Tarp and American Auto Companies Thesis

  • Length: 8 pages
  • Sources: 6
  • Subject: Economics
  • Type: Thesis
  • Paper: #73839289

Excerpt from Thesis :

Yet, today, they sell only about 47% and this market share loss has accelerated over the past decade (Sullivan, 2008). The major issue, according to Sullivan, is the inability of the Big Three to effectively compete with their more efficient and market savvy Japanese rivals, even on their home turf. Opponents of the auto industry bailout feel that placing more money into a failed business strategy makes no sense and that everyone is better off if the free market, not the federal government, choose the winners and the losers in the economy (Moran, 2008). The end result of the auto bailout could well result in a return to protectionism which could unfairly impact other American industries' ability to compete in a global market. A policy analyst at the German-Marshall Fund voices a common concern that a bailout of the auto industry has the potential "to be the torch that lights the fuse of a general resort to protectionism among America's trading partners and the beginning of a downward spiral that undermines the world trading system" (Moran, 2008). Others are dubious of economic intervention because they consider it a stepping stone to an undesirable socialist political and economic system.

Regardless of how unpleasant the auto bailout is, it is needed as a tool to help stabilize the economy. Estimates are that a Big Three shutdown would cause a decline in personal income of $151 billion the first year, and $398 billion over three years ("The Impact of the U.S. Economy of a Major Contraction of the Detroit Three Automakers," 2008). This same source projects that federal, state and local governments would lose tax revenue, and instead spend a total of $156 billion on welfare programs over three years. The Alliance for American Manufacturing estimates that the total number of Big Three employees, parts-supplier employees and car-dealer employees to be approximately 1.6 million workers (Myerson, 2008). Further, all auto-related industries and after-market service businesses employ approximately 3.1 million people in the United States. The U.S. Bureau of Labor Statistics breaks down the workers into the following segments, as of September 2008: Parts manufacturing-504,000; Repair operations-864,000; Wholesale operations-340,000; Dealer operations-1.2 million; and Manufacturing-114,000. General Motors directly employs 123,000 in North America and an estimated two million people rely on the industry for health care and 775,000 retirees collect auto-industry pensions (Myerson, 2008). Plus, there's a multiplier effect of jobs dependent on auto industry shows such as those in construction, retail and restaurants (Myerson, 2008). Already in steep economic decline, these reductions in personal income and taxes and a large number of job losses could easily turn the recession into a depression.

Prior success with bailouts in the auto industry demonstrates that they can work. As a case in point, Chrysler got in trouble in the 1970s when it found itself manufacturing large gas guzzling cars during the gas crisis. In 1979, the company received a $1.5 billion loan guarantee from the federal government that helped save the company and tens of thousands of jobs ("1979 Chrysler Bailout Holds Lessons," 2008). In exchange, Chrysler was forced to come up with $2 billion in concessions from unions, white-collar employees, dealers, suppliers and banks as part of the deal. State and local governments connected to plants provided tax concessions, and Chrysler was required to adhere to tight government supervision after they received the loans ("1979 Chrysler Bailout Holds Lessons," 2008). Chrysler then developed a successful new car and paid off their debt to the government seven years early. For its efforts, the government made over $660 million in profit from the bailout. This situation demonstrates that, given another bailout, the auto companies could orchestrate another turnaround and eventually pay the government back.

Another indicator of why the Big Three should receive a bailout is the ease to which financial institutions have received money. The government has handed out money to American International Group, Citigroup and other banks and financial institutions with literally no strings attached to the money (Abouhalkah, 2008). Some banks have even complained that they were forced to take the money. Yet, the government has asked car makers to cut jobs, shed brand names, slash CEO pay to $1 a year, reduce benefits for workers, make more hybrids and sell corporate jets and have basically agreed to any and every demand to get taxpayer funds in order to survive (Abouhalkah, 2008). In contrast, the CEOs and employees of financial institutions and banks have not had to take pay and benefit cuts; only recently has the government demanded salary caps on executive pay (Abouhalkah, 2008). Certainly, the auto industry is deserving of more equitable treatment and shouldn't be on its hands and knees while others simply open their hands.

