Tuesday, December 16, 2008

What's going on with the auto bailout

Last week the proposed bailout of the big 3 auto manufacturers died after an impasse was reached. The agreement called for the UAW (United Auto Workers) to reduce their compensation package to be competitive with foreign manufacturers who have plants in the US. The Senate wanted this to happen in 2009, the UAW refused to consider it before 2011. This has been spun several different ways.

Democrats are spinning it two different ways. The first is to blame the Republicans in general. This overlooks the fact that ten Republicans supported the agreement with the 2011 date. The Democrats could have passed it if all members were on board.

The other Democrat spin is to point out that senators from southern states with foreign car plants are against the bailout. This might be true but it does not follow that this is a cause and effect relationship. The implication is that these senators are trying to sabotage the big three on behalf of their clients (although no one has come out and stated it this way). I think that demographics have more to do with this. Most Republican senators are from the south and most foreign plants are in the south. The Republicans could just as easily be opposing the bailout on principle.

Further to the left, posters on Huffington have accused the Republicans of union-busting, perpetuating class warfare, and hoping for a depression. All of these either assume good-faith motives on the part of the UAW or figure that the issue is so important that the bailout must happen regardless.

We should keep a few things in mind about all of this. The first is that the UAW is in the wrong. The big three are hurting now. GM claims that they will be out of business by the end of the year without a bailout. The bailout will not solve their problems. Their problem is not that they are not making the cars that people want to buy. Their problem is that they can't make money by selling anything smaller than an SUV. The only reason that they make smaller cars is to meet CAFE standards. They have to give away four small cars in order to make a profit on an SUV. Take away the SUVs and they don't make any profit. The only way that they can make money on smaller cars is by cutting production costs and the UAW is a big part of that.

The UAW argues that labor costs are only around $1,800 per car. This may be true but labor costs are negotiable. Steel costs are not.

So what is really going on? First, the Democrats are beholden to the UAW. Unions have given them a lot of support over the years. Republicans don't owe unions anything. That means that Democrats have to support the UAW but Republicans are likely to be skeptical or even hostile to the union.

Second, the UAW is stalling because they are hoping to get out of their commitment to become competitive. They are hoping that by 2011, with a solid Democratic congressional majority they will be able to renege without penalty.

Third, after ignoring their principles in bailing out the financial markets, Republicans are regrouping. Many believe that the election was a sign that Republicans need to stand for something. Public opinion supports them on this, also. A lot of the electorate was upset about the $700 billion already allocated. Further revelations that the money has been spent differently than intended has made Congress and the electorate leery of other bailouts. A solid majority of the country backs the Republicans on this.

I suspect that Republican strategists are hoping to tarnish Obama's image with this issue. Bush has come forward with a bridge-loan from money already allocated for other purposes. This will run out early in 2009 dumping the problem in Obama's lap. This will put Obama in the uncomfortable position of having to choose between his union supporters and the general public.

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