The TARP Sequel

The Detroit auto bailout is beginning to drearily resemble the drama that surrounded the enactment of TARP. Only, like any bad sequel, you just want it to be over since you have already figured out the end.

Republicans are standing on free market principals-for the time being. Democrats are doing their best to make sure that all the blame gets placed on the departing Congress and the administration just wants to clean off their desks, kick back and enjoy the holidays and then get out of town and wish the new team good luck. By next week a poorly conceived, probably unworkable plan will be in place and we can plan on starting the whole thing over sometime around the end of March. Only then the taxpayer will be in for billions and all sorts of illogical arguments will be advanced for throwing good money after bad.

Just about everyone that I respect seems to think that a real Chapter 11 is the way to go. Two articles caught my eye today which make some excellent points as to why we need to head down that road.

David Leonhardt in the New York Times does a good job of parsing and debunking a lot of the myths about the supposed burden that labor costs place on the Detroit auto makers. After working through the numbers he makes a convincing case that if you reduced the labor cost of the Big Three to $45 an hour, roughly the cost of the competition, it would reduce the cost of producing a car by about $800. Not exactly a huge number and of even less importance when you consider that they already price their product about $2500 below the competitions.

Mr. Leonhardt contends that the problem isn’t going to be solved by reducing costs since the real problem is that no one wants to buy their product. If that’s the case, and I suspect it is, then no amount of government money is going to solve this problem.

My favorite pundit on this subject is Holman Jenkins and he delivers another missive today in the Wall Street Journal. His contention is and has been that the essential problem is that Detroit is hamstrung by Washington rules catering to constituent groups. His contention is that Ford and GM are very good at building trucks and SUV’s that consumers love and do a very credible job of building small, energy efficient cars overseas. What they can’t do well is deliver small cars with comparable value to their rivals in the U.S. thanks to high wages and government mandates.

All this is dragged down by federal fuel-economy mandates that require them to lose tens of billions making small cars Americans don’t want in high-cost UAW factories. Understand something: Ford and GM in Europe successfully sell cars that are small but not cheap. Europeans are willing to pay top dollar for a refined small car that gets excellent mileage, because they face gasoline prices as high as $9. Americans are not Europeans. In the U.S., except during bouts of high gas prices or in the grip of a Prius fad, the small cars that American consumers buy aren’t bought for high mileage, but for low sticker prices. And the Big Three, with their high labor costs, cannot deliver as much value in a cheap car as the transplants can.

Under a law of politics, such truths were unmentionable in last week’s televised circus because legislators are unwilling to do anything about them. They won’t repeal CAFE because they fear the greens. They won’t repeal CAFE’s “two fleets” rule (which effectively requires the Big Three to make small cars in domestic factories) because they fear the UAW. They won’t hike gas prices because they fear voters.

Two views for you to consider. In the end, they seem to come to somewhat the same conclusion. Detroit doesn’t produce cars that the government would like them to manufacture and will at the same time be purchased. So we proceed down the road of a bailout that probably only means we have to add more zeros down the line. Congress continues to pretend that up is down and that their actions don’t have real world consequences. Enjoy the TARP sequel. Or take a nap because you already know the outcome.


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