When reading “Auto industry deserves bailout, too” the possibly of not having a bailout has to be considered. This week CEO’s from the Big 3 automakers march to Washington D.C. to make a case for why they should receive bailout money.
These CEO’s are really asking for hard-earned taxpayer money to subsidize their businesses. Why should taxpayers subsidize failure? In addition, the government recently gave financial institutions $700 billion to ensure the financial system would not collapse. However, many people believe that the financial world would collapse without this “bailout.” Nothing could be further from the truth.
Yes, there would be a temporary crisis, but banks would file for bankruptcy and another company or individual would buy the banks that went bankrupt. Banks would consolidate, but banks would still exist. Taking this to the extreme, let’s say every single bank failed, it would induce personal lending. For example if people needed money to start a business, they might knock on the door of Bill Gates or Warren Buffett to get a loan. In return, Gates or Buffett could charge a rental fee for using that money or in other words, interest. To say the financial system needed a bailout is utter nonsense.
With regard to the auto industry, a bailout is also not needed. Foreign automakers such as Toyota, Honda and Nissan are not asking for a bailout. One problem with the domestic automakers such as Ford, General Motors and Chrysler are the unions. Unions are granted special permission by the government to get contracts that other companies are not allowed access to. In addition, unions ask for “fair wages” and sometimes go on strike if their demands are not meet. Union labor workers at GM in 2008 earn around $69 per hour. Compare this to workers at Toyota who earn $48 per hour.
Of course the worker at GM is getting a better deal but the only problem is that GM has to pass along the costs to the consumer. In addition to getting higher wages employees also get generous health benefits. For GM, health care benefits add around $1,500 to the price of every car that GM sells.
With all of these expenses, it is hard for any of the domestic automakers to turn a profit. To put it simply, automakers were spending more than they were making. If these automakers could drastically reduce their costs and keep their costs below their revenue then they would turn a profit.
However, the more important question is why should taxpayers subsidize failure? Giving automakers money will not magically make them successful. What is very disturbing is that the government would even think of giving CEOs money (especially when the CEOs clearly don’t understand the basic concept of revenues and costs). Companies can do a number of things to raise money. For example, companies can issue stock to raise money or issue bonds to investors.
Giving automakers and other institutions bailout money creates risk for future problems. Since people now know they can be eligible for current and future bailouts, it will induce them to engage in risky behavior. This risk is known as moral hazard.
Why must the government intervene when the private market already has a solution? Some people argue it is un-American to let companies in the United States fail. Even if the automakers filed for bankruptcy it doesn’t mean they disappear. The companies restructure and usually some other entity buys out the company. Companies within the airline industry and steel industry have filed for bankruptcy and are still in business. However, people would still have options if GM, Chrysler and Ford disappeared. Toyota, Lexus and Honda are always ready to do business. Giving money to a failing business is analogous to giving a drug addict more drugs.
Just because the government gives a company money doesn’t mean that the company has to wisely spend that money. A perfect example of this is are the financial institutions that received money from the government via the bailout, but are reluctant to lend out money and in essence hoarding money. Also very few people have considered what happens when the government hands out money and prints more of it.
As the government prints more money inflation sets in and the currency is devalued since there is a large supply of money. As former President Ronald Reagan once put it “Government is not a solution to our problem; government is the problem.”
Peter Parlapiano is a senior finance major from Houston.