Summary

The President of the United States must be able to lead the country through an emergency or crisis and is granted executive powers to do so. A collapse of the Big Three automotive companies would have crippled the economy of the United States. With two bankrupt and the other surely to follow, the President made a wise decision to rescue Chrysler and General Motors by using TARP funds originally intended for financial institutions. Opponents of the auto makers' bailout are justly concerned that the Big Three are struggling in large part due to their inability to compete against foreign competitors. No wonder they feel like the government is throwing money into a rat hole. However, the bailout is coming with massive requirements to restructure that should spark greater innovation and cut costs so that they are in line with lower-cost producers. While temporarily distorting free marketing dynamics, this is a frequent practice of countries throughout the world. The goal should be to promote free trade, but not at the expense of losing an entire industry that is so vital to United States economic interest. Therefore, Bush and then Obama have both made the best decision to bailout automotive companies given the circumstances they faced, certain failure with dire consequences.

Bibliography

Abouhalkah, Yael T. "The Big Three Bailout vs. Big Bank Handouts for AIG, CitiGroup." Kansas City Star 4 Dec. 2008. http://voices.kansascity.com/node/2983

"1979 Chrysler Bailout Holds Lessons" The Washington Times 24 Nov. 2008. http://www.washingtontimes.com/news/2008/nov/24/1979-chrysler-bailout-holds-lessons/

Grossman, Andrew M. And Gattuso, James L. "TARP: Now a Slush Fund for Detroit?" 12 Dec. 2008. http://www.heritage.org/Research/Economy/wm2170.cfm#_ftn2

Kiley, David. "Auto Bailout Hung Up in the Senate." BusinessWeek 10 Dec. 2008. http://www.businessweek.com/bwdaily/dnflash/content/dec2008/db20081210_152585.htm

Liu, Henry C. "The Burden of Elitism." Asia Times 6 May 2009. http://www.atimes.com/atimes/Global_Economy/KE06Dj04.html

Meyers, Jim. "Conservatives: TARP is Unconstitutional. Moneynews. 16 Jan. 2009. http://moneynews.newsmax.com/streettalk/tarp/2009/01/16/172195.html

Myerson, Harold. "The Case for Keeping Big Three Out of Bankruptcy." The American Prospect 24 Nov. 2008 http://www.prospect.org/cs/articles?article=the_case_for_keeping_the_big_three_out_of_bankruptcy

Miller, Don. "U.S. Bankrolls GM Bankruptcy with $50 Billion Taxpayer Investment." Money Morning 2 June 2009. http://www.moneymorning.com/2009/06/02/gm-bankruptcy-4/

Moran, Michael. "Picking Winners." Newsweek 15 Dec. 2008. http://www.newsweek.com/id/175062

"Obama Backs Chrysler Bankruptcy." CBS News 30 Apr. 2009. http://www.cbsnews.com/stories/2009/04/30/business/main4980040.shtml

Relyea, Harold C. "National Emergency Powers." CRS Report for Congress 18 Sept. 2001. http://www.fpc.state.gov/documents/organization/6216.pdf

Sullivan, Andrew. "Detroit: Same Old, Same Old." National Review 16 Nov. 2008. http://corner.nationalreview.com/post/?q=NGE4MGEwMTkwMzE3MGE1NWI4MGJkYTA4M2NkMTIwZmU=

"The Impact of the U.S. Economy of a Major Contraction of the Detroit Three Automakers." CAR Research Memorandum 4 Nov. 2008. http://www.cargroup.org/documents/FINALDetroitThreeContractionImpact_3__000.pdf

"The Troubled Asset Relief Program: Report on Transactions through December 31, 2008," A CBO Report. Jan. 2009. http://www.cbo.gov/ftpdocs/99xx/doc9961/01-16-TARP.pdf

Thomas, Ken, Kuhnhenn, Jim, Espo, David and Johnson, Kimberly S. Associated Press 1 June 2009.http://news.moneycentral.msn.com/ticker/article.aspx?symbol=U.S.:FRE&feed=AP&date=20090601&id=9967699

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