Why We Can't Throw Out the Auto Industry with the Bath Water

The US government is about to get bigger. Economic and political experts as well as Congress are split on whether the federal government should bail out the auto industry, GM in particular, just as the fed bailed out Wall Street. The problem is that the U.S. is supposed to run on free market or laissez-faire principles of capitalism. Government should not have to intervene to save reckless business from itself. Therefore, any company that cannot manage it's business is doomed to suffer the consequences by disappearing from the market, e.g., going out of business as did companies like Washington Mutual. However, just as with the Wall Street bailout, it is not that simple to just let a major U.S. manufacturer die a death which it's leadership has inflicted on itself.

If the economy were doing well as it was in the 1990's, that would be just fine. However, with record unemployment just in this year alone combined with the recent Wall Street meltdown millions of people who rely on the auto industry for living, pensions, benefits, and more would immediately be thrown out of the workforce with no immediate opportunity for re-training or re-education to get back on their feet. You can imagine that many of these factory workers and union workers have already seen their investments plummet since September to the point that some may have to postpone retirement. Such is the big picture for our economy. US News explains how the US Congress has been aiding the auto industry since September 2008:

The airwaves and the Internet are blanketed with debate over a proposed federal bailout for Detroit's Big Three -- but didn't we already send them a check a few months back? The numbers are so staggering, and the facts on the ground are changing so quickly, that it can be hard to keep track of which auto industry bailout is being discussed. We'll attempt to clear up the confusion with a summary of the last month's auto industry news.

Auto Bailout, Round I: In September, Congress approved $25 billion in aid to the struggling U.S. auto industry. The money will come in the form of loans. That money would be dispensed beginning in 2009, used to retool factories and take other steps to enable U.S. automakers to produce more fuel-efficient vehicles.

The loans were not strictly limited to American-owned automakers. AFP explained at the time, "Under provisions of the new legislation, not only US carmakers are eligible for the guarantees but also suppliers and foreign automakers with plants in the United States that are more than 20 years old -- Nissan and Honda's US operations qualify." Other foreign automakers, however, were not pleased with Congress's decision to help out the Big Three. At the time, the Big Three insisted the move should not be called a bailout. ABC News reported, "'Bailout' isn't the word automakers are using. A greener Big Three, the automakers argue, will reduce the country's dependence on foreign oil. Chrysler Vice Chairman Jim Press told ABC, "It's not a bailout. It's a good investment between industry and government." Critics of the plan disagree. Economics Professor Peter Morici of the University of Maryland said "Oh, I'd call it a bailout. They are having increasing difficulty borrowing money in the private credit markets because there's a high risk of default. In that environment, giving them a government loan is a bailout."

Auto Bailout, Round II: But a lot has changed since September. It has become increasingly clear that the loans set aside by the September vote won't come in time to save the ailing U.S. auto industry, and the largest U.S. automaker now says its expects to run out of cash before the end of 2008. Such a failure could have untold consequences. By some estimates, one in 12 American jobs is dependent on the auto industry.