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Argument: Moral hazard: US auto bailout would reward failure

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Supporting quotations

Thomas Friedman. "How to Fix a Flat". New York Times. 11 Nov. 2008 - "Last September, I was in a hotel room watching CNBC early one morning. They were interviewing Bob Nardelli, the C.E.O. of Chrysler, and he was explaining why the auto industry, at that time, needed $25 billion in loan guarantees. It wasn’t a bailout, he said. It was a way to enable the car companies to retool for innovation. I could not help but shout back at the TV screen: “We have to subsidize Detroit so that it will innovate? What business were you people in other than innovation?” If we give you another $25 billion, will you also do accounting?"

How could these companies be so bad for so long? Clearly the combination of a very un-innovative business culture, visionless management and overly generous labor contracts explains a lot of it. It led to a situation whereby General Motors could make money only by selling big, gas-guzzling S.U.V.’s and trucks. Therefore, instead of focusing on making money by innovating around fuel efficiency, productivity and design, G.M. threw way too much energy into lobbying and maneuvering to protect its gas guzzlers.

This included striking special deals with Congress that allowed the Detroit automakers to count the mileage of gas guzzlers as being more than they really were — provided they made some cars flex-fuel capable for ethanol. It included special offers of $1.99-a-gallon gasoline for a year to any customer who purchased a gas guzzler. And it included endless lobbying to block Congress from raising the miles-per-gallon requirements. The result was an industry that became brain dead.

Nothing typified this more than statements like those of Bob Lutz, G.M.’s vice chairman. He has been quoted as saying that hybrids like the Toyota Prius “make no economic sense.” And, in February, D Magazine of Dallas quoted him as saying that global warming “is a total crock of [expletive].”

These are the guys taxpayers are being asked to bail out.

David Lazarus. "Bail out Big Three? Sure, with conditions". Los Angeles Times. 16 Nov. 2008 - Though a number of people I spoke with said they'd reluctantly support a bailout of Detroit rather than see the companies disappear, most said this would be rewarding failure after decades of mismanagement and poor decision making.

"A Detroit Bailout Is Unwise". Wall Street Journal. 30 Aug. 2008 - The three big U.S. car makers are angling for government help to the tune of $50 billion. It is understandable: They are struggling, and policy makers have thrown money at financial sector basket cases. But Chrysler, Ford Motor and General Motors shouldn't get handouts.

Aside from the cost to taxpayers, a government safety net for companies discourages prudent management. It also potentially puts rivals at a disadvantage, making markets less efficient and ultimately hurting consumers. That doesn't mean policy makers should never, ever, step in. But the test should be whether the alternative is disastrous enough to justify intervention.

"Editorial: Auto Bailout; The alternative is worse". Philadelphia Inquirer. 23 Nov. 2008 - "the chiefs of General Motors, Chrysler and Ford didn't help their cause by arriving in Washington in private jets to ask Congress for a handout. The move typified the industry's cluelessness."

Steven Pearlstein. "The Road to a Bailout They Don't Deserve". The Washington Post. 3 Sept 2008 - "it's hard to imagine an industry less deserving of government help. Here are three companies that for decades failed to produce cars that were well designed, well produced and exciting to look at, that fought tooth and nail against efforts to require greater fuel efficiency and, until recently, did too little to bring wages, benefits and retiree costs in line with competitive realities. And while they whined for years that it was unfair trade that put them at a disadvantage, Toyota, Honda, BMW and other foreign transplants came along to prove that it is possible to produce quality cars at affordable prices in U.S. factories while offering decent wages and benefits."

David Brooks. "Bailout to Nowhere". New York Times. 18 Nov. 2008 - "If ever the market has rendered a just verdict, it is the one rendered on GM and Chrysler. These companies are not innocent victims of this crisis. To read the expert literature on these companies is to read a long litany of miscalculation. Some experts mention the management blunders, some the union contracts and the legacy costs, some the years of poor car design and some the entrenched corporate cultures."

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