A Huge Dilemma: Bailing Out the Big Three

It appears that the troubling economic cloud looming over America will continue to impact our nation's economic climate, as yet another bailout package has been proposed for a sinking industry. More than a month ago, a $700 billion bailout plan was approved to resuscitate the ailing financial sector. Now, constituents of the automotive industry are begging for a injection of capital from the government to ensure their corporations survival. U.S. companies GM, Ford, and Chrysler, otherwise known as the Big 3 due to their majority stake in the domestic car market, are seeking a sum of $25 billion to help keep them from filing for bankruptcy. Numerous media outlets have picked up the story, including The San Francisco Chronicle, which features the article "Congress Debates Industry Bailout" on the front page of their website. The article offers an analysis of the gloomy situation the manufacturers are facing, citing several reasons for their downfall, including the credit crunch and longstanding poor managerial practices. The blogosphere is also teeming with debate over the issue, as individuals have been weighing the pros and cons of extending aid to the corporations considered over expanded and ill equipped to continue to viably operate. One blog featured on Newsweek's website, "In Defense of Detroit," concedes though the Big 3 have been "a disgrace," their vitality is nevertheless of integral importance to the American economy. Conversely, I found another Internet editorial with a differing view on the automotive site The Truth About Cars. In "Is the American Automobile Industry Worth Saving? Pt. 2," writer Robert Farago disputes that though GM, Ford and Chrysler do have a sizable presence in the U.S. auto market, they only constitute 50% of the market share and employment has steadily declined since 2000 (see graphic to the right). He furthermore asserts $25 billion is simply not enough to save the manufacturing giants from their impending fate. Instead, they should be left to fail to ensure their "rebirth" into more efficient and streamlined corporations, dexterously able to respond to market and consumer demands. After reading each of these two posts, I felt compelled to offer my own opinions on the subject. While my comments may be found under the comments section of each blog, I have provided them below for convenience.

"In Defense of Detroit"

Comment:

Mr. Gross,

Your article provides important insight as to why it is imperative domestic automakers receive a government backed cash infusion similar to the package granted to our ailing financial sector. It can be a tricky matter understanding the complexities of the many interrelated issues impacting our economy, and the plight of car manufacturers happens to be one of them. You bring up an interesting point that filing for Chapter 11 bankruptcy is an expensive and extensively drawn out process for companies like GM, Ford, and Chrysler. In rationalizing this assertion, you write, "people would be reluctant to purchase expensive, long-lived assets from a bankrupt entity." Though the Big Three’s products appear to match these asset types, why do you hold this to be true? Is it because no matter what the market conditions, consumers demand a constant supply? It seems that in a significant downturn like the one we are facing, it would be a shrewd option to declare Chapter 11 and sell cars at a significantly discounted amount. Though consumers may be presently reticent to purchase large expenditures, if price tags were reduced to an incredibly attractive figure, vehicles could be sold at a high enough volume to possibly lift these manufacturers out of bankruptcy. Your discussion of the regional implications resulting from this sector’s potential collapse warrants reconsideration by those currently against the proposed bailout package. The forecasted figure of three million jobs lost nationwide is enormous, especially given the realities of the economic recession. It is significant that a large number of businesses in our country, large and small, have some affiliation with the U.S. automobile industry. According to a recently published article in the San Francisco Chronicle, Detroit lawmakers claim that one in ten jobs are tied to domestic vehicle manufacturing. Though these figures may be somewhat inflated, the inextricable nature of this sector with other currently fragile parts of the American economy grants legitimacy for a plan to keep it from failing. Though I agree with your arguments supporting the existence of U.S. carmakers, I worry that the proposed amount may be too little, too late. $25 billion may not be enough to save the sinking industry from its fate. Hopefully though, the amount will be enough to keep these corporations from bankruptcy, yet will be insufficient to keep them from operating in their current state. The Big Three need to downsize and streamline operations in order to realign with the marketplace and become attractive again to American consumers.

"Is the American Automobile Industry Worth Saving? Pt. 2"

Comment:

Mr. Farago,

I found your arguments against the issuance of a bailout package for U.S. car manufacturers to be extremely informative. It is important to examine this type of governmental expenditure given the current economic downturn. You bring up several great points in defense of your assertions. I agree with you that companies composing the Big Three (Ford, GM, and Chrysler) are bloated corporations in need of an overhaul. They need a shake up that will restructure their management and restore their prominence as premier American brands, delivering products with amenable features customers want. However, I believe it should be a concern of our nation’s citizens that foreign automobile makers have such a stranglehold on the domestic market. I do not share your sentiment that this is an unavoidable reality. American cars can indeed make a comeback through careful revision of their manufacturers and their subsequent realignment with the market. You advocate that the industry should be left to fail, yet what do you think about this sector’s synergy with other areas in the economy? According to the Center for Automotive Research, as many as 2.5 million workers could become unemployed nationwide if any one of these corporations go bankrupt. That is a significant amount of jobs lost, especially considering the recession is expected to raise the unemployment rate considerably by the year’s end. It is true that the Big Three have been consistently unable to competently respond to foreign competition, and they have indeed been mismanaged for years. Yet they appear to exist as a cornerstone of the American economy and job market. Therefore, wouldn’t it be a better plan to keep these corporations afloat, but in doing so demand they concede to requirements they have been avoiding for years? Stringent mandates could be attached to the bailout, successfully realizing the implementation of guidelines such as higher fuel economy standards. These types of policies would not only help to address environmental concerns, but they would help automobile manufacturers to put cars on the road better matching the evolving demands by consumers for more innovative products. I agree with you that “the new car ‘bubble’ has burst,” but more pragmatic policy approaches could be introduced to address the U.S. carmakers than to simply let them fail.

