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General Motors Bailout

Posted Nov 17 2008 12:09pm

Op-Ed by John Addison (11/17/08). On September 24, Congress approved a $25 billion bailout for GM, Ford, and Chrysler. "It seemed like a lot when we first started pushing this," says Democratic Sen. Debbie Stabenow of Michigan, one of the bill's sponsors. "Suddenly, it seems so small." The three troubled automakers are already back in Washington D.C. asking for another $25 billion.

A couple of weeks ago, GM said that the future of our nation depended on it getting added billions so that it could buy Chrysler. GM has changed its mind. It just wants taxpayers to give the Detroit three another $25 billion. The problem is that the total of $50 billion is paid by taxpayers like you and me.

Congress would do well to have some national goals for the $50 billion, not goals set by auto lobbyists. Goals include America’s need to become competitive with the world if we hope to create more jobs and end this recession. Workers need help by either keeping their jobs or by getting new jobs. Americans need cars that cost less at the pump and better alternatives to always using a car. America needs to be energy secure, not desperately dependent on oil. To meet these goals, several alternatives are being considered:

  • Another $25 billion with no strings attached.
  • Let GM reorganize under Chapter 11 bankruptcy.
  • Boost consumer auto purchases with tax credits for buying vehicles with excellent fuel economy.
  • Invest the $25 billion in rail and transit.

When Chrysler got its 1980 loan guarantee, Lee Iacocca cut his annual salary to a dollar and slashed the wages of other top workers by 10 percent. The tax payers never paid a cent. It was a $1.5 billion loan guarantee.

This time around, Chrysler will be fine. Chrysler President Jim Press, when talking in September at a Western Automotive Journalist meeting, stated, “We need a new business model based on one word – Reality.” The new management team at Chrysler inherited a 4 million car per year overhead with sales falling to one million per year. Chrysler is privately owned by Cerberus Capital Management. Chrysler has been actively downsizing to be smaller, agile and profitable.

Ford is also moving to a business model that matches the name of its best selling car – Focus. In recently discussing its third quarter results, Ford stated that it remains on track to achieve $5 billion in cost reductions in North America by the end of 2008 compared with 2005. After a quarterly pre-tax loss of $2.7 billion, Ford had overall liquidity of $29.6 billion. The company promised shareholders further cost cuts and cash improvements.

In his November 17 Wall Street Journal article, Michael Levine discusses why Chapter 11 bankruptcy is the best option for GM. Chapter 11 would allow GM to be more competitive with Toyota, which now has now the world leader in market share. Over the years, GM has lost about two-thirds of its market share. Only with bankruptcy can GM be free of restrictions that prevent it from being competitive. It has 7,000 dealers compared to Toyota’s 1,500 successful dealers. GM has enormous pension and health care costs that add thousands to the cost of cars. The burden is so great, that GM needs SUVs to make money and sees no margin in fuel efficient cars. Yet, it is fuel efficient cars that customers are now buying. If GM reorganizes under bankruptcy, creditors will be forced to give it breathing room and paralyzing restrictions will be removed.

Robert Reich, former Labor Secretary, wrote on November 11, “When a big company that gets into trouble is more valuable living than dead, there used to be a well-established legal process for reorganizing it - called chapter 11 of the bankruptcy code. Under it, creditors took some losses, shareholders even bigger ones, some managers' heads rolled. Companies cleaned up their books and got a fresh start. And taxpayers didn't pay a penny. In exchange for government aid, the Big Three's creditors, shareholders, and executives should be required to accept losses as large as they'd endure under chapter 11, and the UAW should agree to some across-the-board wage and benefit cuts.”

Al Gore, in his November 9 NY Times Op-Ed identifies a major opportunity, “We should help America’s automobile industry (not only the Big Three but the innovative new startup companies as well) to convert quickly to plug-in hybrids that can run on the renewable electricity that will be available as the rest of this plan matures. In combination with the unified grid, a nationwide fleet of plug-in hybrids would also help to solve the problem of electricity storage.”

Now law, the Emergency Economic Stabilization Act of 2008 gives tax credits exceeding $7,000 for the purchase of plug-in hybrids. President-elect Obama, when campaigning, favored expanded use of tax credits to speed the transition to a competitive auto industry that makes clean cars. Consumer vehicle spending could be boosted now by expanding the offering to include a $2,000 tax credit for vehicles getting over 35 miles per gallon and up to $10,000 for zero-emission vehicles. Auto industry sales would immediately jump without a $25 billion give away.

In the seventies, I left my job with a major Detroit corporation, Burroughs, then the second largest computer firm. At the time, all makers of mainframe computers were in trouble, including IBM. If the government had done a massive bailout and protected their businesses, the United States would not have transitioned into the global giant of information technology. Lacking a bailout, IBM reinvented themselves into a global leader in IT services with a deep new patent portfolio. Burroughs became Unisys. Honeywell redefined itself. GE exited the computer field. An industry thrived instead of died. The transition made the United States the global leader in the Internet and technology innovation, creating millions of jobs.

Big corporations resist change, yet change they must. To grow and be profitable, the United States transportation industry must be innovative and responsive to customers.

Car customers are voting with their pocketbooks. The average car owner spends $8,000 on their car. The average household with two cars spends $16,000. People are demanding fuel economy. They have stopped buying vehicles with lousy mileage. They want hybrids that deliver over 40 miles per gallon. There is a pent-up demand for millions of electric vehicles and plug-in hybrids.

Only a smaller innovative customer-oriented GM can create permanent jobs. Yes, a GM bankruptcy reorganization could lead to the short-term loss of over 100,000 jobs at GM, its suppliers, and some of its dealers. These laid-off workers, however, could be part of a million new workers. Federal government tax credits could be given to any company hiring laid-off auto workers. Community colleges could be funded in Michigan and other states to retrain workers for jobs of the future.

$25 billion invested in public transportation would create over one million new jobs in the United States. The America Public Transportation Association has learned that every $1 billion invested in public transit capital projects generates 30,000 jobs, and the same amount invested in transit operations generates 60,000 jobs.

U.S. citizens want better public transportation as ridership soars to 11 billion this year. This November, voters across the country in 16 states approved 23 measures out of 32 state and local public transit ballot initiatives, authorizing expenditures approximating $75 billion. Clean Fleet Report

Senate Majority Leader Harry Reid plans to move forward with a bill that would give the auto industry access to the $700 billion Troubled Asset Relief Program set up by the government in October to help ailing banks and other financial firms.

As Ben Franklin observed, “Great haste makes great waste.”

Congress may release the total $50 billion by Thanksgiving. Such haste sends all taxpayers a message, “Enjoy this turkey. You can pay for it later with interest.”

John Addison publishes the Clean Fleet Report.

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