The Death of the American Automakers (short version)


    The government's handling of the US automakers continues to illuminate.  Far from recognizing the roots of the demise of these former American icons, GM and Chrysler, and repairing them, they have taken actions that only ensure their continued failure but now at ongoing taxpayer expense.  GM and Chrysler, once powerful and dominant corporations, symbols of American preeminence, have now been reduced to, in effect, federal jobs programs.  The contempt of the governing class for private enterprise could not be more manifest than in its conduct towards these two former titans through the years, its gradual but unrelenting asphyxiation of them to serve political ends and, particularly, to payback constituents.  There is blame, of course to go around, but as is so often the case, it is government policy that lies at the center of the storm.
    We have seen over and over how it is the heavy hand of government, of political aristocrats in Washington, with generally limited knowledge (to be kindly) of the private sector, earnestly endeavoring to engineer outcomes, leading to disaster.  Look no further than the current financial calamity over affordable housing.
    When politicians decided to force banks to make faulty loans to unqualified borrowers for the perceived social good of expanding minority homeownership, they bequeathed us instead the sub prime mortgage crisis, from which we are still reeling.
    Then we have the CAFÉ (corporate average fuel economy) standards by which Washington imposed mileage per gallon rules on US automakers, initially in response to the Arab Oil Embargo of 1973, and then, more and more, to satisfy the UAW (United Autoworkers) and green constituents (and to achieve the fantasy of energy independence).  This, though, required Detroit to make small cars with little profit margin.  
    Compounding this, the Big Three were forced to manufacture the econocars in UAW plants here in the US at a prohibitive cost (the "two fleet rule” - a giveaway to the UAW) rather than import them from abroad where they actually make them for a profit (at non-UAW plants).  The current fleet average of 27.6 mpg already requires the Detroit Three to sell pixie cars at a loss; it is the SUVs and pick-up trucks that actually make money for American car companies.  Now Obama has committed the nation to a fleet average of 39 mpg by 2016, which will make it all but impossible for the Big Three to produce the kind of cars that actually generate revenue. We will have, in effect, bankrupt companies making cars that Americans don't want and selling them at a loss - a recipe for ongoing failure at taxpayer expense.   
    But if the political class is that worried about energy independence, reducing oil consumption, and battling (mythic) global warming demons, than simply tack on a gas tax.  It is more direct and honest and doesn't oblige carmakers to bend themselves into pretzels trying to accommodate federal regulators every time they roll out a new vehicle.  If there is demand for little green putt putts and hybrid plug-ins there will be no need for mandates, nor will it be necessary to bribe Americans with taxpayer subsidies.
    Furthermore, CAFÉ has done nothing anyway to curb oil imports or reduce energy consumption.  It merely compels American carmakers to make econocars at a loss, subsidized by the more profitable SUVs and pickups at which American companies excel.  
    But one wonders what is wrong if Detroit shifted into making chiefly the larger vehicles Americans like to buy and leave the smaller fuel sippers for the foreign transplants (Honda, Toyota, etc.) who, coming as they do from nations where the price of gas is much higher, have developed expertise in producing fuel efficient vehicles, a kind of natural diversification of the auto industry?
    Well, no matter.  The government and the UAW have driven GM and Chrysler into bankruptcy.  In the process of restructuring Chrysler, though, rather than trimming the UAW down to size and making the company competitive, Obama and the Democrats have given their UAW allies all that they wanted, including a 55% stake in Chrysler, even as they stiffed senior secured bondholders for 29 cents on the dollar, in violation of bankruptcy law.  
    In the restructuring of GM, the government will take 72.5% ownership of GM at a cost of $70 billion (not counting the $12.5 billion to GMAC, the financial arm of GM); the UAW will receive 17.5% ownership. The outcast bondholders will have to settle for 10% (on a $27 billion claim).
    One wonders how GM and Chrysler or other companies with special relationships with the government will raise capital from future investors who may fear possible illegal confiscation of their assets?  While engaging in political payback, the President has dealt a severe blow to the sanctity of contracts upon which normal business interaction is based.  Obama may have perhaps saved some UAW jobs, but he has probably unwittingly caused the loss of countless others by treating established law with impunity.
    And what of America's other auto industry, the 12 foreign or transplant producers making cars in America, with names like Toyota, BMW, Hyundai, and Honda, that together produce 54% of cars and employ 113,000 Americans?  Transplants operate under conditions of the free market.  Labor costs per hour (with benefits) for non-Detroit companies are 44$ compared with 73$ in US companies.  Generous union health care and retirement benefits have made Detroit companies non-competitive.
    Obama's ambition to turn the American auto industry into a state subsidized manufacturer of green eco-cars will not cut carbon emissions, reduce energy dependence, change the temperature of the planet, or make a profit; it will, however, bleed the American taxpayer.
    It is sad, if not tragic, to see these American giants that have done so much for our nation reduced to servility and dependence as government appendages.  For no one can seriously expect GM or Chrysler to emerge from their government shakedowns as viable entities - not with the UAW, Obama, and the Sierra Club on their backs.  Chrysler and GM: RIP.  


  • George

    July 15, 2009

    George, you may already be aware of Dr. Moss' blog.

Add Comment