Six weeks after Congress passed an unprecedented $700 billion bailout bill to help stabilize American financial institutions and the economy, another industry appeared before Congress in hopes of receiving a cash infusion from the U.S. government. During the week of November 17th, General Motors, Chrysler and Ford (Detroit’s “Big Three”) testified in the House and Senate about their joint request for $25 billion in loans to help meet operating expenses, payroll and settle accounts with suppliers.
The auto industry is a central component of Kentucky’s economy and workforce. According to the Kentucky Cabinet for Economic Development, nearly 20% of the Commonwealth’s manufacturing workers are employed by the motor vehicle parts, bodies and trailers manufacturing sector. In 2005, the gross domestic product from Kentucky’s automotive industry was over $5.4 billion.
Nationwide vehicle sales have fallen by 14.6 percent this year and analysts expect sales to remain slow well into next year. Many of the problems faced by the American auto industry have resulted from their failure to restructure their business model to meet 21st century standards and the needs of modern consumers.
Not only are the Big Three experiencing trouble due to slowed sales and gas-guzzling cars, they are also struggling to compete with foreign automakers while budgeting for “legacy costs,” the expensive pension and health care packages negotiated by unions and paid to retirees. On average, $2000 of every domestic car goes towards legacy costs, making it more difficult to compete in the global marketplace.
Unfortunately, the Big Three’s $25 billion bailout proposal did not include a plan to address these issues. Without details on how the money would be spent and how the companies plan to become more competitive, Congress cannot justify another blank check. Speaker Nancy Pelosi told the executives to develop a business strategy by December 2nd before Congress will consider a rescue package.
Some Republicans have created a compromise proposal that would remove restrictions from a previously authorized federal loan to the auto industry. In September, Congress approved a $25 billion loan for automakers to develop more energy-efficient factories and vehicles. The Republican compromise would allow the Big Three to use that loan to stabilize their companies. Then, once they have repaid the loan, the loan would be reissued to any automaker for its original purpose of “greening” the industry. Unfortunately, Speaker Pelosi and senior Democrats have strongly opposed this more fiscally responsible proposal.
Industries that have engaged in poor business practices should not expect to be rescued by the taxpayers’ hard-earned money. However, failure of the domestic automakers could mean even bigger costs transferred to the federal government and the loss of tens of thousands of American jobs.
For any proposal to be acceptable, it must at least include robust taxpayer protections and require the automakers to detail how the money will be used and what steps will be taken to strengthen the auto industry. In order to reinvigorate America’s competitive spirit, struggling industries must commit to a long-term change, rather than a short-term bailout.