Nov 102008
 
Authors: Ian Bezek

It appears that President-elect Barack Obama is intent on creating a plan to aid the ailing automakers.

It’s inarguable that the automakers are in deep trouble. For instance, General Motors has roughly $40 billion of debt and is losing more than $1 billion every month, according to Yahoo! Finance.

However, we must ask ourselves if these failed companies are worth saving with our taxpayer dollars.

Let’s look at Ford more closely. Ford’s debt load, $166 billion, is astronomical. $166 billion is roughly eight times the annual budget of the State of Colorado; Ford doesn’t have a prayer of paying this much debt off.

Ford is, like General Motors, losing roughly $1 billion a month. They have a negative profit margin, meaning that their average car sells at a loss. Add it all up, and you see their present situation is hopeless.

The simple truth is that our auto companies have made inferior products that people don’t want.

They’ve made gigantic gas-guzzling vehicles while their foreign competitors have made small efficient cars that made far more sense in our resource-constrained world.

The American auto companies completely and utterly failed to predict the wave of hybrid vehicles, once again getting left in the dust by foreign manufacturers.

Aside from making the wrong cars at the wrong time, our automakers are also constrained by unions.

Our companies are forced to vastly overpay workers to make substandard cars. Even though Ford employees make far more money than a Toyota employee, our cars are shoddy and don’t have nearly the reliability of the import autos.

Other than nostalgia, there’s no good reason to buy American.

Our cars are totally outclassed by foreign competition.

In this environment, simply granting these companies another bailout solves nothing. It would cost us $10 to $20 billion a year to keep our automakers afloat. Those billions of dollars per year wouldn’t fix the companies; it would merely keep their pulse faintly beating.

What’s needed is to allow these companies to go into Chapter 11 bankruptcy. Unlike a complete liquidation, a Chapter 11 bankruptcy allows a company to reorganize, be freed of some debt, break onerous union contracts, freely fire employees and other such things that allow a company to rebuild itself.

The only way a company like Ford survives is by greatly cutting costs, shutting down unproductive model lines, firing thousands of employees, breaking the unions and axing all of the upper level management.

A government bailout Band-aid accomplishes nothing; these companies are in need of open-heart surgery.

Of course, the myopic management of these companies insists on robbing us, the taxpayer, rather than taking the lumps for their own terrible business decisions.

General Motors CEO Rick Wagoner claims that going into bankruptcy is impossible and told Seeking Alpha, an online stock market analysis Web site, “we’re convinced the consequences of bankruptcy would be dire.”

He argues that no one would be willing to buy products from a bankrupt company.

However, he ignores companies such as K-Mart and virtually the entire airline industry, including Frontier Airlines presently, which have gone through Chapter 11 bankruptcy before emerging as stronger companies.

Instead, it appears that Wagoner is just trying to save face.

Doug McIntyre of the 24/7 Wall Street analysis Web site argues a bailout would be pointless, saying, “The U.S. government could hand GM a tremendous sum of money and watch it be burned up in the fire of management’s stupidity.”

It would be a grave mistake to give incompetent management more time and money to make defective cars. Bankruptcy will, in the short-run, cause many job losses. However, the companies will emerge stronger and be able to take on the likes of Toyota and Honda.

If we bail the automakers out, they’ll remain fiscal basket cases for the foreseeable future — an outcome no one should want.

Ian Bezek is a junior economics major. His column appears Tuesdays in the Collegian. Letters and feedback can be sent to letters@collegian.com.

 Posted by at 5:00 pm

Sorry, the comment form is closed at this time.