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Scot Lehigh

Why we should bail out automakers

By Scot Lehigh
Globe Columnist / December 17, 2008
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IT'S A STRANGE circumstance indeed when one finds himself saying, jeez, I sure wish people would pay more heed to Dick Cheney.

And yet, the view here is that Senate Republicans should have listened to the vice president last week when he reportedly urged them to support a bridge loan for American automakers. Instead, they dug in, scuttling a congressional deal and leaving it up to the Bush administration to take unilateral action to help the Big Three.

At a time when the US economy is hemorrhaging jobs, it's astounding we've arrived at this juncture.

Yes, people are angry at Detroit, which has been frustratingly myopic for far too long.

But let's focus for a minute on the salient facts of the current situation.

First, for all the shortsighted bets on gas-guzzling behemoths, the immediate problem Detroit faces is not of its own making. Rather, it's the Wall Street meltdown, which has erased trillions in wealth, crumpled consumer demand, and made financing difficult.

"They wouldn't be asking for money if they weren't creamed by the financial crisis," says Mark Zandi, chief economist at Moody's Economy.com.

Further, it's not just the American car companies whose sales have plunged. Japanese firms have also seen a steep falloff.

Chrysler suffered a decline of 47 percent in November, GM 41 percent, and Ford 31 percent; in the same month, Nissan's sales fell 42 percent, Toyota's 34 percent, and Honda's 32 percent. Thus current dismal sales figures shouldn't be taken as an accurate barometer of long-term viability.

Second, the labor-cost situation isn't nearly as bad as it's often portrayed. Although it's true that UAW members earn more than comparable workers at nonunionized auto plants in the United States, they aren't making anything like the oft-cited figure of $73 an hour in total compensation; that inflated number comes only by including the cost of benefits for retirees.

As David Leonhardt wrote recently in The New York Times, the wage and benefit gap for current workers is around $10 an hour: $55 an hour at the Big Three versus $45 an hour for nonunion foreign firms. The largest part of that $10 difference is higher benefit costs at GM, Chrysler, and Ford, which have older workforces, says John Paul MacDuffie, a professor of management at the Wharton School and co-director of the International Motor Vehicle Program, a research consortium.

Certainly the Big Three need to do even more to refocus, restructure, and reduce costs. Still, labor expenses, which account for only about 10 percent of the price of a new vehicle, don't consign Detroit to ineluctable oblivion. Indeed, Detroit's offerings are often significantly less than the competitor cars from Japanese automakers.

Thus the idea that the Big Three shouldn't be helped because it's impossible for them to compete is suspect.

"I don't think they are structurally unable to compete," says MacDuffie, who adds that when it comes to quality, the middling reputation of American cars lags the improved reality.

Now, Zandi thinks the ultimate cost of rescuing Detroit will be considerably larger than anything talked about so far, perhaps reaching the $75 billion to $125 billion range. (He suggests that, after an initial infusion of funds to stave off bankruptcy, further federal dollars be made dependent on real restructuring progress.)

Still, even that price pales before the cost of letting the US automakers go under. Although some contend that bankruptcy will be a purgative that ultimately produces better health, Columbia University economist Jeffrey Sachs has argued convincingly that it's more likely to be a confidence-killing death knell for the domestic industry.

Ford is in less perilous shape than GM and Chrysler. But if all three go belly-up in the near future, the effects - from lost automaking jobs to erased supply-industry employment to reduced spending by jobless workers - would cascade through an already troubled economy. By summer 2010, "the economy will have 2.5 million fewer jobs," Zandi says. That higher unemployment would cost the federal government alone some $240 billion, his firm projects.

Is trying to save Detroit a gamble?

No doubt.

But in these troubled times, it's a gamble worth taking.

Scot Lehigh can be reached at lehigh@globe.com.

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