Rewarding Failure Only Postpones The Inevitable
In 1979, the federal government provided $1.2 billion in loan guarantees to help the ailing Chrysler Corporation fend off bankruptcy. The company was teetering on the brink of failure because it produced poorly designed and poorly built vehicles that consumers rejected in favor of Japanese and European brands. They were failing because they were unable to meet the demand for fuel efficient vehicles, even 6 years after the Arab oil embargo. They were failing because their bloated bureaucracy and the extortionate demands of the UAW made it impossible to compete in a marketplace that was rapidly becoming global. Chrysler was not the only U.S. automaker facing these problems, but it was the weakest of the 4 major players at the time.
Fast forward three decades and the remaining U.S. automakers are asking for another bailout on a far more massive scale. Their inability to obtain credit for marginally qualified buyers is a major factor in the equation, but the greater underlying problems are exactly the same as they were in 1979. The companies continue to produce poorly designed products that consumers reject in favor of Asian and European brands, and they are still unable to meet the demand for fuel efficient vehicles, 35 years after the 1973 oil embargo. Their bloated bureaucracies and the continued extortionate demands of the UAW make it virtually impossible to compete in the global marketplace.
The main argument in favor of saving Chrysler in 1979 was that it was essential to preserve jobs in the manufacturing sector. In spite of this, Chrysler shed 60,000 workers in the three years following the bailout. When Chrysler merged with American Motors in 1987, the resulting layoffs were equivalent to the entire white collar workforce at AMC. Auto industry lobbyists claim that as many as 2.5 million workers could lose their jobs if the Big Three automakers are allowed to fail. The reality is that the only way for the automakers to survive is by shedding massive numbers of employees.
The largest group of people employed in the automobile industry don’t actually work for the manufacturers or the parts suppliers, but for franchised new car dealerships. At the start of 2008, there were nearly 21,000 new car dealerships in the U.S. employing roughly 1.1 million people. Over 15,000 of these dealers sold GM, Ford and Chrysler products. Big Three dealerships have been closing in record numbers in recent years, but analysts estimate that a full 2/3 of the remaining dealers will have to close their doors in order to allow the strong to survive. As it stands today, the average Toyota dealer sells over 1700 vehicles per year, while the typical Big Three dealer only sells around 600. Chrysler alone has over 3600 dealerships in the U.S., compared to 1200 for Toyota. Bailout or no bailout, the number of people employed by new car dealerships will be substantially smaller in the not-too distant future.
Just as they did in 1979, supporters of a bailout today point to the auto industry as the cornerstone of the manufacturing sector. What they don’t mention is that auto manufacturing is actually very much alive and well in this country. Toyota, Honda, Nissan, Subaru, BMW, and Mercedes-Benz all have sizable manufacturing operations in the U.S. The primary difference is that they have chosen to set up shop in Right To Work states far from the poisoned labor atmosphere that prevails in the Rust Belt. Given that the auto industry is one of the last strongholds of organized labor in the U.S., the fact that Democrats tend to support the idea of a bailout should come as no surprise. Just as in 1979, Democrats will soon control the White House and have overwhelming majorities in the House and Senate.
At this point we can only speculate what the condition of General Motors and Ford might be today if Chrysler had been allowed to fail in 1979. The remaining players would have learned some hard lessons about the need to streamline their operations and to offer consumers the kind of products they wanted to buy. The unions might have come to realize that their unrealistic demands amounted to a stranglehold on the their employers. What they learned instead is that Uncle Sam will come to the rescue and reward decades of poor decisions on the part of management and labor alike. Unfortunately, we are poised to make the same mistake again, using tax dollars to prop up an otherwise unsustainable business model.
What happens without a bailout? In all likelihood, Chrysler would fail immediately, and GM and Ford would both be forced into Chapter 11 bankruptcy. This would give both companies an opportunity to reorganize and emerge as more viable competitors in the global marketplace. They would be much smaller than they are today, but their new size would better reflect their market share. There is no question that many jobs would be lost in the process, but the fact is that those jobs are going to be lost regardless of whether the government steps in.
Do not assume that the demise of the Big Three would be the end of automobile manufacturing in the U.S., and do not dwell on mythical notions about American cars built by American companies. Auto manufacturing is a truly global industry, and other global companies will expand quickly to meet the demand. Rapid technological advancements by smaller companies may also bring about a dramatic change in the composition of the industry. You may have never heard of companies Like Tesla Motors, Fisker Automotive, or Aptera, but growing demand for electric vehicles could very well make them the next Big Three. If our government cannot resist the urge to save the automobile industry, they should consider investing in the future instead of dwelling in the past.
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I’m not a fan of bailing out any organizations, specifically for the reason you stated: It rewards poor decisions and equally poor management. It’s almost as if we have a welfare program for “Big Business” and feel the need to continue to prop up any failing institutions with the defense of ’saving jobs’ or ’shoring up the economy’.
