We must bail out our auto industry, with strings attached

    The Big Three – General Motors Corp., Ford Motor Co. and Chrysler LLC – are on the verge of bankruptcy.  

    It’s hard to have sympathy for the Big Three executives. They have grossly mismanaged the companies they were entrusted to run, investing in highly profitable SUVs and light trucks. They ignored the emerging market for fuel-efficient, green vehicles and fought increased fuel efficiency standards and health care reform while earning huge salaries and bonuses.  

    But as President-elect Barack Obama recently said, the auto industry is the backbone of American manufacturing and the cornerstone of the blue collar middle class. Its manufacturing and research and development capacity are critical to the nation’s national defense.

    The American automobile industry is simply too important to the welfare of the country, its people and their communities to be allowed to fail.

    Congress should immediately provide the car companies with a $25 billion bridge loan to protect family supporting jobs and our nation’s future competitiveness.

    If we don’t save the Big Three, America will lose 3 million family-supporting jobs, and almost a million retirees would lose their health care coverage. Thousands of small and medium-sized business that support the auto industry would vanish. Hundreds of communities across the country would be devastated and the current nasty recession might become a full blown depression.

    All one needs to do is examine the impact of GM’s closing on Janesville, which has the highest unemployment in Wisconsin and is among the nation’s leaders in job loss. About 1,200 GM employees have already lost their jobs. Another 1,400 will be laid off when the plant finally closes. Supplier firms like Allied Automotive Group (117 jobs) LSI (159 jobs) and Lear (371 jobs) are also closing. The GM shutdown will ultimately cost Rock County 9,000 total jobs and nearly half a billion dollars of labor income.

    Wisconsin is the home of hundreds of automotive supplier firms, such as Johnson Controls Inc., Dana Holding Company, Charter Wire Inc. and Strattec Security Corp., as well as hundreds of dealerships. We have seen what deindustrialization has done to cities like Milwaukee, which has the seventh-highest poverty rate in the country, and Racine. We simply cannot afford to allow auto, which accounts for one out of ten private sector jobs, to go bankrupt.

    The Big Three have been mismanaged. But the current crisis is not simply the result of poor management. In October auto sales fell to 10.8 million on an annualized basis compared with 17 million in recent years. All auto companies, including Toyota, the leader in fuel efficient vehicles, have experienced deep declines.

    Consumers aren’t buying cars, the second-largest purchase that families make, because credit is not available on reasonable terms and because American families are cutting back in response to the deteriorating economy.

    Chapter 11 is not an option for the Big Three. Consumers will not buy cars from companies that are in bankruptcy. And debtor-in possession financing would not be available to the auto companies.

    Calls for cuts in worker wages and benefits are also misguided. The auto companies have been successfully reducing labor and legacy costs. According to KDP Advisors, an independent research firm: "The Detroit automakers have, in essence, been pursuing an out-of-court restructuring over the last three years. These efforts have produced a competitive labor contract with the UAW, a viable solution to reduce retiree health-care expense, and a substantial downsizing of capacity and headcount. Incremental gains achieved through bankruptcy would be minimal in comparison and would likely result in even further deterioration of enterprise values as consumers would be far less likely to purchase an expensive vehicle from a bankrupt manufacturer, with or without government guarantees."

    In both the 2003 and 2207 collective bargaining agreements, active and retired workers made huge concessions reducing wages for new employees by 50 percent and eliminating half the liabilities for retiree health benefits. UAW-represented plants are now every bit as productive as plant operated by Toyota and Nissan in this country.

    When Washington bailed out Bear Stearns, AIG and other financial titans, the Treasury Department insisted on executive compensation restrictions, but not on pay and benefit cuts for rank and file workers. Why should auto industry employees be treated differently?

    When Washington allowed Lehman Brothers to collapse, the economic crisis spiraled out of control. We shouldn’t play Russian roulette with the jobs, incomes, health care and pensions of millions of Americans by allowing the Big Three to collapse.

    President Obama has asked that Congress to provide the Big Three with a $25 billion loan so it can survive this nasty recession, the worst since the Great Depression.

    Insist on executive salary and bonus limits, a transparent repayment schedule, a new generation of green, fuel-efficient vehicles and technology and support for affordable and accessible health care. But do not preside over the destruction of the America’s manufacturing sector.

    The federal government has a responsibility to help save the jobs of millions of American workers and the communities that depend on these jobs. Congress bailed out Wall Street. Main Street and the side streets are watching and waiting.

     

    Michael Rosen, Ph.D., is a professor of economics at the Milwaukee Area Technical College.

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