Why Bailing Out Automakers Is Still a Fundamentally Bad Idea

by Inya Ivkovic, MA

Billions of dollars have already been poured into ailing automakers General Motors and Chrysler. There is an “interesting” conundrum going with bailout money coming into these two from both U.S. and Canadian governments, whereby GM got a much larger piece of the pie compared to Chrysler. Yet, Chrysler’s smaller piece of pie is more likely to keep more jobs in North America then GM’s lion’s share, as it is referred to by industry watchers. The reason for this shortcoming is GM’s pension plan, which has to pay six times as many pensions every month than Chrysler’s does.

Additionally, although the courts are muddying the waters with their questioning of the Fiat-Chrysler deal, if and when it goes through, it will provide Chrysler with an opportunity to revolutionize its product line to manufacture smaller, leaner and energy-meaner vehicles that people would actually want to buy. In contrast, GM’s future hangs on the “Chevy Volt,” which is marketed as a green car, yet needs to be plugged into the U.S.’ already overextended and not so green, mainly coal-fuelled power grid.

Making things even worse for GM, there are no guarantees that the Volt would actually be manufactured at profit. Going purely green at this moment is just not yet economically viable, which is why Toyota has opted rather to explore the hybrid route. Joining Toyota on that path is also Ford, which managed to stay out of the bailout melee and has just introduced its highly fuel-efficient hybrid “Fusion,” which has been received quite well by the industry.

So, the usual bearish rhetoric aside, there are very good reasons why continuing to bail out troubled North American automakers is a bad idea. Of course GM and Chrysler’s bailouts are unfair, biased, and set dangerous precedents. But it gets worse, because the likelihood of their actual survival — even if more bailout money is poured in— remains very low, while the likelihood of the eventual downfall rises exponentially.

Why unfair? There are other sectors within the economy that are ailing as well; yet no bailout money is coming their way. Why biased? The way the auto sector’s troubles have been portrayed in the media, among lobbyists and with the government, you’d think two-thirds of Americans are employed by GM and Chrysler. Why setting a dangerous precedent? The decisions where the bailout money was to go resemble far too much trying to pick winners from losers at a race track. But governments are notorious for picking losers just because losers more often than not look fairly attractive on the election ballot.

Case in point: in less than a year, decades of political folly governing the economy appeared to have been forgotten, swept under the carpet, as if they never existed. What has kept the wheels of our industrial evolution turning over the past century or so was not propping up the weak whenever they needed help, but it was the industrial transformation, finding new technologies, identifying new markets, and creating that fundamental spark that would set consumer spending on fire and keep the capitalist engine running. And it was certainly not tying that noose around one’s neck even tighter.

Finally, there is always the possibility that neither GM nor Chrysler would ever pay off their debts. When private investors lend money, a borrower defaulting is a normal risk taken in the course of the business. However, when a government is lending money, the decision to take on the risk and the responsibility for the default is not just its own. Rather, all those risks and billions of dollars will eventually fall on the taxpayers’ heads in the form of higher taxes and the loss of public services.