Auto Bailout–Free Market?
Many are asking how the bailout of the auto industry fits into a free market economy. I asked Heath Suddleson to give me his thoughts since he is a particularly clear thinker on economic questions.
Today’s post was written by Heath
Is the Auto Industry a Free Market Economy?
With the $14Billion bail out package for the Auto Industry passing the House of Representatives, we need to ask ourselves what is free market and what is governmental engineering? If this were a true free market, the bail out would not have passed because the “Big 3” auto companies cannot survive with their current structures of management, labor wages (including executives), and legislation. The free market would deem it better to allow the auto industry to emulate the phoenix through bankruptcy than to subsidize continual failure. A phoenix is a mythical bird who spontaneously combusts and dies in flames only to be reborn through the ashes. The auto industry could experience much the same transition through bankruptcy, but only to a degree. There are still two hurdles to overcome for our homegrown auto industry.
First is the United Auto Workers (UAW) and second is our own Governmental regulations. Let’s first talk about the unions. Over the past many decades, the UAW has negotiated many deals for current and past workers. Each time the deals constrain the auto industry more and more. Today the “Big 3” are paying for decades of retiree pensions and health benefits as well as those of current employees. Because they are located in Michigan, they cannot operate without the unions due to state laws. Foreign car company plants in the US are Foreign Trade Zones (FTZ) in non-union states. They not only pay no taxes, but are not subject to UAW influence. They often get the land for a great price to build a state of the art plant so that they can hire local workers who pay income tax. Plants for the “Big 3” in the US are decades old and need to be modernized at a cost of billions of dollars.
Next at issue is out own governmental regulations that require our companies to renovate and retool plants to meet various governmental standards. Because the foreign auto makers in the US have recent facilities, they are already set up to produce under the strict guidelines.
The fact is that bankruptcy would allow the “Big 3” to better negotiate new contracts with the UAW, suppliers, and creditors. That said, they will still have to deal with the UAW, suppliers, creditors, and the various levels of governmental interference. Suppliers and creditors are very much a free market issue, but the UAW and the governmental regulations are not free market. In fact, those two factors put our home grown companies at a distinct competitive disadvantage when compared to their foreign counterparts. This bail out package will take out $14 Billion in new debt to sink it into a failing business model and continue to hamper free market outcomes. This would further delay our economic recovery by saddling the American taxpayer with even more debt.
If you are interested, the House of Representatives vote on the bail out was 237 to 170. There were only 32 Republicans who supported the bill, and there were only 20 Democrats who voted against the bill. This vote was primarily along party lines and the Senate Republicans are already against the bill. Please call or write your Senators to express your views.
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