Arnold Kling  

The Economics of the Auto Industry

Why the Left Should Not Forgiv... More on Autos...

President-elect Obama held a press conference yesterday. He said, in part,

The auto industry is the backbone of American manufacturing and a critical part of our attempt to reduce our dependence on foreign oil.

I would like to see the administration do everything it can to accelerate the retooling assistance that Congress has already enacted. In addition, I have made it a high priority for my transition team to work on additional policy options to help the auto industry adjust, weather the financial crisis, and succeed in producing fuel-efficient cars here in the United States of America.

The market is telling the American auto industry that it has too much capacity. It needs to shrink.

A big reason that the auto industry is in trouble financially is that many of its current and past workers have retirement benefits (including medical care) that are defined benefits. That is, the benefits are promised regardless of whether enough money was contributed to provide for them.

Under these circumstances, if the industry shrinks, it may not be able to cover the fixed costs represented by those defined benefits. In that case, the market is telling the auto companies to declare bankruptcy, with the proceeds from the sale of the auto plants going to creditors, including pension beneficiaries.

Instead, of course, would those of us who have had our own retirement plans disrupted by the decline in the stock market step in as taxpayers to bail out the auto worker beneficiaries?

Yes we can!!

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CATEGORIES: Fiscal Policy

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The author at View From a Height in a related article titled PERA-lous Territory writes:
    Moral Hazards, everywhere you look. Arnold Kling has been all over that terrible idea, the proposed auto bailout. A big reason that the auto industry is in trouble financially is that many of its current and past workers have retirement... [Tracked on November 12, 2008 3:00 PM]
COMMENTS (7 to date)
The Dirty Mac writes:

I am hopeful that the altruistic young voters will eagerly step up to save the pension benefits of their elders.

I expect that the domestic auto industry will become GSE's or something similar with a mandate to produce heavily subsidized akternative fuel vehicles. With so much of the northeastern industrial base forced to move elsewhere and reduced taxation/regulation out of the question, government becomes the engine of growth by default.

psugrad writes:

Already! the Change we were to believe in....

altruistic young voters might step in with their votes in some abstract way to save pension benefits as long as they don't think they are paying for it directly. Honestly, I don't think 'helping your elders' is personal enough at a national level to drive young people to do much with their own money. Community level, maybe - Other people's money, sure.

R. Richard Schweitzer writes:

Actually, the "pensions" part of the auto makers has an existing solution in bankruptcy. The Pension Benefits Guarantee Fund.

The other load - health benefits (steel industry redux) may be transferred to an enhanced Medicaid (not Medicare) provision.

Since the U S does not maintain a "balance sheet," reserves for those contingent liabilities would flow through with political ease.

Les writes:

It seems that the government CAFE standards are partly to blame for the difficulties of the U.S. domestic auto industry.

This is a familiar pattern - the politicians impose harmful mandates that create substantial economic problems. Then, when a crisis erupts, the politicians avoid taking the blame for their blunders, and impose increased taxes on us, picking our pockets to bail out politically influential parties.

Maybe we could save money by simply paying each politician a few million dollars to permanently move to the country of their choice and never return.

bad dog writes:

"The market is telling the American auto industry that it has too much capacity. It needs to shrink."

I think it's obvious the responsibility for the auto industry's current failures resides with the auto industry itself. They made bad decisions, and they are reaping what they've sown.

The argument to bail out the auto industry is the same as the argument to bail out the bankers: They're "too big to fail."

As an average guy worried about his 1) wallet and 2) country, I wonder: Are these institutions truly too big to fail? Should we, in the words of one smart investment guy I saw on TV, take the money from the competent and give them to the incompetent, which he says is wrong (for obvious reasons)? Or should we do nothing, let the market correct itself, and thereby risk a greater disaster?

And: Should we stop allowing institutions to exist that are too big to fail and go on soaking the taxpayers every time they trip and fall? Or should we go on letting the market create bubbles and then "correct" itself, cracking up the world during each of its volatile swings?

Jacob Oost writes:

I know politicians aren't perfect, but how in the world can any sensible economist back candidates like this one? Is it old guard Keynesians? People angling for government positions?

EM writes:

I wonder what the average Detroit auto retiree receives in reitrement each year?

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