Economists Say No On Taxpayer Bailout of Auto Industry

Economists Say No On Taxpayer Bailout of Auto Industry Wednesday,

November 12, 2008

By Matt Hadro, of CSNNews





(CNSNews.com) - It would be better to let struggling U.S. auto firms file for bankruptcy and restructure their companies than subsidize them with a taxpayer-funded bailout, said free market economists and financial experts. House Speaker Nancy Pelosi (D-Calif.) and Senate Majroity Leader Harry Reid (D-Nev.) have expressed support for a bailout.


Last weekend, Pelosi and Reid sent a letter to Treasury Secretary Paulson, calling for him to provide temporary support to the automobile industry. “A healthy automobile manufacturing sector is essential to the restoration of financial market stability, the overall health of our economy, and the livelihood of the automobile sector’s workforce,” Pelosi and Reid wrote.

On Nov. 6, the Democratic congressional leaders met with the president of the United Auto Workers (UAW) and the CEOs of Chrysler, Ford Motor Co. and General Motors to discuss the state of the auto industry and what could be done by the government. CNSNews.com talked with economists and experts in the financial markets about the proposal. “I think it’s a horrible idea,” said Bert Ely of Ely & Company, Inc., a financial and monetary policy consulting firm. “It’s not clear to me why it’s in the public interest to salvage those companies in that matter, other than the fact that this is obviously something that is a payoff to the labor unions and specifically to the UAW [United Auto Workers].”


“Quite frankly,” Ely said, “I think that all three of them ought to go into Chapter 11.” Both Dan Ikenson, associate director of the Center for Trade Study Policies at the libertarian Cato Institute, and Alex Tabarrok, associate professor of economics at George Mason University, disapproved of the bailout. “It definitely should not happen,” Ikenson told CNSNews.com. “It’s a farce to say that the U.S. auto industry is facing an existential threat.” The UAW, however, thinks the government should provide aid. “There is an urgent need for federal assistance,” a Nov. 6 UAW press release stated, “not just for our members, but for millions of workers and retirees and for thousands of companies who depend on the auto industry for jobs, retirement benefits, and revenue.”


UAW President Ron Gettelfinger called on Congress to immediately provide $25 billion in loans for auto companies to fulfill their obligations to provide health coverage for mreo than 780,000 “retirees and dependents,” the press release said. “Strategic assistance to a critical manufacturing industry makes sense for U.S. taxpayers,” stated Gettelfinger. “The alternative is lost jobs, business failures, and a shortfall in pension and health care obligations – all of which will cost far more in the future than the assistance we are requesting now.” But “they’re in the positions that they are in because of bad decisions that they have made,” said Ikenson. “As a result, they now have a very uncompetitive cost structure.” “Nowhere is it written in stone that these companies must exist,” he said. Prof. Tabarrok said it is foolhardy for the federal government to pick which industries get subsidies and which do not. The auto industry is not a key industry, he said. Many firms have pension and health care obligations, said Tabarrok, including the federal government with Social Security. Matthew Shapiro, a professor of economics at the University of Michigan, did not say whether he supports a bailout of the auto industry. “The auto industry is in extremely bad shape,” he told CNSNews.com, “because of the twin shocks of having oil prices shoot up, and then having the credit crisis, which basically means that it’s very hard for individuals to buy cars on credit.”

“They need to be part of a comprehensive solution, and I think it’s important that Congress, the current administration, and President-elect Obama all work together to do things for autos and other industries that will get them on a good footing going forward,” said Shapiro. “I would hope that the Congress would work with the incoming administration to craft a package that fits its longer-term plans,” he said.


“Longer-term includes both the next coming months where the auto industries face a very serious cash flow squeeze, but we also want to design a package that gets them on a sustainable path.”