Over the 4th I had a very astute cousin visit.  Said cousin is an engineer and I heartily concur he knows more about car designs and engines than I ever could.  But where he and I find disagreement on vehicles has more do with the politics of the companies and US government.  This disagreement centers on one simple question.  Should GM and Chrysler been bailed out?

It does need mentioning that America is by far not the first country to bail out its auto-industry.  This also is not the first time we have done so.  In the early 80’s when the oil crisis was peaking and American consumers were still reeling from stagflation the US government gave GM, Chrysler and Ford an infusion of cash to keep them going.  This infusion allowed the Big Three to start making new models and offering new incentives to consumers.  The Big Three also benefited from numerous tax breaks passed with tax reform.

A little history of foreign car companies is needed to put America’s Big Three bailout in perspective.  In the 1950’s America’s Big Three reigned supreme in domestic and foreign auto production.  The world was still recovering from WWII and modern Japanese and German automakers had seen their industrial based destroyed.  Modern-day Korean automakers had yet to develop. The 60’s to 90’s would see a resurgence of competition against the Big Three and lead to the creation of new car brands.

These new car brands got their start in countries such as Korea and the Asian Tigers who had a dramatically different view of economics and the market than the US.  Unlike the US, which until the 90’s and 2000’s has done a decent job of limiting its protectionist tendencies, Korea had no such compunction.  Instead, Korea helped Hyundai and Kia get their start by heavily subsidizing their efforts.  They also created massive tariffs for foreign cars to sell their wares in the country as another way of protecting their new domestic industry.

Japan’s economic model following WWII was very similar.  However, since the US was rebuilding the country, foreign imports were allowed in the country.  This slowed the ability of Japanese automakers such as Suzuki, Mitsubishi and Mazda to recover from the war but after the reconstruction effort was done Japan instituted high tariffs to protect their small, auto industry.  Smaller car companies such as Toyota and Subaru also greatly benefited from the protectionist tendencies of their country.

A number of other countries across the globe have tried the same.  In the 70’s Turkey tried the same strategy with several of their major industries.  However, outside of their nation their national products were sub par and did not sell well.  In the 80’s Mexico tried to internally subsidize their industries (ISI).  Again, sub par products were produced and many of the industries went belly up and forced Mexico into a deep recession.

So what explains the success of these auto companies beyond being protected by high tariffs domestically?  A number of factors.  Starting in the 50’s the US pumped a massive amount of money into the Pacific as a hedge against a Communist Russia and China.  That money was used by Asian countries, particularly Korea, to fuel their industrial growth (more money means better subsidies).  Second, in the 70’s the oil crisis allowed the small cars these automakers produce to find a niche in the American market.  This niche was so threatening to the Big Three that the US government gave their domestic industry a big helping hand in the 80’s.

A third factor is one my cousin brought up.  When you look at the different automakers, whether it be Japanese, Korean, German, British, or American, their car designs reflect their economic philosophies.  Whereas smaller German brands designed high-priced, high-performance cars, American cars were largely gas guzzling trucks and sedans, Asian cars were small, compact and fuel-efficient.  They were also extremely well-built and priced.  Thus, unlike other cars these cars were built for utility and mass-sale.

There are a number of other variables but I will not complete an entire list.  What I have above should suffice.  Now how does this tie in GM and Chrysler?

Well, we have established that foreign car companies got their start through a distinctly anti free-market system.  Instead, they were helped by protectionist policies and the US defense interest in the region.  The US has dabbled with this system before.  But the auto bailouts of GM and Chrysler were a distinct and unique phenomenon for protectionism.

Prior to the recession which prompted the auto bailouts the Big Three’s lineup was stale.  Whereas foreign competitors like Toyota were revamping their brands and adding new cars the Big Three were barely modifying their’s.  Also, the Big Three had for decades allowed union pensions to pile up and not done anything to prevent it.  Thus, when their sales dropped dramatically they had no choice but to turn to the unions and say they need to modify workers retirement benefits.  Only Ford was successful in this regard, largely because of unique circumstances.

After the unions reused to deal with GM and Chrysler President Bush along with a Democratic Congress allowed a small auto bailout.  The much larger bailout came with President Obama.  But should the Big Three have been bailed out?  This was an issue in the 2012 campaign.  Mitt Romney debated the President on this issue.  Most likely, as Romney wrote, the government refusing to bail out out GM and Chrysler would have resulted in them declaring bankruptcy.  However, bankruptcy laws in the US would have allowed GM and Chrysler to revamp their lineups and renegotiate their contracts with the unions.  It never turned out that way.

In looking to see whether the bailouts should have been committed I turn to how successful the companies have been since the bailouts compared to how much the bailouts have cost taxpayers.  According to the latest estimates the bailouts cost to the American public will be over $25 billion.  Ford, which did not get but asked for bailout money has been successful since 2009.  They have restructured their union and pension contracts, closed factories they did not need and now produce cars based on sales, not on union contracts.  Their lineup has also been revamped.  Chrysler, a brand in need of a change, was sold to Fiat in 2011.  Fiat has run Chrysler well in that time, providing financing for Chrysler to produce new cars, helped acquire government funds for the Volt and changed up Chrysler’s luxury brand, Cadillac.  Minus I think Chrysler’s look like tanks the public has once again warmed to the car brand.

There is one stark contrast to these successes, GM.  GM is consistently ranked as unreliable by every major car review I have seen, their cars continue to be expensive and their sales, while up, lag behind Ford and Chrysler. So were the auto bailouts worth it?  I leave that to you to decide but I say no.  Foreign car brands have moved into the US and they make cars as good and cheaper than American automakers.  Having a domestic base for auto production is a nice notion but it does not ensure consumers or the public are better off.

Note: There is an argument in favor of the bailouts stating we had a national security interest in protecting the US automakers.  This argument rests on the fact it is better to have an American company produce our weapons of war than a foreign company.  This debate played out when Boeing was competing with a German company to produce the Army’s latest jet fuel-tanker.  In the end Boeing got the deal despite the German company providing a cheaper contract.  This argument could hold credence, if I am ever presented with evidence a company such as Toyota would sabotage US war products.  I have yet to see tat evidence.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s