I must admit, I got scared when I watched this video. No, it's not one of those videos that you watch for a while before something pops into frame screaming. It's the GM-sponsored video that argues for the auto industry bailout. Currently, Congress is looking to give the Big 3 US automakers around $25 billion in low cost loans.
This would amount to spending $104,000 per job saved at those companies. Sounds like an awful deal when you put it like that and I'm betting GM knows it. That's why in the videos they expand their influence to all of the jobs in all of the sectors that they buy parts from (electronics, plastics, steel, etc). In order to keep jobs in those industries, the US auto industry needs your money now.
The worst thing is, is that it all seemed so reasonable. Even a dyed in the wool economist like me even got worried. So I started doing a little research. Here's what I found out:
The Big 3 pays its employees an average of $70 an hour or $140,000 per year. Japanese companies pay their employees $44 an hour or $88,000 a year. This is a result of the union control at these plants. It makes our companies extremely uncompetitive.
Also, the bailout money is being given with restrictions. Essentially, the money can only be spent to research more fuel efficient cars. That's not going to help most of the employees. They're still going to be fired while the industry waits to invent something the public will buy.
I also found out on the radio that this isn't the first time that the US auto industry has received low cost loans from the government. The problem is, the news is swamped with stuff on the current bailout, so I can't find out anything about it, but I have a conjecture. I bet it was probably around 1981. In 1981, the US and Japan reached a Voluntary Restraint of Trade agreement. The Japanese knew the government was going to put a tariff on imported cars and offered the restraint instead. I bet the reason the US government was considering the tariff was the original bailout. The government knew that raising the import tax on foreign-made cars would help the auto industry. The auto industry had to be propped up in order for the government to get its money back. The quota raised car prices by $1,600 (just like the tariff would have) and cost US consumers $7 billion dollars.
In the end, the government made money off of the deal, helped by the quota. I bet a current bailout would be accompanied by tariffs or quotas again. The government would hate to look like it invested money in people who couldn't pay us back*. The same thing is going to be true of the finance industry. The government is going to become majority share holders in some of those companies and will probably change the rules to make sure the industry is able to pay back those loans.
The whole thing makes me extremely nervous. I don't think the government can pick a winning company better than private investors can. I know things are tight in the credit market, but these companies have been hemorrhaging money for a long time now. Something has to be done to make these companies more efficient, and government money doesn't seem like the way to do it.
Update: My guess was right. In 1979, Chrysler petitioned the government for $1.5 billion in low cost loans which were approved by President Carter in January of 1980. The loans were repaid in 1983-earlier than they had to be-and the government made a tidy $350 million. Clearly, the government knew it had a stake in auto industry and went out of its way to help it by hurting everyone else.
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Update 2: Economist, Robert Lawrence, talks about how the auto industry could fail in the future by doing what Congress forces it to do. Article here.
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