Make Detroit Change Its Ways‏

November 18, 2008

by Faiz Shakir, Amanda Terkel, Satyam Khanna, Matt Corley, Benjamin Armbruster, Ali Frick, and Ryan Powers Contact Us | Tell-a-Friend | Archives | Permalink | Subscribe to Feed

ECONOMY

Make Detroit Change Its Ways

Last month, Congress approved $25 billion in low-interest loans for automobile manufacturers and suppliers to retool their plants to build more fuel-efficient vehicles. However, slumping sales, frozen credit markets, and the current global economic crisis has prompted the Big Three automakers -- General Motors, Ford, and Chrysler -- to ask Congress for an additional $25 billion in aid. House and Senate Democrats, led by Rep. Barney Frank (D-MA) and Sen. Carl Levin (D-MI), are pushing legislation that would dole out the emergency funds from the $700 billion Congress previously allocated to stabilize the financial markets. Both House and Senate plans are accompanied with varying degrees of conditions, including strict oversight and limits on executive compensation. Levin even argued that, in order to receive the cash, the Big Three's CEOs would have to resign. The White House agrees that the auto industry should receive the aid but claims that those funds should not come from the $700 billion allocated for struggling financial institutions. The White House argues that Congress should instead fast-track the $25 billion loan approved last month and drop the loan condition that Detroit build more fuel efficient cars. Despite agreement between the Bush administration and some in Congress that some form of auto bailout is necessary, many conservatives are staunchly opposed -- arguing that free market capitalism should reign and the troubled auto giants should be allowed to fail. Given the opposition, prospects for passing auto industry bailout legislation remain dim. Failure to act would not only have a catastrophic effect on America's auto industry but also on a U.S. economy already in tatters.

MISPLACED BLAME: Part of conservatives' efforts to curb any talk of rescuing car makers has involved placing blame for the crisis on labor unions. Sen. Jim DeMint (R-SC) claimed that "some auto manufacturers are struggling because of a bad business structure with high unionized labor costs," while Sen. Jon Kyl (R-AZ) said on Sunday that the auto industry has "been sick" for years because of a "bad business model" with "contracts negotiated with the United Auto Workers that impose huge costs." But unions have repeatedly made concessions to auto executives over recent years. Bad executive leadership is more likely the catalyst for the Big Three's woes. GM Vice Chairman Bob Lutz has dismissed global warming as "a total crock of sh*t." Such sentiments from Detroit's leadership has contributed to the Big Three basing their business model on a future of cheap oil while fighting fuel efficiency standards despite repeated warnings against pursuing such a strategy. Indeed, as The New Republic's Jonathan Cohn noted, Lutz "should be the first to go."

WHY A RESCUE PACKAGE: Many rescue measure critics also argue that the Big Three should instead file for Chapter 11 bankruptcy protection. But because the auto industry depends heavily on credit -- and the credit markets are frozen -- the Big Three would likely soon be forced to file Chapter 7 bankruptcy, "which would entail total liquidation." As Princeton economist and New York Times columnist Paul Krugman noted, "If the economy as a whole were in reasonably good shape and the credit markets were functioning, Chapter 11 would be the way to go." But because of the current economic crisis, a wide ranging default in Detroit "would probably mean loss of ability to pay suppliers, which would mean liquidation -- and that, in turn, would mean wiping out probably well over a million jobs at the worst possible moment." Indeed, the Center for Automotive Research predicts that "the impact on the U.S. economy would be substantial were all -- or even half -- of the three Detroit-based automotive manufacturers' U.S. facilities to cease operations. ... Nearly 3 million jobs would be lost in the first year if there is a 100 percent reduction in Detroit Three U.S. operations." "Every auto plant job generates another five jobs among suppliers and the surrounding community," writes auto industry representative Dave McCurdy. "By comparison, a Wall Street job generates two additional jobs." Moreover, one in 10 American jobs is related to auto manufacturing.

AID WITH CONDITIONS: In a letter urging Treasury Secretary Henry Paulson to give assistance to America's auto industry, Senate Majority Leader Harry Reid (D-NV) and House Speaker Nancy Pelosi (D-CA) argued that any federal aid should come with "strong conditions" such as requirements that automakers manufacture more fuel efficient vehicles. Oversight of the bailout must also be stronger than the bank bailout, as "reports continue to circulate about the banks potentially hoarding portions of the $250 billion Treasury has offered to invest in exchange for senior preferred stock, or using the money for purposes other than lending." In a letter urging support for the auto rescue, Center for American Progress Action Fund experts Winnie Stachelberg and Daniel J. Weiss argue, "To ensure that the managers who helped create this mess are not unduly rewarded, the loans must disallow excessive executive compensation." They add that auto companies "must fulfill their commitments to provide both health care and retirement security for their employees and retirees" and "should assure Congress that they will cease their legal and lobbying opposition to the imminent new fuel economy standards."