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Point of View »Michael Barone: Detroit Automakers a Relic of the Past

Michael Barone: Detroit Automakers a Relic of the Past

By Michael Barone | Posted on 11/14/2008

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A government bailout of the Big Three would block the path to a better America.

Barack Obama has noted, carefully and correctly, that we have only one president at a time. Yet on at least one issue he has taken the lead and nudged the man who soon will be his predecessor in a direction that he might not have taken without prompting.

It is an issue, moreover, that points up the tension between Obama’s appeal to young voters and his calls for creating a new America on the one hand and, on the other, policies he backs that seem designed to freeze in place the America we have.

Michael Barone
Michael Barone
The issue is whether the federal government should bail out, with a capital injection the size of what would have been unthinkable four months ago, General Motors and perhaps the other two U.S.-based auto manufacturers, Ford and Chrysler.

As one born and raised in Detroit and its suburbs, who once lived next door to Big Three factory workers and later went to school with the children of Big Three executives, I have mixed feelings about this proposal. My native Michigan is ailing, with the highest unemployment in the nation, plummeting housing values and cascading foreclosures. Its economy, despite the efforts of two previous governors — Democrat Jim Blanchard and Republican John Engler — is dangerously dependent on what used to be called the Big Three and are now called the Detroit Three.

The bankruptcy of one or more of them would deeply affect the personal lives and dash the seemingly reasonable expectations of those who, directly or indirectly, have depended on them. I can’t help but think of these people when the issue is raised.

Yet, the implications of a bailout are frightening. The Detroit Three were unprofitable well before the current financial crisis hit, and GM is reportedly hemorrhaging $1 billion a month. The huge cost of lavish employee and retiree health care benefits, negotiated with the United Auto Workers, makes it impossible for the companies to sell for a profit anything but the big cars and SUVs that, after gas prices hit $4 a gallon last spring, almost no one wants to buy.

No one in the private sector is willing to pony up a dime for this business plan. GM stock is below its 1946 price, and one investment house has priced it at zero.

The Detroit Three are taking advantage of the passage of the $700 billion financial bailout to argue that they, too, need government money to go on. But as Megan McArdle of The Atlantic argues, the finance firms are different. If credit coagulates, everyone suffers, while if the Detroit Three go bankrupt, their shareholders lose their stake, employee and retiree pay and benefits are cut, and real estate values go down in areas where the companies and their suppliers operate — but life for most of us goes on.

McArdle, native of a similarly bedraggled industrial area (Upstate New York) and an Obama supporter, further argues that the capital invested in keeping the hulk of the Detroit Three operating pretty much as they are, unprofitably, would not be available to those whose startups could morph into the Microsofts and FedExes of the future. We don’t know who today’s Bill Gateses and Fred Smiths are, but markets sure have a better chance of finding them than the federal government.

Obama’s presidential campaign was an entrepreneurial enterprise whose success owed much to harnessing individual initiative through an innovative management structure and creatively using emerging technology. The campaign, as well as the candidate, helped inspire 30-or-younger voters, who preferred Obama by an unprecedented 66 percent to 32 percent margin — as opposed to his 50 percent to 49 percent margin in those age 30 or older.

Keeping the Detroit Three in their present form, with their extravagant health care benefits and the union’s 5,000 pages of work rules, is an exercise in preserving in amber the America of the past.

And, of course, the Detroit Three will not be the last flagging enterprises to line up for government subsidy. Michigan is not the only state that has a talented congressional delegation capable of enlisting allies on relevant committees and from states with economic stakes in failing companies. Other unions, noting the UAW’s success in maintaining benefits, will be standing in line.

George W. Bush may well acquiesce in a Detroit Three bailout. GM could run out of cash over Christmastime (Big Three plants don’t operate between Christmas and New Year’s), well before Jan. 20. If so, I will feel happy for the respite provided my friends and relatives in Michigan. But I will wonder if in preserving the past we are giving up the chance to get to a better future.

Michael Barone is a senior writer for U.S.News & World Report and principal coauthor of The Almanac of American Politics. Click here to contact him.

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» Ex_Inmate wrote on 11/14/08 @ 06:05 AM

I won’t argue with you that allowing the big 3 automakers to stay as they are would be wrong.  I will argue that allowing them to collapse is in the best interests of the country.  Their plants are not just in Michigan, they also have plants and suppliers that are located all over the country and world. The effects of a collapse would be felt all over the world.

The union isn’t the major problem. It is the short sightedness of management that creates these meltdowns as they are responsible for the long term planning and execution of those plans.  Most rank and file would do whatever it took to make a company perform well and save their jobs.  It is up to management to create the environment that fosters communication and cooperation.  Other union companies have been successful and improved their bottom line.  The current crisis has been in the making for years and management kept cranking out poor quality cars and gas guzzling SUV’s.  Granted in a free market system, these vehicles were in high demand, but unlike Toyota who had quality made, gas misers ready to go when the market changed, Detroit kept making half hearted attempts at producing economy cars. Anybody with half a brain knew that this was coming, but Detroit ignored the signs. The companies were completely short sighted with the goals of sucking as much short term profit as possible from the American public with little concern about the ozone and end of cheap oil. Management heads should roll without golden parachutes and any help given to the big 3 should have very tight performance strings attached.  Change will painful but the alternative is worse and “business as usual” is no longer an option.

» goletan wrote on 11/15/08 @ 12:33 AM

I voted for Obama but the US automakers need to fail and learn a lesson.

Let American ingenuity come up with a better company. While we were busy being lazy, Japanese automakers received govt subsidized loans in the 90s to develop hybrids and look at them now. That is the difference between short term vs long term thinking. We deserve to fail vs throwing handouts to GM employees. Bailing them out would be nothing more than welfare handouts.

If the free market won’t invest in them, so be it, let’s not bury future generations under debt needlessly.

» Ex_Inmate wrote on 11/15/08 @ 06:54 AM

To Goletan,

I am as disgusted by Detroit as you are, but should GM fail, I believe it could start a crisis of confidence that would start a domino effect that would be devastating to an already fragile economy. I believe your view is just as short sighted as the management in Detroit.  You have no concept of the scope of the impact of what would happen in this country and world wide should the big 3 fail.  These companies are huge conglomerates not the small corporations that you see in Santa Barbara.  Many tens of thousands of people would be on the street and whole communities decimated.  Hundreds of businesses that rely on contracts making parts for the big 3 would also be affected, plus all their employees.  Then add in the dealers and all their employees. Then there is the secondary effect when all the employees are laid off.  The economy is bad enough that most won’t be able to find jobs so that starts the downward spiral in the businesses that serve the employees in their communities.  The economic impact would be devastating to the economy as a whole.

» sbnative wrote on 11/15/08 @ 02:00 PM

Let them fail. If the Big Three were building a product we wanted, they wouldn’t be failing. Bottom line: If their managers are so stupid (despite their awesome salaries) that they can’t see the writing on the wall (higher gas prices = smaller cars!!!) well that’s just too bad. Market demand has spoken. No more behemoth SUVS! Except for Wall Street--which got a bailout and look how much good that’s NOT doing--most busineses don’t get a bailout when they’re stupid (or their unions are greedy.) Not mine, that’s for sure. Why theirs?


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