Grim times, indeed, when an op ed in The New York Times reads “Let Detroit Go Bankrupt”. Ford Chrysler and GM are definitely not getting much traction. That’s another nail in Michigan’s coffin, so the Union now consists of about 49.2 states.
The auto industry, which has been making very bad calls for a decade, is largely responsible for the mess it’s in. But there are much bigger economic issues, not least of which are the huge number of jobs and related industries tied in to the car makers.
The exact fallout from Detroit going under isn’t clear, nor could it be.
The manufacturers are saying it would be a catastrophe for America, which would just be one more, really, but the direct impact on Main Street is likely to be gruesome at best. On the other side of the equation, a lame duck industry isn’t exactly a national asset, either.
A few considerations:
1. Current estimates are that Detroit could eat the $25 billion it’s asking for by the New Year, based on the amount it’s losing per month.
2. To retool and reequip the industry won’t happen in two or three months, and will be extremely expensive.
3. There are no guarantees of avoiding job losses, win, lose or draw on the $25 billion.
4. The industry has become chronically uncompetitive, and eager investors aren’t exactly blocking the highways to Detroit.
5. Previous information regarding mergers with other manufacturers indicated that some parts of the industry can operate viably. That information needs to be considered as at least part sales pitch, but may be an avenue for survival of a large part of the industry.
6. There’s a theory that China can help the industry with an additional sales boost of up to a million vehicles. Maybe, but the proof will be in actual delivery on those figures.
Washington’s response wasn’t just negative. It was hostile.
The New York Times:
“A bailout is not a solution to the fundamental problems of the Big Three automakers,” said Representative Spencer T. Bachus III, Republican of Alabama. “A bailout of the auto industry will just push the problem further down the path. To survive, the Big Three will have to become more efficient and competitive. I am not sure if management and labor are ready to make that sacrifice.”
Representative Michael E. Capuano, Democrat of Massachusetts, told the executives that it all came down to trust.
“My constituents do not trust you,” Mr. Capuano said, and need some assurances that “you’re not just going to blow this again.” Carmakers have been fighting the Congressional attempts to pass higher fuel-efficiency standards, and if they had listened, he said, they would not be facing the problems they are experiencing.
Mitt Romney’s op-ed comments are pretty much in keeping with the Washington reaction:
Without that bailout, Detroit will need to drastically restructure itself. With it, the automakers will stay the course — the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check.
Treasury secretary Paulson also opposed the concept as a dangerous precedent. Michigan's reps and Senators are still trying, but things don't look good.
Economically, this will be a real bullet for Michigan. The state has been in bad shape for years, and the industry’s collapse would be a massive blow to state revenue and jobs.
Yes, the industry needs a severe kick in the butt. Yes, the economic risks go beyond that $25 billion. Yes, there’s nothing to be said for paying for inefficiency.
But no, ignoring the appalling condition of an entire state isn’t the way to go.