Great Change Ahead: The Dawning of a Green New Deal

Several weeks ago I wrote a post emphasizing the importance of electing a president who would focus attention on the issue of climate change and the development of renewable resources. I argued Mr. Obama was the candidate best fit to undertake t task, and his subsequent appointment certainly represents momentous change for Washington and the United States. However, the President-elect now faces a myriad of challenges during his presidency that could potentially delay the advancement of sustainable energy policies. The current condition of our nation’s economy is a principle worry among many, as the American people face a recession projected by experts to be as bad The Great Depression of the 1930s. Rising unemployment rates, decreases in household wealth, and stifled growth across numerous sectors are just some of the realities facing the once-mighty American market. Similarly, European countries are experiencing the same struggles, demonstrating the inextricable interconnectedness between many national economies. Consequently, the worldwide downturn has led citizens of the U.S. and those of foreign countries to call for decisive global action similar to The New Deal, which was enacted by President Roosevelt to counteract the turmoil he faced during his term (see graphic left). This contemporary version would introduce a series of policies and reforms to combat the slowdown by converging social welfare programs with increased governmental involvement in both the private and public sectors. Differing from FDR's New Deal, which utilized public works projects to stimulate the U.S. economy, a contemporary version would rely on the advancement of sustainable practices and alternative energies to restore the health of markets worldwide. Despite the promise of such a program, critics contend its likely exorbitant cost would be an overbearing burden on already financially troubled countries. Other naysayers cite fundamental economic theory, which holds that the present market conditions do not encourage the necessary investment and development of new technologies and fuel types. While I acknowledge the legitimacy of these concerns, the potential benefits associated with a Green New Deal, including the possibility of greater social equality through expansion of an entirely new market sector, would garner enormous promise for the future.

There are numerous realities potentially undermining the success of an environmentally focused New Deal. One of the major worries is the costly price tag associated with such a plan, as well as its potential to distract policymakers from addressing more critical issues. A piece featured in Time Magazine, "Will Green Progress Be Stalled by the Bad Economy?" reflects this pessimistic outlook. It contends that the present climate is causing many European governments to re-evaluate the markedly higher greenhouse gas emissions reduction targets they put forth in 2007. It appears the cost to realize these initial figures is forecasted to be $100 billion per year, a financial strain many nations cannot afford, as more pressing issues require government attention and spending. This then is problematic for legislation that promotes the development of various alternative energies yielding benefits in the long term. Additionally, basic economics also appears to have the potential to deter the launch of a Green New Deal. Discussing the matter is Newsweek, citing Fatih Birol, the chief economist for the International Energy Agency, for his analysis of the realities of a recession. He argues that during a downturn, commodity consumption decreases, and so too does the price of energy. Therefore the current stagnant market conditions do not induce the proper incentive for investment in the development of alternative sustainable fuel sources such as solar power and ethanol production.

Still, despite these potential deterrents, a number of factors support the likelihood of a modern New Deal. Many people feel that a new source of economic growth is needed in order to adequately remedy the world's current ills. It is my belief that the development of a “green industry” represents the greatest potential for expansion, and this outlook has been supported by a number of sources. Pete Altman, Climate Campaign Director for the NRDC, asserts that investments in clean energy "create more jobs per dollar invested than tax cuts, military spending, or oil and natural gas” (see graph). In review of the data, it would behoove the elected bodies of nations’ with climbing unemployment rates to encourage the growth of these areas. In addition, social reform groups view a "green revolution" as a way to bring wealth and greater equality to marginalized members of society. Van Jones, founder of the organization Green For All, envisions the creation of a "Green Growth Alliance," formed to champion the cause of minorities in the name of sustainable development. He claims "we can take the unfinished business...of equal opportunity, and combine it with...a green economy, thereby healing the country on two fronts and redeeming the soul of the nation." Thus Mr. Jones sees the encouragement of this emerging sector as vital in not only increasing the number of jobs available to Americans, but a method to provide more opportunity to low income earning individuals. I too agree with Mr. Jone’s belief, as the industry's relative infancy enables social welfare groups the ability to influence how it will ultimately take shape. Engaging in dialogue early on can effectively establish the interests of the constituents they represent. Furthermore, another strong indication that suggests the likely implementation of a plan of this sort is that world leaders, including newly elected President Obama, hold energy independence and investigation into other resource types to be a top priority. The American President is quoted in a Time Magazine interview, saying, "there is no better potential driver that pervades all aspects of our economy than a new energy economy.... That's going to be my No. 1 priority when I get into office."

In review of the arguments concerning the feasibility of a Green New Deal, I find that a program of this type could not be launched at a more vital time. According to the previously cited Newsweek article, American employment rates are expected to climb from 6.1% to 8% by the end of this year, the highest they have been in twenty-five years. Introducing this plan could stave off further unemployment and provide new opportunities for workers. Furthermore, in the past two months, the United States has witnessed an unprecedented degree of government intervention in the form of the $700 billion dollar bailout that was quickly passed through the Congress to assuage the financial markets. This, in tandem with the prospect of a significant economic downturn, reflects the reality that the United States may witness a degree of change not seen since The Great Depression. The parallels between our current situation and that time period are too similar to be ignored. Though we may have fallen on hard times, I believe that hitting the bottom allows us to start anew, to reevaluate the policies of our country, and implement new plans that can ensure the future success of America. Thus, I believe 21st century New Deal would be a viable way to address the many social and environmental ills we currently face today.