Saturday, November 22, 2008

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.


conrad said...

Do we even need to really worry about wage costs in the US? Apart from politics, I don't see why these companies are making cars in the US at all. Surely, the amount saved on shipping a vehicle from Asia to the US would be easily recouped by the wage differential, even for the Japanese producers.

hc said...

These are wage differentials within the US not between the US and Asia. Firms like Toyota operating and producing in the US are doing fine - its the Ford, GM and Chrysler slugs that are facing oblivion.

rabee said...

Harry, In Australia, how many workers would be affected by the winding down of the car industry?

2000? 4000? Even 10000?

Surely a fraction of what we're spending on the bailout can handsomely compensate these workers.

hc said...

rabee said...

And you're going to fix that link soon?

hc said...

Rabee, The link is fine, it answers your question, p.14.

sir henry casingbroke said...

So really you're prescribing a Schumpetarian creative destruction of the old slugs, right?

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