Honestly, if we’re going to just hand out Federal funds to corporations, I’d rather it go to the smaller companies who are looking to the future and will be filling the vacuum left behind in the wake of the collapse of the larger ones.
However, I believe we’ll continue to offer these bailouts, primarily because our elected officials feel obligated to/pressured by the unions and the power they have within their electoral districts. The irony is, if we allowed the giants to fall, the migration of unemployed workers to plants in the Right to Work states would weaken the membership power of the unions.
For the record, I consider myself a ‘damned, dirty’ liberal and, as such, tend to side with the Democrats on most issues. However, I am rather anti-union, as I’ve always felt organized labor produces more problems in the long run than they solve.
On a completely unrelated note, Chris, I just thought I’d point out you’ve made some impact with the Market Building crowd, if only in the negative sense. At least a few times a week, I’m approached with a discussion of one post or another of yours, assumingly due to my being one of your more recent prolofic responders. Apparently, to date, no one has brought up the fact that I tend to be in agreement with you on a number of the issues regarding the building.
Matt,
For a damned dirty liberal, you strike me as a fairly level headed person. Organized labor served a vital purpose in this country at one time, but today it is nothing but an anchor around the neck of companies like GM. Fortunately for the automakers, the can reorganize under Chapter 11 and dump the labor contracts. The real problem with the unions is in the Northeastern states where the public employees are bankrupting state and local governments.
As for the Market Building vendors, my guess is that they probably have more time to discuss blog posts now. My wife and I ate there 2 or 3 times a week until the threats of lawsuits began to fly. We haven’t been back since. We’re regulars at The Cornerstone now.
Interestingly enough, the unions are already preparing to take advantage of the new political climate:
(from msnbc)
“Labor’s wish list for the incoming president and the expanded Democratic majority in Congress includes making it easier to form unions, expanding the pool of workers who can join them, prohibiting employers from permanently replacing striking workers and expanding health care.”
The full article can be found at http://www.msnbc.msn.com/id/27649167/
I apologize if I’m pulling this conversation even further off topic, but I am a bit curious about unions. I can certainly see the problems with them. From the “smaller” problems of employees who do subpar work or no work at all because they know they can’t be fired to the larger problem of companies being unable to finacially meet a union’s demands. And while I can see all the advances that have been made in working conditions (thinking of “The Jungle” still makes me quesy) there still are a lot of difficulties faced by workers. To site one example, Walmart has a terrible history of how it treats its employees.
In an economic climate such as this one, where quiting may not be a viable option, what will protect people from being mistreated? Do I just need to accept that there are always going to be crappy places to work?
Megan,
There will always be crappy places to work, but this is true whether the workers are represented by a union or not. Some business owners and managers will always treat their employees fairly, and others will go out of their way to create a hostile work environment.
Unless you have actually worked there, it is hard to know whether Walmart really deserves their reputation as an unfair employer. They have been vilified by the unions for so many years that it is difficult to separate myth from reality. One thing you can say for sure about them is that they employ large numbers of people who would not find work anywhere else, most notably the elderly and handicapped.
Methinks many unions will be standing with their hands out now looking to get back their “investment” in electing our new president. I’m still amazed that the recent mega bailout money was given with absolutely no strings attached. How will this be any different?
As large an entity as Walmart is, it’s difficult to assess whether issues with their employment conditions are a matter of corporate or local management policies. When I first left the Pet Industry, I looked at management opportunites with them and found little about which to complain as far as salary and benefits. My only concern was the requirement to work hours that might prevent me from spending time with my children.
Given the number of people employed by Walmart, a union supporting those workers in the non-Right to Work states would have considerable strength. I would also have to wonder how it would affect employees in the Right to Work states… would it afford the union a ‘back door’ in the statutes that would allow them to impose a ‘closed’ working environment in all Walmarts across the board.
That’s part of my disdain for unions. In the states where they have they’re greatest power, they can generate contracts with corporations forcing employees to pay union dues as a requirement of employment. This is, perhaps, one of the main issues that brought Right to Work laws to power, as it violates the Constitutional right of ‘freedom of association’.
Now, there are those who will state that strong, organized labor is an important aspect of a democratic society, but it provides something of a contradiction. Unions serve their own agendas, not necessarily those of their membership, which tends to contradict what a true democracy should be.
Don’t forget the Union Legislation on the table in Congress. The Employee Free Choice Act would eliminate secret ballots and enable any work force to unionize if 51% of the workers voted for it.
GM is doomed. 80% of their most recent bail out money went to pay retirement benefits. How can a company survive if they pay people who no longer work such a large percentage of their profits?
Chris… You are easily one of the best writers/journalists in Roanoke. Your insight and facts are a pleasure to read and I have no doubt people are talking about your opinions. Keep it up!
Other Chris,
Thanks for the compliment. It would be nice if I could figure out a way to make a living doing this, but I may end up working at Walmart instead.
The free choice act is the singe most dangerous idea on the Democratic agenda right now in terms of its potential to damage our economy.