Nailchipper

The American auto industry epitomizes many of the issues I have with large institutions– they are wasteful and unresponsive, but worst of all, we depend on them. Few things are as unsettling as forced dependence.

Yet, we are in the midst of yet another bailout by US government - again, by institutions deemed “too big to let fail.” The auto industry is asking for $25 billion, which as of now, appears could come from the $700 billion intended (and also failing) to restore liquidity in the financial markets. The financial markets are in turmoil and it would seem like a bad time to consider letting the auto industry collapse. But, we might also want to consider this a good opportunity to do what’s been needed for a long time now - and that is restructure our economy.

Before I give my reading on the situation I want to make clear that I understand that people’s livelihoods are at stake here. Even more so, our entire economy at risk. Here is some perspective:

GM’s payroll pumps $8.7 billion a year into its assembly workers’ pockets. Directly or indirectly, it supports nearly 900,000 jobs — everyone from auto-parts workers to advertising writers, car salespeople, and office-supply vendors. When GM shut down for 54 days during a 1998 labor action, it knocked a full percentage point off the U.S. economic growth rate that quarter. So what’s bad for General Motors is still, undeniably, bad for America.

That reason alone should discourage any talks of letting these companies fail. But how long can we put off restructuring this industry? If the government had not coddled these companies for the past decades we would not be in this situation today. There is no reason to believe that in future it will be easier to restructure the industry. It will be hard no matter when it happens. The reality is that the American carmakers have been zombies - clinically dead, yet still walking around - for years now. Not only that, they have been dead weight, preventing the modernization of our entire economy.

the U.S. automotive industry has been on the wrong side of almost every environmental, social and safety issue since the 1960s. The industry objected to the Clean Air Act, publicly opposed fuel economy standards, fought against seat belt and air bag legislation, dragged its feet on alternative-fuel vehicles and lobbied against almost every socially responsible initiative. Exactly why would the public want to bail out an industry that has failed in the market and been so unresponsive to the public good?

The decisions we make right now will shape our future economy in dramatic ways. As the world economy swerves in every which way, we have to make sure that we don’t just straighten out, but also end up going in the right direction. And for that, I believe what we need is a well-managed dismembering of the auto industry. We certainly do not want a situation where the industry meets a sudden and catastrophic end. But that’s the direction we are going. Market pressures from Japan, Korea, and now, China, will only continue to squeeze the auto industry and I am not willing to bet our future economy on their resurgence.

the solutions will slip from GM’s control. At some point the laws of physics take over and, like steel-makers and airlines, GM is at the mercy of global forces. It simply cannot compete in a global economy with the enormous burden it now carries in legacy costs. It certainly cannot meet those costs for long off a shrinking sales base and negative cash flow. And distracted by those woes, it can’t begin to make the investments necessary to match the Koreans on price, the Japanese on quality, and the Europeans on performance.

So what does the future hold? Well, if we take a long-term view of the economy, it’s clear that the search for sustainable sources of energy will be key to our economic future, similar to the way transportation was an important economic struggle of the 19th and 20th centuries. The car brought mobility to the masses, but now transportation, as a problem, is for the most part solved. With planes, buses, trains, cars and boats we can reach most places of the world in a matter of hours - not months. We will continue to make improvements to transportation (coupled with telecommunications) but we need a larger economic scope if we are to lead in the new century.

As I said before, there needs to be a well managed dismembering of the industry. First, the companies need to file for Chapter 11 bankruptcy. The government can then move in and - and as was the case with the FDIC-managed dismembering of Washington Mutual and Wachovia - assets can be sold to highest bidder. The government can then invest in and encourage Toyota, Honda and Nissan to take over as much of manufacturing as they can. The government can assume responsibility for the pensions of the oldest employees and focus on retraining and job placement programs for the youngest.

We’d rather the government spend billions on retraining and job placement than on propping up perpetually weak companies that can’t fix themselves. We also don’t buy the argument that bankruptcy would be a deathblow for GM. The only folks it would be a death-blow for would be shareholders and many bondholders.

Will it be expensive? Yes. Is it necessary? Absolutely.

Retraining should focus on manufacturing and retrofitting our existing infrastructure with “green technologies.” When we reach an acceptable level of stability, we should consider taxing inefficient and wasteful sources of energy to increase market pressure and encourage innovation. This way we can solve the short-term economic problem of keeping people employed and the long term problem of promoting sustainability.

Obviously there will many more issues that need to be considered in this transition and there will be seen and unforeseen problems that will pop up. But if we don’t keep a long-term view when solving these issues, we are surely to find ourselves here again in the not too distant future - having accomplished little.