Car industry woes

Chapter 11 is the best outcome for GM since it will permit the types of restructurings that are currently impossible given union demands for taxpayers to pay their member’s salaries and state resistance to plant closures. The US autoworkers were big financial supporters of Obama’s election campaign and for good reason. An aid package from the US Government won’t fix things. Wage costs at US auto-makers are a mile higher than comparable costs for Japanese producers, like Toyota, based in the US. The three US auto-makers (Ford, GM and Chrysler) are asking for a loan of $25 billion to prevent what they claim will be 3 million in job losses within a year and $156 billion in tax losses over 3 years. In other words they are suggesting a bailout is a bargain. This view is predicated on the assumption that Chapter 11 would involve an evaporation of the three firm’s assets and a total loss of all jobs which is false.

Henry Paulson has refused to allow his $700 billion piggybank to be used as a general source of bailouts in the economy and, in particular, to the auto industry.

Australia can scarcely point with high-minded free market zeal to the disgrace of a possible $25 billion US auto bailout by the US Government. Such a bailout will seek to preserve inflated wages and conditions for US workers but Australian workers in Geelong and Adelaide won’t benefit. The Rudd Government has already committed its own $6.2 billion handout to foreign multinationals based in Australia – proportionately higher in given Australia’s diminutive industry size than the US bailout. And news to hand – Ford will stay in Geelong and not cut 600 jobs as announced last year. Ford will invest $21 million upgrading its environment-friendly car production facility of which $13 million will be funded by Kim Carr, err no, by the Australian public.

The Productivity Commission have clamoured to favour lump-sum handouts of the ACIS type to the Australian car industry over tariff protection because such measures do not alter relative prices.  It would be better however to forego both lump-sum handouts that have very limited incentive effects and tariffs.