When the Big Three CEO’s arrived in Washington, D.C. to ask the federal government for money the first time in private jets, everyone would be excused for thinking to themselves, “You have got to be f**king kidding me…”. Not only did it seem to be poor form (private jets, as it turns out, cost a lot of money and are not what you would say fuel-efficient) but it was just one more example of how private citizens now had ample ammo to not trust public corporations.
“Why should I trust public corporations?” you may ask yourself. Well, it is very simple really. Public (and private) corporations are the conduit for innovation and technological advancement.
A country can get by if its people (say, 40% of them) do not trust their government. However, a country cannot get by if an overwhelming majority of its people has no trust in its corporations or big businesses. What are typically the worst places in the world to live in? It is usually the countries whose governments control all aspects of business or whose governments destroy most aspects of business—save for weapons manufacturing and drug operations, of course. This is not to say that I think America is right around the corner from being the next Haiti or Democratic Republic of Congo but the recent round of bailouts, if left unchecked, will convince a lot of people that we cannot trust big businesses at all, which is really bad too.
Nowadays, it is in the government’s best interest to make sure that Americans’ trust in big businesses is restored. We may think that a world without Target, Wal-Mart, and chain restaurants would be optimal given how inefficient it has been working recently. But reverting to a world without the new foundations in place (stores open late hours and on holidays, affordably eating out and choosing from huge menus, etc.) would be similar to asking everyone to voluntarily get rid of their DSL or cable Internet connection and go back to the simpler 56K v.90 dial-up connection. You don’t realize what you got ’til it’s gone. But I digress.
The Big Three bailout is seen, as is most things right now, through the lens of the frenetic cable news shows; the ones that always prophesy doom at a moment’s notice and are never interested in long-term forecast or positive trends. I realize too that the ground that the Big Three has built upon makes it an easy target for cynicism and doomsday speak (i.e.-their cars are not selling well because they their quality does not match Japan’s and Germany’s—or even Korea’s—quality). And that cynicism is not entirely groundless. The laissez-faire, Ayn Rand capitalist in me thinks that the Big Three should be left to die and let the repercussions fall where they may. But the problem with the Ayn Rand logic is that her economic philosophy (while I agree with much of it–for instance, “Francisco’s Money Speech”) is too Utopian. For every five good points from the “money speech” there are two that make you say, “That seems waaay too unrealistic.”
The reality is that the Big Three does need a bailout right now, if only because we would not be prepared to shoulder the health insurance costs that they are currently fronting for their employees. To quote Gregg Easterbrook from two weeks ago:
“The hauteur of the Big Three CEOs should not cause us to lose track of several major points on which empathy for General Motors, Ford and Chrysler is justified. One is that the sterling health benefits they give workers and retirees, often mocked as an excess, saves everyone else money. Detroit spends about $1,500 more on health benefits per car sold than is spent on health care per car manufactured in the United States by Subaru, BMW and the rest. Big Three retirees are sending their medical bills to Detroit (increasingly, to a United Auto Workers trust), not to the Medicare system. This aspect of the Big Three dilemma is underappreciated, because Detroit health care spending reduces government spending, especially on Medicare.
Suppose General Motors, Ford and Chrysler went out of business. Medicare (and in some cases, Medicaid) spending would rise by billions of dollars. General Motors says it spends about $8 billion annually on health care and pensions; most of this cost would shift to taxpayers, indefinitely. In regard to pensions, failure of the Big Three would foist much of their obligations onto the federal Pension Benefit Guarantee Corporation, which in theory is an independent company supported by insurance-like payments but in practice is a pass-through mechanism for the national debt. Not only would taxpayer pension subsidies rise should the Big Three fail, we would reach the repulsive condition in which average workers who themselves have no special pension deals were being taxed to provide extra-sweet pensions for retired autoworkers.”
I think it is safe to say that we would all be severely pissed off if the last sentence were to become a reality.
The main problem with the Big Three, as I see it, is this: they are entirely disconnected from reality. They are making no attempt to look like innovators. They simply look like victims offering no solutions asking for more money. Tell the public how ridiculous the CAFE (Corporate Average Fuel Economy) standard is—again, to quote Easterbrook:
“The fuel efficiency of Detroit products simply must go up, to reduce national dependence on Persian Gulf dictatorships and to cut greenhouse gases. Your columnist is a strong supporter of lower-horsepower, higher-mileage vehicles. But in Detroit’s defense, the Corporate Average Fuel Economy standard used by the federal government to enforce mileage rules is dizzyingly complex and riddled with perverse incentives — among other sins, the system in effect discourages General Motors and Ford from importing into the United States the high-quality, high-mileage models each builds in Europe. For years, Americans traveling in Europe have come back saying, “I rented a [Ford or GM] car in France and I loved it! Why can’t I buy that car here?” Consider the Mondeo, a fabulous car Ford builds in Europe — high-quality, fun to drive, 40 mpg with a smooth-running, clean diesel engine. Why isn’t the Mondeo in U.S. showrooms? Unintended consequences of the CAFE rules are part of the reason. Here, my Brookings Institution colleague Robert Crandall summarizes his longtime opposition to CAFE, with links to details of his argument. Brookings is as liberal as the day is long; if even Brookings Institution economists don’t like CAFE, there must be a problem.”
Come out with a comprehensive forecast of what you are going to do. If you have to sell off businesses then do it (honestly, why is Buick and Pontiac still around?). But whatever you do, do not arrive in D.C. on private jets.
The Big Three bailout may not solve every problem that lies ahead but to let them file for bankruptcy would be disastrous—both for the companies themselves but also for the parts distribution companies too. You can be angry at the government all you want but just know that one of the biggest obstacles our society faces is making sure that our corporations are trustworthy again. If the government gives them financial assistance then they should, in return, kill CAFE for the benefit of the US auto industry, and make sure that the companies are straight in their dealings for the benefit of us.
If the government takes away the incentive for corporations to defraud their consumers and shareholders, then everything will slowly but surely stabilize. But it starts with defining which companies need assistance and the Big Three does, regardless of how counterintuitive it may seem. If this is the first step in restoring trust and profitability in the Big Three then everyone wins. If this all turns out to have been bunk from the get-go, then I guess I will forever be haunted by the ghost of Ayn Rand for selling out.