Gary Becker (Nay) and Richard Posner (Yea) Debate U.S. Auto Industry Bailout

18 11 2008

Gary Becker – a highly respected economist, and Richard Posner, an esteemed lawyer and former judge, debate the benefits and costs of the U.S. government bailing out the U.S. auto industry on “The Becker-Posner Blog” (http://www.becker-posner-blog.com/index.html).  

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A. Gary Becker – Opposing a U.S. Auto Industry Bailout

Gary Becker, 1992 Nobel Prize Winner in Economics (Dr. Becker’s website), presents his reasons for being against a U.S. Auto Industry bailout (here) in a blog entry titled “Bail Out the Big Three Auto Producers? Not a Good Idea-Becker“.  Following are a few key exerpts…

“If GM is not bailed out, the company claims it will be forced into bankruptcy within a few months, and Ford’s situation is only slightly better. GM is blitzing Congress, President Bush, and President -elect Obama with pleas for a bailout, followed by a warning that bankruptcy will also hurt auto suppliers throughout the nation that depend on GM’s business. GM is also claiming that bankruptcy will put major financial pressure on the Pension Benefit Guaranty Corp, the federal agency that insures benefits to retirees in the auto industry as well as to million of other workers.”

“Nevertheless, I believe bankruptcy is better than a bailout for American consumers and taxpayers. The main problem with American auto companies is that during the good times of the 1970s, 1980s and 1990s, they made overly generous settlements with the United Auto workers (UAW) on wages, pensions, and health benefits. Only a couple of years ago, GM was paying $5 billion per year in health benefits to retirees and current employees because their plans had wide health coverage with minimal co-payments and deductibility on health claims by present and retired employees. In those days, the UAW was one of the most powerful unions in the US, and it bargained aggressively with the auto manufacturers, carrying out strikes when its demands were not met. When the American auto industry began to face tough competition from Japanese and German carmakers, they were saddled with excessive pay to their workers, and vastly excessive pensions and health benefits to their current and retired workers.”

“Is GM “too big” to fail? I do not believe the company is too big to go into a reorganization-which is what bankruptcy would involve. Such reorganization would abrogate its untenable labor contracts, and give it a chance to survive in long run. A bailout, by contrast, would simply postpone the needed reforms in these labor contracts, the business model of GM, and its management.”

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B. Richard Posner – Supporting a Bailout of the Big 3 U.S. Automakers

Richard Posner (Judge Posner’s website) presents his reasons for being in support of a U.S. Auto Industry bailout (here) in a blog entry titled “Bail Out the Detroit Auto Manufacturers? Posner’s Comment“.  Following are some of Richard Posner’s thoughts on the subject…

“Becker has laid out the case for refusing to bail out GM, Ford, and Chrysler. It is a powerful case, and if the drop in auto sales that is driving these companies toward insolvency had occurred two years ago, there would be in my view no case, other than a political one, for a bailout. But in the current financial crisis, I believe a bailout is warranted, provided that the shareholders and managers of the companies are not allowed to profit from it.”

“The major problems with allowing the automakers to be forced into bankruptcy within the next few months are three, all arising from the depression that the nation appears to be rapidly sinking into. The first problem is that the companies might have to liquidate, because they might be unable to attract the substantial post-bankruptcy loans that they would need to enable them to remain in business. The credit crunch–less politely the near insolvency of much of the banking industry–has made that industry unable or unwilling to make risky loans, and loans to the auto companies after they declared bankruptcy would be risky.”

“Second, not only the size of the automakers, but peculiarities of the industry, would cause bankruptcy to greatly exacerbate the nation’s already dire economic condition. In the very short term, the automakers would probably stop paying their suppliers, which would precipitate a number of the latter–already in perilous straits because of the plunge in the number of motor vehicles being produced–into bankruptcy. Many of the suppliers would probably liquidate, generating many layoffs. At the other end of the supply-distribution chain, consumers would be reluctant to buy cars or other motor vehicles manufactured by a bankrupt company because they would worry that the manufacturer’s warranties would be unenforceable. So more dealerships would close, producing more bankruptcies, liquidations, and layoffs. With the demand for the vehicles made by the Detroit automakers further depressed and the supply-distribution chain in disarray, the liquidation of those companies would begin to loom as a real and imminent possibility. Liquidation of the automakers would produce an enormous number of layoffs up and down the chain of supply and distribution. Such prospects reinforce the unlikelihood that a reorganized industry could survive on debtor in possession loans.”

“The U.S.-owned auto industry may be doomed; it may simply be unable to compete with foreign manufacturers (including foreign manufacturers that have factories in the U.S.); or a reorganization in bankruptcy may be the industry’s eventual salvation. But the automakers should be kept out of the bankruptcy court until the depression bottoms out and the economy begins to grow again. …  Any bailout, however, should come with strict conditions, to minimize the inevitable moral hazard effects of government bailouts of sick companies. The government should insist on being compensated by receipt of preferred stock in the companies, on the companies’ ceasing to pay dividends, and on caps on executive compensation, including severance pay.”

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Some Comments

As economists say, this reasoned discussion of the pros and cons of this issue is “good stuff”.  Generally, I would side with Becker in thinking that the inexorable and ongoing economic pressures upon a noncompetitive economic enterprise such as the U.S. Auto Industry essentially doom it to perpetual unprofitability and eventual economic inviability. 

From an individual point of view, I have never in my life bought anything other than a General Motors or Ford automobile.  However, now that “the veil is completely pulled back” in regards to the noncompetitive position and future inviability of these two companies who are so heavily dominated by noncompetitive union labor contracts and costs, I as a consumer wish that now I had the local option of at least considering the purchase of a Toyota, Honda, Kia or Nissan. These are the companies that are competitively positioned to survive in the current economic downturn, and to prosper beyond that. And they are not mortgaging the future of my children in this country by seeking to deepen the U.S. government’s debt at the present time.  Good will capital is a precious thing to preserve among your customer base. It could be that the Big 3 U.S. automakers are squandering their public goodwill with their intranscience over dealing with their noncompetitive labor cost issues. 

 

 Mount Hood, Oregon (www.summitpost.org)

 Another picture of Mount Hood (www.weiss-miller.com)

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