” decision to stabilize the financial system or auto industry. What’s at stake is the entire economy. There is a point at which one single thing is too big to fail because sudden failure would cause such a shock to the market that the free market would not be able to cope. It’s like catching a cold many times over versus getting hit by a car. And actually right now our economy is so weak that even colds can be dangerous. The time to punish a child and teach them a lesson is not when they are sick in bed. Right now we need to be doing everything we can to stop the bleeding, stabilize the economy, keep it from falling into a long depression, and try to return to normalcy.
I’m not surprised that most bloggers are against the auto industry. But I think they’re discounting how much of our economy depends on the auto industry as well as how difficult it is to start and run a car company. Start up a automakers like Tesla and AFS are also now begging the federal government for hundreds of millions of dollars before they’ve even produced anything.