Guest post: the auto industry

Much political territory has already been staked out on this issue, but it is anything but a black-and-white thing we're dealing with. I'm going to lay a lot out here, and I certainly am not an expert on any of this, but here's where I am.

My personal approach is to measure as much fact as I can, balance it against philosophy, and then try to evaluate what I think the best course of action would be. So, if I were a congressman right about now, where would I be on this?

First, facts:

-the big 3 employ directly and indirectly about 10% of the US workforce
-the big 3 spend much more per employee than the transplants and foreign companies. This is due to the combined influences of the UAW and the fact that the US is the only industrialized nation without universal health care.
-stock prices for the big 3 are in the floor. GM is at its lowest price since the great depression. This makes it remarkably difficult for them to raise operating capital
-some 20% of the entire US national manufacturing sector is tied to the automotive industry
-sales are off over 35% across the board (in some cases much more than that)
-the auto industry has already received a 25 billion dollar US govt loan this year
-corporate and consumer credit are both very difficult to come by right now
-the big 3 have a crappy track record of making great cars.
-Germany, Italy and France have considered a common EU bailout that the US could potentially negotiate its way in on

now on to philosophy:

-I don't really believe that congress should be particularly in the business of running the industry
-I do believe that US manufacturing is incredibly important to our continued prosperity and success. It's also remarkably important from a military strategic perspective.
-I agree with Obama when he says that the US auto industry is a key cog in what our national energy policy should be going forward (plug in cars). I haven't done the research yet as to what the impacts of importing that industry as would be as opposed to domestically producing it, but my hunch is that it wouldn't be nearly as advantageous.
-Generally, two big systematic problems for the US auto industry are the lack of national health care, and the credit crunch - both of which are out of the automaker's control.
-I don't believe that Ford, GM, or Chrysler have any inherent right to exist as American companies. If it's in our best interests as Americans to let one or all of them fail, then so be it. If it's not, then lets not let it happen though.

So if I were a senator, what would I propose?

Well, first off I'd go ahead and do the bridge loan. The Bush admin has made it clear that they're punting the whole economic thing to the Obama admin, and the financial realities of the auto industry seem both real and dire. There's no real reason to let them fail due solely to electoral timelines. If we're going to let them die, then let's have it be a conscious decision.

Once we get them into the Obama administration, they won't be the first priority. The first priority will be the economic stimulus - public works, states and local government, education etc. Effective execution of that stuff will have a big impact on the bottom line of the auto industry by itself. If they cannot stabilize themselves after that, then a real look should be taken into the effects of bankruptcy.

Chapter 11 bankruptcy (reorganization)would not necessarily be a bad thing. Many inflated and crappy companies have gone through Chapter 11 in recent years, only to come out smaller, refocused, and profitable. It would force the companies to cut fat, allow appropriate bargaining with the UAW, and generally air out a lot of dirty laundry that needs to get aired out. The problems really come if they slip into chapter 7 bankruptcy (liquidation). Liquidation of the auto industry would be devastating to the economy overall, and is just strategically a really bad idea.

So that's where the line should be. In a perfect world congress would be able to put out some kind of assisted chapter 11 where they could infuse capital if needed but otherwise let it work itself out. A certain amount of stuff probably does need to get liquidated, and a certain amount of credit needs to be written down, but there is a line beyond which the industry cannot continue and therefore it should not be allowed to cross it.

All of this is remarkably tricky to be sure. That's why longer term actions need to be up and running quickly. Incentives for upstarts to begin innovating and manufacturing in that same space should be put into place. Movement into public transportation needs to be happening at a greater pace as well.

Obama's putting together a team of the best and the brightest, and for now that's the best we're going to be able to do. In the short term I support a bridge loan for the big 3, but over a longer period of time we probably need to re-grow manufacturing in this country from the ground up.